In any economy, money has three main functions to society. It is there to measure monetary value, to be a unit of account, and provide and be the medium of exchange. Any government-backed currency must serve the public good and public institutions such as central banks are responsible for efficiently providing it.
However, the new term might forever change this central Bank’s Digital Currency. As technologies vastly improve and cryptocurrencies become the new financial trend, policymakers, traders and analysts continue to ask themselves how a digital economy will affect a state’s market.
Even though the notion of a digital economy is gaining popularity fast, it is not supposed to completely remove hard cash. Rather the idea is for both of them to co-exist. However, the key factor for moving towards such an economy is to provide a secure network-based code that will account for the equivalent of conventional money.
The problem with all of this, of course, is cryptocurrency. The notion of a digital economy comes at a time when cryptocurrencies are booming and fluctuating daily. Unlike the private cryptos, A CBDC system will be centralized and controlled by the government, therefore stability is a necessity.
The overall belief is that a CBDC-backed economy system will be much easier to maintain than a conventional one. Not only that, but governments across the world believe that it is actually cheaper than printing money. The Reserve Bank of India recently said in a statement that “Private virtual currencies sit at substantial odds to the historical concept of money. They are not commodities or claims on commodities as they have no intrinsic value. Some claims that they are akin to gold clearly seem opportunistic. Usually, certainly for the most popular ones now, they do not represent any person’s debt or liabilities.”
The United States, on the other hand, will issue several pilot programs that will test the efficiency of a CBDC system. The main reason why governments want a digital economy is because of the quick transfer of public funds during times of crisis and need. A CBDC-backed economy will also reduce the risks of settlements and their effects on the financial system.
The risks and worries of policymakers are that a digital economy will weaken the baking system and potentially give more power to individuals as banks will not have access to deposits and revenue. Another key risk is that the CBDC system is also prone to hacker attacks and cyber security breaches. An instance of a financial breach could easily lead to an economic breakdown and a possible financial crisis. A digital economy would also require impeccable internet services throughout the state and fraud-free telecommunication systems.
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