Central Bank Digital Currencies (CBDCs) are slowly but gradually taking up a place in today’s financial world. They are governments’ replacements for cryptocurrencies which are banned in many countries across the world. They will, when fully instated in economies across the world, perform important functions like narrowing the financial inclusion gap as well as making cross-border and domestic payments be performed easily and seamlessly. Central bank digital currencies promise to change the future – that is not far away – and bring in a new era of digital domination and cashless systems of payment. Before we examine what the next decade could look like with Central bank digital currencies (CBDCs), we need to demystify what they are.
What are Central Bank Digital Currencies (CBDCs)?
Like the name implies, central bank digital currencies are owned, issued and controlled by a country’s central bank. They are digital, virtual or electronic versions of a country’s currency. In other words, they are digital, electronic or virtual representations of a country’s national currency. For example, Nigeria’s e-Naira or China’s e-Yen. Simply put, they are digital forms of fiat money already existing in a country.
Central bank digital currencies, according to Wikipedia, was directly inspired by cryptocurrencies – Bitcoin, which is the world’s most used cryptocurrency, to be exact. What this, therefore, means indirectly, is that a central bank digital currencies can be seen as or compared with cryptocurrencies only that they are issued and regulated by a country’s apex bank. Another interesting thing about central bank digital currencies is that they are, like fiat money, backed by a country’s reserves unlike cryptocurrencies which have been criticized for being based on “thin air”.
According to some schools of thought, central bank digital currencies are the attempt of governments to provide digital currencies while being able to regulate and control them. Some others see it as governments’ attempt to replace cryptocurrencies which they have largely turned their backs on because they cannot be easily controlled or regulated.
The world is changing, our way of life, systems and industries are changing – some drastically, others slowly but gradually. Technology continues to prove that its presence is here to make things easy and faster as well as make them permanent. The financial world is one sector that technology is sweeping across with a huge wave.
With the rate at which the changes are coming, central bank digital currencies will prove to be more useful than we can ever imagine. In the next decade, the financial world and society will not be as we know it now. The following are some of the ways that central bank digital currencies could bring changes in the next decade.
- Central bank digital currencies could hasten the transition into a fully cashless society
Society could become fully cashless in the next decade thanks to central bank digital currencies. Although there are already existing technologies to support a cashless society in existence in many first world countries, they are not readily available in poor and/or developing countries. Central bank digital currencies could hasten governments’ efforts of transitioning their societies into completely cashless ones. The advantages that a cashless society poses are numerous. Some of these include automatic paper trails, fewer costs for cash management, lower crime rates – especially with crimes related to money laundering, etc.
- With central bank digital currencies, society could really carry everyone along by providing increased access to financial services
According to Investopedia, the costs associated with developing banking infrastructures that are essential in providing access to financial services especially for the poor and unbanked is a huge impediment to financial inclusion. This is the case for many poor and developing nations. Central bank digital currencies can change this as they will provide a direct connection between consumers and central banks, are almost free from intermediaries and eliminate the need for some financial infrastructures which are very costly.
- With Central Bank Digital Currencies, the implementation of monetary and fiscal policies will be a smooth journey
The process for the implementation of virtually all government policies is usually cumbersome and time-consuming. This is because the implementation of new policies is dependent on quite a number of factors and intermediaries like commercial banks and other financial institutions. Usually, monetary and fiscal policies take time to take form but this could change in the next decade. With CBDCs, the implementation of these policies could take on simpler forms as the system will no longer be dependent on intermediaries and other factors which are currently sine qua non.
- CBDCs could also bring huge changes to remittances
If governments can design a good system based on its CBDC, it will be possible to bring huge changes in cross-border payments and remittances. All these could be done in a more secure, faster and seamless way.
- CBDCs will eradicate risks associated with being dependent on intermediaries
Being dependent on intermediaries exposes the financial system to risks associated with being dependent on third parties. These risks could vary in intensity but at whatever level have the power to cause a disruption to any financial system. With CBDCs, countries could escape these risks.
- The crime rate could drastically reduce in the next decade
In the next decade, we could see a drastic reduction in the amount of money-related crimes. Crimes such as money laundering could plummet and governments would have better facilities to track crimes especially because technology would have changed a whole lot. With CBDCs, governments will not only be able to track illegal activities, they would be able to prevent them.
- CBDCs could make governments functions and efforts simpler
As CBDCs have the potentials to narrow the financial inclusion gap, control and prevent illegal activities, they could also make government functions and efforts such as distribution of benefits, tax collection, etc., easier. CBDCs could go a long way in making government processes that are usually tiresome and time-consuming, simpler, easier and more effective.
The next decade promises to be a completely different era but this is dependent on the kind of CBDC-based systems that governments build, their rate of adoption and the extent to which they cater to society’s needs.