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Why the Sovereign States Want Central Bank Digital Currencies (CBDCs)?

Author: Danial Jack
by Danial Jack
Posted: Mar 02, 2021
central bank

For the past few years, the traditional banking sector around the globe has made every effort to control the rapid growth of popular digital currencies like Bitcoin and Ethereum. These blockchain networks have become a threat to the traditional banking system which operates under the control of the Central bank -the centralized financial institution of a country. Owning to the independent and decentralized nature of these virtual currencies, Central banks have decided on exploring ways to create a digital version of cash: money that is trusted, convenient to use, and widely available to people, for making payments and getting paid. Digital currencies have the potential to make it easier, cheaper, and faster to move money around.

Recently, fruitless efforts have been made by some countries to put strict measures in place to limit the widespread use of cryptocurrency. But due to the unproductive measures taken to control the influence of these virtual currencies, central banks in developed countries across the globe have started deliberating on developing their cryptocurrency. A cryptocurrency that will be regulated and controlled by the central bank. This virtual currency is known as the central bank digital cryptocurrency (CBDC). It is also called digital fiat currency or digital base money, centralized and operated by the monetary authorities.

The CBDC provides a visual representation of a country’s fiat currency which is backed by monetary reserves like Gold or foreign currency reserves. It is the paper bill equivalent and can be used as a medium of exchange, payment, and an official unit of account. It is equivalent to the paper bill fiscal system in the sense that each CBDC is distinguishable from another to avoid forgery and imitation.

Sovereign states push for the CBDCs to reduce dependence on decentralized virtual currencies and regain financial control. This system will wage a lasting war against private cryptocurrency moguls like Bitcoin and Ethereum. They know that if private cryptocurrencies were to gain widespread acclaim and popularity, it will limit the use of the traditional forms of money issued by central banks. CBDCs will be heavily backed by the government and will possess all of the power the traditional currency owns.

The government supports the CBDC scheme to keep track of people’s records and transactions on the blockchain compared to cryptocurrency and cash. They could manipulate the supply and track individuals with their tokens. This limits the freedom of people to carry out their activities on the blockchain network.

Global financial institutions have seen a significant increase in financial crime over the last several years, which can bring monetary costs, reputational damage, and loss of customer trust for those who fall victim to it. And that is the reason CBDC is backed by the government to reduce the rate of financial crime incidents which may reduce counterfeiting and tax evasion attempts and generally enhance the safety and stability of financial institutions.

To date, no country has successfully launched a digital currency backed by the central bank. However, research and pilot programs are been organized to bring CBDC into realization.

About the Author

For the past few years, the traditional banking sector around the globe has made every effort to control the rapid growth of popular digital currencies like Bitcoin and Ethereum.

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Author: Danial Jack

Danial Jack

Member since: Feb 23, 2021
Published articles: 3

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