Updated: Aug 5, 2021
What are CBDCs?
Central Bank Digital Currency (CBDCs) are essentially a digital equivalent of banknotes and coins (hence the 1s and 0s in the illustration). Their design will probably be like existing online payment platforms, but money held on CBDC app will be a deposit at the central bank (not a commercial bank intermediary). Therefore, money held as CBDC is safer or deemed ‘risk-free’ as your deposits at commercial banks are only insured by governments up to a certain point if the commercial bank fails.
So why are Central Banks going digital?
Central banks interest in CBDCs has gained momentum recently due to several factors. Most notably, the prominence of volatile cryptocurrencies like Bitcoin and the introduction of payment services by big tech firms like Facebook’s Diem. The rise of these alternative payment methods means Central Banks lose their control of the money supply and financial stability. With CBDCs, central banks can claw back some of their territory, and people would be able to keep some of their money in official safer CBDC accounts.
Is it the end of banknotes and coins?
China has started large scale trials of ‘e-yuan’ with the EU, UK and US, all investigating the issuance of their own e-currencies. For the near future, central banks will continue to supply banknotes and coins alongside their e-currency. Not everyone will be willing to give up hard cash or be able to work smartphones. So maybe ‘The Professors’ plans are safe for now!
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