Will CBDC Be A Game Changer For The Existing Financial System?

The method we make payments are about to undergo a significant update, thanks to the advent of new technologies and continuously changing consumer demands. Cash appears to be disappearing in many nations, opening the way for a new type of payment system that is mainly digital.

Central bank digital currency (CBDC) is gaining pace and attention among central banks, as well as financial and technological experts. A CBDC is a bank-issued digital form of legal currency.  A CBDC, also known as digital base money or digital fiat currencies, is similar to physical currency except that it is held in a digital or virtual form.

The new digital currency would reduce our reliance on cash and make foreign settlements more affordable and efficient. People will be protected against the volatility of the private digital currencies that are presently available on the internet by the RBI-backed currency.

The Indian central bank has stated that it is working on a large-scale introduction of a digital currency. It also voiced worry that if digital currencies become more widespread, users would remove money from their bank accounts. The United States has announced that five pilot initiatives would be launched over the coming year to ‘explore the possible usage’ of a US CBDC. Within the United States, it is the first of its type.

While the concept of CBDC is still in its early phases, projects such as the Digital Dollar in the United States, the Digital Yuan in China, Sweden, New Zealand, and others have attracted the interest of both institutions and governments.

In a crisis, a digital currency will aid governments in the fast transfer of public cash or emergency handouts (much like the Covid-19 pandemic). Payments conducted with CBDCs can also help to alleviate the financial system’s settlement risk.

However, effective integration with existing banking and payment systems is a crucial success element for CBDC adoption to ensure smooth operations. The digital system’s reduced regulatory and administrative requirements will also assist governments in considerably lowering operational and technology maintenance expenses.

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