Rethinking Currency: How the Digital Revolution is Transforming Currencies and Finance, Emerging Trends, Central Bank Digital Currencies.
Recently, central banks around the world have been exploring the potential benefits and risks of issuing their own digital currency. On October 26, 2018, the Bank of England (BoE) released a report outlining how it could issue a CBDC. The report recommended exploring the use of distributed ledger technologies (DLT), with an eye toward speeding up cross-border payments and allowing the BoE to better manage its assets.
Central banks are reconsidering whether to issue their own cryptocurrency, a digital currency that is issued by a central bank, in response to the growing number of digital payments offered by private companies.
The idea of a Central Bank Digital Currency (CBDC) is spreading. The latest technological advances have propelled the idea of CBDCs and gave birth to the concept of open-source digital currency (as opposed to private central bank issued digital currency).
Whether it’s a currency, token, or asset issued by a fiat central bank (CBFD), a digital CBDC is likely to become an important part of the financial infrastructure in the future.
Fiat currencies are the most common form of money in the world. They are generally backed by a government and tend to be issued by a central bank. The value of a fiat currency is determined by supply and demand, and the issuer has no obligation to maintain its value.
There are several different types of fiat currencies, below are the top 4:
The US Dollar is the most widely used currency in the United States and is sometimes referred to as “US$”. It is also used as a unit of account, which means that it can be used to buy goods and services from other countries. The US Dollar is the standard currency of the United States of America. It was first introduced in 1792 and has been used ever since. The dollar is divided into 100 cents, which are further subdivided into mills. The US dollar is the world’s reserve currency. It is the most liquid currency and is used in 41% of all transactions.
The Pound is the currency of England, Wales, and Northern Ireland. It is divided into 100 pence (p). The pound sterling is often abbreviated to “£” or “GBP”. The pound is the second-most valuable currency, valued at 1,000 Riyals, or $0.067, and is used in 36% of transactions.
The Saudi Riyal has been the third most popular currency since it was first introduced in 1995. It is primarily used by expatriates living in Saudi Arabia and its Gulf neighbors, but it can be traded on some foreign exchanges. They are also known as “funny money” because they are used for all kinds of transactions in Saudi Arabia and other Middle Eastern countries where there are no other legal tender currencies.
The dirham is worth 2,000 Riyals. The dirham was only introduced in the year 2000 when oil prices skyrocketed and it became a necessity to have a local currency that could be used for everyday transactions. The Dirham is the currency of Saudi Arabia. It has been subdivided into 1⁄2 dirham (دريجا), 1⁄2 reals (ريالا), 1⁄4 riyal (ريال) and 1⁄8 dinar (دنار).The dirham was introduced in 1973 as part of a series of measures to stabilize exchange rates between countries within the Gulf Cooperation Council (GCC).
A lot of people still lack access to banking. Getting a bank account requires going to the nearest bank branch, which might be inaccessible. More accessible services for the under-banked population, and maintaining the public’s trust in payments is a challenge that needs to be addressed on an urgent basis.
Cross-border payments currently face a number of challenges, including slow settlement, high costs, and lengthy processing times. As of the second quarter of 2021, the average cost of sending a remittance via wire transfer was $10.50 per transaction, up from $8.75 in June 2018. This leaves those sending money to friends and family at the mercy of service providers, who charge high fees to move money around the world
The technology behind cryptocurrencies like Bitcoin is what makes this possible. It allows people to send money anywhere in the world at any time and at a low cost. The global remittance market reached $520 billion in 2018 and is expected to reach $1 trillion by 2024. Many regulators and policymakers continue to question whether cryptocurrencies will become widely adopted. This is because they are less likely to be adopted if they have the same problems as existing currencies: price volatility, difficulty in obtaining and spending them, susceptibility to theft or fraud, and an excessive energy footprint.
Encrypted tokens or “coins” are referred to as digital money. These can be kept on a distributed online ledger that is decentralized using blockchain technology. A common example of digital money is cryptocurrency. It must be noted that it is not under the control of the government like Digital Yaun.
A digital currency is a medium of exchange that uses computer protocols to facilitate the transfer of funds, or goods, among individuals in a virtual network. Digital currencies are not physical, nor are they legal tender. However, they are used to buy and sell goods in some cases. Digital currencies are also referred to as crypto-currencies, digital money, cryptoassets or virtual currencies. The main types of digital currencies include Bitcoin, Ethereum and Ripple.
As mentioned before, the Federal Reserve will continue to explore a wide range of design options for a CBDC. While no decisions have been made on whether to pursue a CBDC, analysis to date suggests that a potential CBDC, if one were created, would best serve the needs of the by being:
There are two types of CBDCs which are being used by different governments: retail and wholesale.
This is digital currency that is issued to the general public, which anyone can use, and is considered a digital banking option for any consumer who owns CBDC, whether it be in an account or a wallet.
Many governments, such as the Bahamas, have opted to pursue retail CBDC, due to both its accessibility to consumers who are unable to access traditional banking services, along with the eliminated risk of bank failure due to the fact that the funds are backed by the government.
This is used by financial institutions such as banks, which would make use of a central bank’s CBDC for transactions.
