Central bank digital currencies, or CBDCs, are digital versions of government fiat money. They are tied to the national currency and issued by a central bank. They are similar to stablecoins, but the main difference is that they are issued by governments. Many countries are working to develop their CBDC systems; each will have slight differences in how they operate but will follow the same working model. More than 80 countries are researching or developing CBDCs, and while some have made slow progress, many have launched digital currencies.
According to a McKinsey report, 14 percent of the US population and 10 percent in the EU own or had owned some form of digital assets. The data on the percentage of households that own digital assets is vital for governments when designing CBDC systems and regulations. Governments can have more control over the levers of exchange and provide financial services to the unbanked by adopting CBDCs. China leads the way in CDBC adoption, with the digital yuan already playing a vital role in its goal of becoming a cashless society. Its adoption is being driven by applications like WeChat Pay, which transact over $1 billion daily. China still has a long way to go to realize its cashless objectives, but it has the best CBDC adoption rate.
Central bank digital currencies offer multiple benefits for governments, such as low cost, inclusion, transaction efficiency, transparency, oversight, and easy enforcement of monetary policies. CBDCs can significantly boost the efficiency of cross-border payments. They help speed up processing times, and transactions are completed in seconds. This feature will help international commerce. As they become more common, central banks will be able to have greater control over the flow of money and monetary and fiscal policies. The COVID-19 pandemic proved that effective implementation of monetary policy can save lives. Not all are convinced; some argue that greater government control over our finances will lead to a loss of choice and freedom.
CBDCs raise several vital questions, one of which is whether they are doing more harm or good for citizens. Another crucial question would be: how can we trust governments to ethically implement CBDC systems and not undermine democratic values? Governments can also connect your personal financial information to credit systems. They can also see health expenses and, more importantly, your political donations.
So governments must design CBDC systems that maintain democratic supervision. This also applies to security agencies, those in charge of tax collection, and other stakeholders who have access to our digital transactions. Governments worldwide should make responsible CBDC design and policy choices to uphold democratic values and prevent illicit activities. The future of CDBC adoption depends on how governments can gain the trust of their citizens and give them confidence in using their CDBC systems.
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