Digital Currency CBDC Inevitable

In 2009, cryptocurrency caught the attention of the general public, the digital currency market was the Wild West. Bitcoin and the many imitators it has spawned is new. Has attracted the attention of technologists and people looking for alternative solutions to basic financial services. At the initial stage of vigorous activity and utopian optimism, the digital currency market was undoubtedly marked by innovations. But it has also been marked by misunderstandings, instability, fraud, and little control.

Now, ten years later, about 80% of central banks are researching, experimenting and developing central bank digital currencies (CBDCs). And 20% said they will be able to provide digital currencies by 2025.

While Bitcoin still has supporters, in hindsight, its true value could be the catalyst for subjecting the world to tokenisation, distributed trust, and multilateral systems.

What is CBDC?

The term CBDC can broadly refer to any digital representation of central bank funds, including the balances of digital accounts of commercial banks in Fed accounts. The innovation here is tokenisation, which creates a unique digital representation of value and serves the same function in the digital realm as the use of hard currency in the physical world. With tokenisation, a successful transaction depends on the validity of the token itself, and not on the fact that there are enough funds in the account.

Tokenised digital currencies have more flexibility and the ability to process large-scale transactions, including the securities market. Because they rely on decentralised tools like distributed ledger technology, they can reduce delays, errors, and reconciliation costs.

What worries the Central Bank?

Central banks are partnering with digital currencies because they recognise that there are still loopholes and weaknesses in the financial system in all of the work undertaken to strengthen the monetary system since the financial crisis.

Large financial companies centralise risk, and international payments can be slow and costly.

In contrast, in many countries, financial inclusion is still an issue. In the United States alone, tens of millions of consumers without bank accounts or in arrears rely excessively on cash, while cash transactions in emerging markets such as Mexico account for over 80%.

The People's Bank of China is currently the world leader in CBDC implementation. China launched digital currency in four cities through more than 100,000 personal and 9,000 corporate digital wallets, which processed more than $160 million.

Until February, US policymakers were openly skeptical about CBDC. Just eight months later, regulators are looking to play a more active role in shaping the future of digital currencies. Federal Reserve Chairman Jerome Powell, reporting to the House of Representatives Committee on Financial Services CBFV in September, said: We have a responsibility to understand and understand this well. Not waking up one day and realising that the US dollar is no longer the world's reserve currency because we just missed it.

The role of the bank is increasing

While foreign CBDCs and private digital currencies do not yet pose a threat to the US dollar's status as the world's reserve currency, it is also important to understand how central bank tokenised currencies can change our world. As the Federal Reserve gradually adds tokenised US dollars to physical currencies in circulation, bank leaders need to take the time to reflect on what a true digital currency means for their businesses and customers.

For example, some lawmakers and academics believe that digital currency can eliminate the need to print and mail millions of paper checks, thereby making assistance in the fight against COVID-19 more effective.

For small businesses, CBDC can also provide a way to control costs, help manage who receives funds and how they are used. To ensure that they are used, for example, to support wages.

Digital currency can also become an important tool in the use of the financial system. Helping people who currently have limitations in service with traditional banks. Provided by public or private organisations, digital wallets will become a low-cost entry into the world of financial services. The proliferation of smartphones, the introduction of 5G technology, and the development of distributed ledger technology can help replace cash in many transactions, allowing consumers not only to use secure digital payment methods, but also to use additional functions such as insurance and short-term insurance and conventional credit.

The tokenised CBDC will also provide a platform for private sector innovation. Based on the CBDC, the digital currency programming capability can be used to restrict consumer use or link other data items to currencies, thereby establishing consumer-driven features or benefits, such as privacy protection or loyalty rewards.

The era of speculation in digital currencies is over. The era of their introduction has begun. In the next few years they will become a reality in many countries globally and their impact on the banking sector will be enormous.