Home Central bank digital currency, costs and risks

Central bank digital currency, costs and risks

Sept 24–In the US, the Federal Reserve is expected to release new research that weighs the costs, benefits and risks associated with the development of a central bank digital currency (CBDC). Experts want to fully analyze how a national digital currency could affect domestic financial stability and the financial system as a whole.

Questions abound regarding how a digital currency would or would not complement the existing monetary system. Leaders aim to make highly informed decisions around the issue. According to Fed Chair Jerome Powell, the ultimate test will be assessing whether or not “clear and tangible” benefits negate investment costs and security risks associated with digital currencies. 

The need for a CBDC has US government officials divided. Although some wish for the US to serve as a leader in the arena, others remain more skeptical. Nonetheless, around the world, governments are actively engaged in projects to develop their own digital currencies. 

Pros of CBDC

Advocates of a central bank digital currency point out that it would help get payments to people quickly during crises; whether pandemic-related, climate-related or otherwise. Other arguments in favor of a US-based digital currency include remaining competitive with fellow G8 nations. China has already begun the first phase of its CBDC initiative.

Cons of CBDC

In the eyes of some, downsides include federal authorities’ high levels of control over the blockchain network used for the digital currency. Central banks would also be able to see precisely how individuals spend money, depriving people of privacy. 

Stablecoins

These types of digital currencies attempt to tie themselves to existing government-backed currencies. Some see them as a bridge between old-world financial operations and modern cryptocurrency endeavors. 

However, stablecoins are backed by various forms of short-term debt. In turn, these can experience sudden illiquidity. Although stablecoins have a somewhat shaky backing, the coins are branded as operating like perfectly safe holdings. 

Nonetheless, this type of financial product can precipitate macroeconomic disasters, according to experts. A US central bank digital currency is expected to be substantially less risky than stablecoin type products. 

The world’s shift to digital currency

Over 90% of the global economy is exploring centralized bank digital currencies. According to experts, interest in CBDC increased sharply in 2019, when Facebook declared that it would create its own digital currency, known as Libra. This digital payment system would be available to Facebook’s 2 billion users. 

In the Bahamas, officials recently announced integration of the digital Sand Dollar into the stock exchange. The world’s first cross-border central bank digital currency exchange program is underway in Australia, Malaysia, Singapore and South Africa. In El Salvador, bitcoin is now a legally accepted tender, although the move has led to protests. Kenya is close to digitizing its entire economy via a payment system known as MPESA. And in Europe, the European Central Bank has released plans for a digital euro, which is expected to emerge in July of next year. 

For more information about cryptocurrency trends, see Cyber Talk’s past coverage here and here. To receive expert-curated content, cutting-edge cyber security analysis, and premium cyber security resources each week, sign up for the Cyber Talk newsletter.