Given the rise of cryptocurrencies such as bitcoin, and the growing use of digital payment systems, states want to avoid giving space to private actors or foreign powers, losing the ability to conduct sovereign monetary policies.
It should be remembered that China is proceeding with the tests of the pilot program of a digital yuan.
WHAT IS A DIGITAL CURRENCY
It is the digitization of the currency issued by the US Federal Reserve, to free it from systemic risks without the need to have a bank account.
The main difference between a digital currency and the traditional one is that the first It allows the possession of money without the need to rely on a bank account or another type.
Fiat money is a currency issued by the government of a country. Traditionally, it comes in the form of bills and coins. It is considered a form of legal tender that can be used to exchange goods and services. The technology enabled governments and financial institutions to move from physical fiat money to a credit-based fiat model, in which balances and transactions are recorded digitally.
The introduction and evolution of cryptocurrencies and blockchain technology created an increased interest in cashless societies and digital currencies.. If eventually implemented, these currencies would have the full faith and backing of the issuing government, just like fiat money.
In specialized terminology These digital currencies are known as CBDC, the acronym for Central Bank Digital Currency. and they would be the opposite of a cryptocurrency that by definition does not have a centralized organization that issues and controls them.
The main objective of CBDCs is to offer businesses and consumers privacy, portability, convenience, accessibility, and financial security. But unlike a decentralized crypto, a CBDC also provides a country’s central bank with the means to implement monetary policy that provide stability, control growth and influence inflation.
Central bank digital currencies would also reduce the risks of using cryptocurrencies in their current form, at least with regard to their price volatility, since it is assumed that the monetary authorities of the countries that issue them would have the possibility to maintain its stability.
On the other hand, a CBDC does not need to be based on blockchain technology like cryptocurrencies. It is one of the strategies analyzed, but not the only one.
Advantages and potential problems of the digital dollar
Creating a digital dollar can create benefits and risks alike, compared to the current form in which fiat currencies exist.
Among the advantages, for example, a CBDC would eliminate counterparty risk. That is, in the face of events such as a bank failure or a bank run, users would have immediate access to their holdings. In fact, they don’t even need a bank to hold them. The risks, in any case, are related to the conduct of the policy of the central bank that issues them.
On the other hand, has the potential to greatly simplify international payment systems to the point of making them enormously cheap. Today, the costs of the international payment system are high and access is not universal.
Source: Ambito
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