CBDCs – The Ultimate Tool for the Global Economy or a Significant Danger to Financial Stability

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At present, a total of 130 nations representing 98% of the global economy have been exploring CBDCs (central bank digital currencies) to date.

With the past six months’ significant progress, almost all G20 countries have progressed to one of the advanced phases of development.

Moreover, based on a July 2023 survey, 24 central banks are expected to launch their CBDCs by the end of the decade.

All of this is clearly pointing toward CBDCs gaining a lot of momentum as a technological and economic trend among many governments across the world.

However, with every innovation, there are risks to consider, and CBDCs are no exception to this.

As they gain in popularity, the topic of their potential dangers is also drawing greater attention.

So the question becomes – are CBDCs worth the fight?

Privacy issues and stability concerns

First things first – let’s take a look at some of the common risks associated with CBDCs.

As I see it, one of the foremost concerns that crypto industry participants share in this field is related to privacy issues.

In contrast to a typical cryptocurrency, CBDCs’ supply, issuance and network are controlled and managed by central banks.

On the one hand, this level of authority could be necessary to conduct sound monetary policies efficiently.

However, it also raises questions about data privacy, as it allows the state to gather information on citizens.

In fact, a January 2022 report by the UK’s House of Lords Economic Affairs Committee raised concerns about CBDCs becoming “an instrument for state surveillance.”

Without strict regulation in this field, governments could take advantage of this opportunity to monitor their citizens’ financial activities in real-time and gain access to detailed information about their transfers.

Besides privacy-related issues, CBDCs could also pose a risk to the financial stability of both individual nations and the global economy.

For example, CBDCs could disrupt the modern financial system by increasing the risks of digital bank runs, particularly during times of crisis.

As a digital form of central bank-issued money, CBDCs can offer interest-bearing features or even direct remuneration by central banks.

If they provide higher interest rates or more attractive remuneration compared to traditional banking products, it may incentivize depositors to shift their funds from commercial banks to CBDCs.

This sudden outflow of deposits from banks could strain their liquidity positions and result in a loss of confidence in the banking system, triggering bank run scenarios.

This is a concern that has been noted by several financial parties across the world including the European Central Bank.

Unless different safeguards are introduced in this field, CBDC-induced bank runs could accelerate the rate at which depositors withdraw funds from their wallets, which could wreak havoc on economic stability.

Risks considered – but what about the advantages

Now that we’ve given the proper consideration to the possible risks and challenges of CBDC implementation, let us turn our attention to the advantages these digital currencies can offer to a diverse range of participants in the global economy.

With an unbanked population of 1.4 billion across the world, many see technology as a tool that can promote financial inclusion.

With a smartphone and a working internet connection being enough to create a digital wallet, important barriers to basic financial services could be eliminated with CBDCs.

Countries like Egypt, the Philippines, Vietnam and Mexico are among the most unbanked regions globally, and all of them are engaged in researching the matter.

Unlike existing solutions, CBDC transactions could provide governments with real-time access to crucial financial data, such as consumers’ spending patterns and local economic activities.

Consequently, central banks could make more informed and data-backed decisions regarding interest rates, liquidity management and macroeconomic stability.

Together, with this improved visibility, enhanced control over the CBDC money supply could result in a more efficient monetary policy implementation.

Moreover, retail CBDCs could replace financial intermediaries with P2P (peer-to-peer) transactions.

Without middlemen, individuals and organizations can send and receive transactions at lower costs and with faster processing times.

And we are already seeing banks in multiple countries collaborating to bring this idea into reality.

Finally, the implementation of CBDCs has the potential to accelerate innovation in the payments sector and enable the development of new products that prioritize user convenience.

By leveraging the capabilities of blockchain technology, CBDCs can streamline the payment process, leading to faster and more efficient transactions.

And this increased efficiency will in turn create a fertile ground for startups and fintech companies to develop innovative solutions tailored to users’ needs and preferences.

CBDCs – benefits could outweigh the risks with the right approach

Due to the technology’s nascent nature and its massive significance to the future’s financial system, central banks should take the potential dangers of CBDCs into account to avoid disastrous scenarios.

With the right approach, I believe the benefits here can significantly outweigh the risks.

But to achieve that, governments and regulators should raise awareness and discuss these challenges to protect citizens and the economy’s stability.

So long as they find a way to minimize the risks and their potential impact, CBDCs could become the ultimate tool to take the financial system to the next level.

Greg Waisman is the COO and co-founder of the global payments infrastructure platform Mercuryo. Waisman is an accomplished entrepreneur and business leader with deep roots in the technology market. He has a wealth of experience in full-cycle business management and establishing IT-related startups and developing them from the ground up.

 
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