The rise of many crypto, the decline in cash use, and the rise of stablecoins have led governments around the world to think about making their own types of electronic money. This month, India announced that it will start issuing digital rupees in early 2023, and China will test its digital yuan at the 2022 Winter Olympics in Beijing, China. And they ask important questions about money and what people need from it.
Cash has been around for a long time because it’s easy to use as a form of payment. It is safe and also protects people’s privacy. Cryptocurrency advocates want to move that level of anonymity into the digital world and take control from central banks. Even though transactions are traced back to individuals. It’s not even the widely-used Bitcoin be useful for making money.
Stablecoins as a Cash Replacement
Stablecoins, which are usually tied to a hard currency like the dollar, try to solve those problems, but they also make other parts of the financial system less efficient and riskier.
When we look at them at first, they look like the electronic money we keep in our bank accounts and spend on our phones. The key to the difference is that there is no commercial bank in the way. Central Bank Digital Currency (CBDC) is a direct liability of the government, just like cash. People who live in places where money isn’t safe might find this kind of electronic money interesting.
In addition, there are a lot of other things that can happen. In Europe, most payments are handled by foreign, private service providers. This puts a wide range of activities at risk from possible protectionist policies, as sanctions and even exclusion from payment systems have shown in recent years.
There would be no need to stop the economy in these situations if there was a digital euro. When the Eastern Caribbean Central Bank spread its Dcash payment system to Saint Vincent and the Grenadines after a volcano erupted, it was a good idea to do it quickly. As a result, China is trying to make the digital yuan more common. This is partly because it doesn’t want big technology companies to dominate payments, which could make things like abuse of market power, ownership of important data, and illegal activities even worse.
The Risks of CBDCs
Many things can go wrong with CBDCs. People who keep too many digital currencies risk cutting off commercial banks. Hinted that it is a big source of money for the economy. This is why many central banks are talking about limiting how many digital currencies people can keep. If CBDCs become more common, poor technology infrastructure in developing countries could also make it more difficult for people to get money. CBDCs also make it easier for the government to spy on people. It also makes them more vulnerable to cybersecurity threats.
How central banks deal with these risks will be very important. In the end, CBDCs might make the world’s financial plumbing cheaper, safer, faster, and more reliable. This is an area where cryptos and stablecoins haven’t been able to show that they are good.
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