Central Bank Digital Currencies are taking over! Read Why?

By Shivangi - 20 Apr 2022 Last Updated: 17 May 2022
Central Bank Digital Currencies are taking over! Read Why?

The Central Bank of the United Arab Emirates (CBUAE) is considering launching a central bank digital currency (CBDC). One of the key priorities of the country's 2023-2026 agenda is the issuance of digital currency. The most recent strategy intends to restructure the country's financial sector through digital transformation and sophisticated technology.

According to the Atlantic Council, 87 countries are working to establish a central bank digital currency system (CBDC). More than 90% of global GDP is generated in this way. The global financial sector is undergoing a revolution as the use of digital currencies grows. Nine countries have now fully implemented a digital currency. With their CBDCs, 15 countries are in the pilot stage and preparing for the launch. What are CBDCs, and how may they help you?

Thus, in this blog we will deeply cover all the aspects of CBDC which are relevant for you. So, without any further ado, let’s learn!

Central Bank Digital Currency: What is it?

A central bank digital currency is a type of virtual currency that is issued and regulated by a country's central bank. It can be seen as a digital version of the country's fiat money that can be used to exchange products and services. Traditional forms of money, such as banknotes and coins, can be replaced with a CBDC, and countries can advance toward a cashless society with the government's complete support.

CBDC and Cryptocurrency: How are they different?

Cryptocurrencies are based on decentralized blockchain technology, which means they are regulated by several hubs throughout the world rather than a single central hub. CBDCs, on the other hand, are governed by the central bank. Because cryptocurrencies are unregulated, their value might fluctuate depending on user interest, usage, and other supply and demand considerations. When using Cryptocurrency for financial transactions, this adds an element of risk. CBDCs are stable because the value of a country's fiat currency is mirrored in them.

Cryptocurrencies have no legal status, and their creation, distribution, and transactions necessitate complicated mathematical calculations. CBDCs are backed by the central bank, and the central bank will assist their transactions and payouts.

Various Types of CBDCs

CBDCs are divided into two categories:

 

CBDC in Wholesale

CBDCs are sold in bulk to financial institutions. It's the equivalent of having reserves at a central bank. For example, the central bank will open an account for financial institutions to deposit funds or make transfers.

CBDC in Retail

Retail CBDCs, on the other hand, are intended for use by both individuals and companies. It can be used in the same way as tangible money. Retail CBDCs can offer cash-based access (through digital wallets) or account-based access to their customers (through bank accounts).

What are the Benefits of CBDCs?

CBDCs have a number of properties that make using this money system quite advantageous. The potential benefits of CBDCs are mentioned below-

Effective

They are more effective than actual currency because transaction costs are lower.

Protection

They give protection against cyber-attacks and dangers because they are legal currencies.

Ease

They foster financial inclusion by making it simple and accessible for everyone, with or without a bank account, to access money on their phone. They also have the ability to make monetary policy flow quickly and easily.

Efficient

With rapid and low-cost exchange mediums, they improve the efficiency of digital payment systems.

Transparency

They increase transaction tracking transparency, making it easier to curb illegal activity.

 What are CBDC’s obstacles or challenges?

Some countries, such as Ecuador and Denmark, have abandoned efforts to introduce CBDCs because of the numerous disadvantages the concept entails. 

The following are some of the common issues that countries may face when establishing CBDCs:

  • It has the potential to have a significant impact on a country's whole financial structure, causing significant changes in sectors such as Investments, interest rates, and bank reserves, among others.

  • When it comes to digital currencies, privacy is a big source of concern. To prevent system intrusion, thefts, and other threats, authorities will need to put in place rigorous security measures and monitor them frequently.

  • Deposits may be shifted from commercial banks to central banks, causing a country's bank system to be disrupted.

  • Commercial banks may lose money and have to borrow money from other countries to carry out their activities, posing a threat to the national financial system.

  • Banks may compete with one another by using techniques such as competitive interest rates or bank deposits, which can be harmful in the long run.

Read More: What is Digital Account and How to One Open Digital Account in Dubai

CBDC in the United Arab Emirates

Below mentioned are past as well as future steps to be taken by our Central Bank and other organizations for the betterment of CBDC-

  1. The UAE Central Bank (CBUAE) is planning to establish its digital currency as part of its 2023-2026 agenda. The move is also likely to assist CBUAE achieve its objective of becoming one of the top ten central banks in the world.

  2. In 2019, the CBUAE cooperated with a Saudi Arabian peer on Project Aber, a cross-border payment project based on blockchain technology. The project concluded that distributed ledger technology may be used to successfully enable cross-border transactions.

  3. The CBUAE stated in 2021 that it would be testing cross-border transactions with three central banks from China, Hong Kong, and Thailand. The Bank of International Settlements is said to be working on the subject as well. This "Multiple Central Bank Digital Currency (m-CBDC) Bridge" is planned to put distributed ledger technology to the test for foreign currency payments.

  4.  Along with CBDC, the UAE central bank wants to foster digital transformation in the whole banking industry in the 2023-2036 roadmap. It seeks to integrate digital IDs, AI, and machine learning to improve inspection and monitoring in order to promote financial inclusion.

CBDC's Future- what should you expect?

9 countries have started CBDCs as of February 2022. 78 additional nations have begun or are in the process of launching CBDC initiatives. UAE, India, Jamaica, Sweden, and other countries are among them. CBDCs are still in the early stages of development, but they provide the finance industry with a wide range of prospects. CBDCs will be the future of finance, with central banks willing to employ cutting-edge technologies.

Conclusion

CBDCs are changing the way the money operates, at a fast pace. Soon they will be an integral part of Monetary Institutions. Therefore keeping up with the changing norms is relevant. We hope this blog provided you with insightful information. For more information on other related aspects, feel free to check out our website as well.

By Shivangi

20-Apr, 2022

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