In recent years, we have witnessed the phenomenon of central banks launching their own digital currencies. Some examples include the Sand Dollar of Bahamas, e-CNY of China and e-krona of Sweden. This shift towards central bank digital currencies (CBDCs) is expected to intensify, as more countries launch their respective digital currencies. Around 100 countries including most G20 nations are actively thinking about launching their digital currencies.
As central bank digital currencies are a relatively new phenomenon, at least in public domain, it makes us wonder why countries have developed an interest in digital currency. Is central bank digital currency same as cryptocurrency? To answer such questions, here’s a look at key reasons why central banks are launching digital currency.
Ease of payment – The concept of central bank digital currency may seem entirely new. But it has existed earlier also. Much of the reserves maintained by central banks is in digital form. However, these are only utilized by other banks and financial institutions. Central bank digital currency is slightly different, as it can be used by everyone including individuals. Digital currency will simplify everyday payments, as they will be able to function even without internet access.
Reduce cash circulation – It is common knowledge that much of the criminal activities are financed through cash. Also, printing cash is a significant cost burden for central banks. As more and more people start using digital currency, the amount of currency notes to be printed will reduce dramatically. The eventual aim is apparently to shift entirely to digital transactions. However, this may take several years to achieve.
Fighting counterfeits – When money gets into the wrong hands, bad things are bound to happen. Counterfeiting is a big problem, with millions of dollars in circulation around the globe. Every country faces the problem of counterfeiting. Counterfeit currency can be used for various nefarious purposes such as crime, creating social unrest, anti-national activities, etc. With a greater share of digital currency, the problem of counterfeits can be minimized.
Reduce money laundering and financial fraud – With digital currency, it will become a lot harder to launder money that is usually earned illegally and without paying the necessary taxes. The risk of financial frauds will also decrease with digital currency.
Is central bank digital currency same as cryptocurrency?
There is a tendency to confuse central bank digital currency (CBDCs) with cryptocurrencies like Bitcoin, Ethereum, Tether, etc. However, the fact is that CBDCs have no relation to cryptocurrency. As compared to a cryptocurrency whose value may increase or decrease based on demand, the value of CBDCs will always remain equal to the respective amount in actual currency. Another difference is that while cryptocurrencies are privately owned, CBDCs are owned and managed by respective central banks.