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State money evolves slowly. Financial rails evolve fast.” — DNA Crypto.
Central bank digital currency (CBDC) is a type of fiat currency that doesn’t exist as banknotes or coins but exists only as digital data. Digital currencies are stored in digital wallets. Typically, its definition is inseparable from that of a “central bank.”
Central Bank Digital Currency, CBDC, is the digital equivalent of physical cash that can be transferred into circulation by central banks. Just as CBDCs use the current infrastructure to move physical cash between bank accounts, blockchain technology could be used to enable these transfers digitally. The main questions surrounding this topic are: why we need this and what the implications are for central banking. In the UK, the Bank of England is the central bank, and it’s currently working closely with HM Treasury to bolster digital currency across the UK.
CBDCs and crypto assets are both digital currencies, but they differ in key ways. Crypto assets are decentralised, peer-to-peer virtual currencies that can be traded independently of central banks or governments, with the most well-known crypto asset being bitcoin. Central banks issue CBDCs as a substitute for cash, meaning they can be used to make payments just like physical notes and coins. They may also be used to make payments between financial institutions. In contrast, crypto assets are typically transacted privately between two parties, with no involvement from the issuing bank or government institution.
Change is inevitable, and we must be willing to adapt with the times. The challenges facing the global economy are immense, but so is the opportunity. Cash has been steadily declining in importance since the introduction of ATMs and contactless cards in the 1990s and 2000s. Today, only about 15% of all payments in the UK are made in cash – down from 40% two decades ago – and many businesses no longer accept it. This trend is expected to continue as more people adopt digital payments and other non-cash methods, such as QR codes and mobile wallets, gain traction. But there are still concerns about whether we have sufficient cash available in emergencies or during bank holidays when banks aren’t open. Surely, this is food for thought.
Despite the potential official adoption of digital currency by governments, cash remains a popular payment method, and it’s essential to many people. The Bank of England will continue issuing money in the UK as long as people want to use it, and has no plans to stop providing notes and coins within the next decade. Ultimately, central bank digital currency has the potential to promote a cashless society. This will likely take time to achieve, but the push toward further adoption of digital currencies is inevitable. Stay tuned, as this technology will undoubtedly be the next big thing in financial services.
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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
“Central banks are pushing CBDC projects not because the system is broken, but because the plumbing of money is no longer fit for a digital-first economy.” — DNA Crypto.
It is no secret that central banks worldwide are collaborating with companies such as Ripple to launch their own CBDCs.
According to the IMF, more than 110 central banks have stepped toward CBDC development. At the same time, Ripple Labs Inc., a blockchain payments company, released a report stating that approximately 90% of central banks are actively developing their own digital currencies.
It is important to note that CBDCs are not entirely new; surprisingly, they have been around for almost three years. In 2020, China spearheaded the CBDC concept by conducting a broad-based retail test of the Chinese digital Yuan. The report titled “The Future of Fiat” by Ripple gives several reasons why it believes many central banks will embrace CBDCs. One of the firm’s main reasons highlighted was improved payment efficiency.
Today, digital payment methods are rapidly replacing cash payments, especially in developed nations. The advent of blockchain technology exposed shortcomings in digital payment methods, including high transaction costs and slow processing times. Typically, an overseas transaction via digital payment takes days to complete, and, worse still, a cash payment takes longer.
However, with blockchain technology, these transactions typically take seconds to minutes to complete. Given its significant advantages, it has been difficult for users to reject blockchain technology and thus threaten legal tender in many nations. CBDCs can improve a country’s overall payment landscape, particularly given recent global advancements.
Ripple has reported that the introduction of CBDCs will improve national competitiveness. In addition, the firm believes CBDCs will help financial institutions reposition themselves and build greater trust among citizens.
Over the years, Ripple has grown into one of the most dominant blockchain payment ecosystems in the market. Throughout its lifetime, the firm has developed a simple, engaging solution built on XRPLedger. Central banks can use this ledger to deploy their own CBDCs. Ripple claims its CBDC hosting platform will offer stability, resilience, and security. The firm adds that central banks can use its XRP-proven ledger to build trust. This will ensure consistent top performance and enforce privacy and security. Moreover, Ripple announced that XRPLedger would enable CBDCs to create wholesale products for use by banks, the public, and fintech.
Another significant benefit for central banks adopting XRPLedger is interoperability and overlay services. The CBDC development will also be sustainable as it will be based on Ripple’s energy-efficient protocol. After highlighting its ability to support CBDC and Stablecoin development efficiently, Ripple noted its strategic plan with Bhutan to create the digital Ngultrum. Currently, Ripple competes with firms such as Visa and Mastercard, which are actively seeking solutions to support central banks in CBDC development.
Image Source: Adobe Stock
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
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