What are CBDCs and why are they important? | Author: Dwayne D’cunha | The Capital | June 2021
I took the liberty to use digital currency interchangeably with CBDC. To anyone who is confused, they all mean the same thing.
The recent rise of Cryptos shows what decentralized virtual currencies can do for the economy. Inflation and other resulting problems need to be addressed, while ensuring that no new problems arise. The premise of creating a CBDC is that if fiat currency can be converted into a more accessible form, then most of the population will be deposited in banks, except for the similar opportunities you find in Cryptos.
Things to consider are different from traditional cryptocurrencies. CBDC has not yet entered the “roller coaster” as a digital currency. There are too many cryptocurrencies, and their decentralized nature provides us with a lot of insights and tells us what to avoid and research. It takes a long time to use new cutting-edge technology to make transactions safe. The analogy I will use is to want a beautiful car, not to buy it, but to try to build my own car without any previous experience. Depriving financial authorities of power is also one of the reasons for the success of cryptocurrency. CBDC does not intend to replace physical currency, but rather to be a supplement to existing assets.
When it comes to experimenting with digital currencies, China has always been at the forefront. It also redoubled its efforts to maintain control and obtain information from citizens, regardless of their privacy. The digital renminbi does pose a threat to the US dollar, and the US dollar has potential problems while maintaining its dominant position. China has released 4 types of wallets to store this digital currency, of which only one has a certain degree of anonymity, but the rest are not so many.
After noticing the volatility of Bitcoin, the United States is studying CBDC. Even for the financial authorities, the huge costs of using fiat currencies for transactions seem very unreasonable. The desire for power (competing with China) is also a driving factor in the creation of a new digital currency.
The Bank of England also officially announced the creation of CBDC. Andrew Bailey, Governor of the Bank of England, once publicly expressed his disregard for cryptocurrencies, saying that most cryptocurrency investors should be prepared to lose all their funds. After the Bank for International Settlements gave a speech, his views have changed a lot. He said that CBDC could lead to fundamental changes in the financial industry and described it as “the most fundamental innovation in the history of central banks.”