Digital currencies have expanded so wide and proven to be a viable innovation with great potentials, one of which is to completely or to some extent, replace the old traditional system for cross-border payments.
Although cryptocurrency is still a hard nut to crack for many central banks, it’s safe to say that digital currencies are becoming a do or die affair for banks. The earlier they join the trend, the easier it becomes for them to explore other service opportunities linked to digital currency.
Cryptocurrencies are seemingly emerging as a daily threat to the current banking system, despite intense actions by traditional banking regulatory authorities to control its development. This new form of now is fast becoming a vehicle to bank the unbanked.
The innovation makes cross-border transactions cheaper and faster, unlike the traditional banking system, which usually requires more time to process such transactions, yet at a high cost.
Popular cryptocurrencies such as Bitcoin (BTC) and Ether (ETH), which runs on a blockchain network, have been able to gain more popularity with respect to their decentralized and regulation-free nature. However, these attributes remain a problem for central banks.
Central banks probably want systems they can control. They would want to keep track of everyone making transactions on digital currencies and other related services.
Seeing that cryptocurrencies have become unbeatable, Central banks are increasingly coming up with the idea of leveraging the blockchain technology to launch their cryptocurrency known as Central Bank Digital Currency (CBDC) in place of private cryptocurrencies.
Central Banks Exploring CBDC
CBDCs promises to offer more advantages to central banks. Notably, CBDCs will provide security and convenience as the digital form, just like private digital currencies. These cryptocurrencies will either be operated by the central bank or country’s monetary authorities.
Unlike common cryptos like Bitcoin, CBDCs digitally represent a country’s fiat currency and supposedly backed by a sufficient amount of monetary reserves such as forex or gold. Also, it will work with other forms of regulated money, like bills, coins, notes, and bonds, since it will become part of the money supply managed by the central bank.
The Bank of England (BOE) pioneered the CBDC proposal, which is currently seeing many other banks joining in the wagon. Today, Hong Kong and Thailand’s central banks revealed they had taken steps to issue a digital currency that will facilitate payments between the two countries.
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