A few countries such as Saudi Arabia have adapted this, due to its security, as the digital legger that is used by wholesale CBDCs to process and record transactions helps reduce fraud, and its efficiency when it comes to cross-border payments.
Technological advancements have recently resulted in a flood of digital assets with monetary characteristics. An example is “cryptocurrencies,” which are the result of a relationship between cryptographic and distributed ledger technologies, which together form the foundation for decentralized, peer-to-peer payments.
A cryptocurrenct is a digital currency that is created and managed through the use of advanced encryption techniques known as cryptography. Cryptocurrencies are used for peer-to-peer transactions, such as bitcoin, or business transactions, such as litecoin. It is commonly accepted that digital currencies are not legal tender. However, they are used to buy and sell goods and services, which makes them a type of virtual currency. Digital currencies are also referred to as virtual currencies or electronic currencies.
A cryptocurrency is not regulated or backed by a government agency or quasi-government body such as the Federal Reserve System (Fed) in the United States. Rather, cryptocurrencies operate independently from any centralized banking system and have no authorities backing them up. The decentralized nature of cryptocurrencies means that they cannot be controlled by any authority or government agency; instead, they operate on a peer-to-peer network where everyone has equal access to them (source).
The first decentralized cryptocurrency was bitcoin, invented by Satoshi Nakamoto in 2009; since then many other cryptocurrencies have been created as well (source).
The mainstream adoption of cryptocurrencies as a means of payment is hampered by the same fundamental problems that have plagued virtual currencies since their emergence: namely, the absence of regulation and acceptance from governments and organizations such as central banks, which creates risks and inefficiencies; issues of volatility and price transparency that can leave consumers with no recourse if they choose the wrong currency or get swindled by a digital exchange; and excessive energy use, which results in financial and environmental costs, without any substantial benefit to offset them.
The exploration, testing, and introduction of central banks’ own stable digital currencies has picked up speed. These Central Bank Digital Currencies (CBDCs), which are issued by financial institutions that are required by the government, have the same legal standing as their fiat currency counterparts. The US Federal Reserve has been one of the first to admit that such a currency may be used in the future and even said that it would not oppose cryptocurrencies if they are backed by a government. According to the Nascus Report, around 105 countries are exploring Central Bank Digital Currencies. While 10 countries have already launched their own digital currencies as per the Atlantic Councils’ CBDC tracker, that are centrally governed.
The world’s first CDBC was launched by the Bahamas in October 2022, named the “Sand Dollar”. Back in 2019, they initiated the project with a pilot version by using 48,000 digital Sand Dollars on multiple islands, namely: Exuma and Abaco. The Bahamian dollar, which is subsequently pegged to the US dollar, serves as the benchmark for each Sand Dollar. The sand dollar cannot be held outside of the United States and does not pay interest. As a result, payees who are not residents of the Bahamas cannot be directly paid in sand dollars. However, it can be applied to all domestic wholesale and retail transactions.
Nigeria is the second country after the Bahamas that has launched its own CDBC. On October 25, 20221, eNaira was launched by President Muhammadu Buhari. Following the launch, the e-Naira app went live and was made accessible to users for download. With the help of unstructured supplementary service data (USSD) codes, which function similarly to SMS messages, the Central Bank of Nigeria (CBN) will make it possible for people without smartphones to conduct transactions using the country’s eNaira central bank digital currency (CBDC) on gadgets like feature phones. Godwin Emefiele, the Governor of the Central Bank of Nigeria (CBN), noted that the eNaira app has been downloaded 840,000 times and currently has about 270,000 active wallets. He called the volume and value of transactions on the platform “remarkable.”
Seven Eastern Caribbean Union nations have developed their own digital currency known as “D Cash.” The digital Eastern Caribbean dollar was first introduced in four of the ECCU’s member nations last year, and the fact that DCash was a relative early adopter of the CBDC caught the attention of monetary authorities all over the world.However, on January 14, the ECCB published an online “region-wise service interruption” notice informing users that the DCash platform had experienced a service interruption that had affected all users. As a result, no DCash transactions are currently being handled.
Many central banks emphasized the difficulty of designing a project in the absence of established standards and little to no experience. The necessity of ongoing research and experimentation is emphasized by all central banks.No doubt this is the nature of any endeavor, but it is particularly the case when there are no established standards or reference points.Furthermore, CBDC projects require a lot of resources, which only gets worse as they get bigger. One of the main reasons Uruguay hasn’t yet started a second e-peso pilot is a lack of resources. The financial burden of the DCash project has been one of the biggest challenges to overcome, according to ECCB staff.
The biggest challenge that most central banks face when developing their own digital currencies is how to regulate them and secure them from cyberattacks. Regulating a decentralized currency is difficult because there are no regulators or government bodies that oversee it. The Federal Reserve has taken steps to address this issue by creating policies and guidelines that govern how the Fed will handle regulation of its own digital currency.In addition, Central Banks are typically not subject to the same regulations as commercial banks. This means that they don’t need to comply with anti-money laundering laws or other regulations that apply directly to commercial banks.
The most basic security concern with central bank digital currency is maintaining control over the private keys used to authorize transactions in the system. If these private keys are lost or stolen, it would be easy for criminals or even malicious software programs to steal money from accounts in their control. Limited access: Another common concern about central bank digital currency is ensuring that people who hold accounts do not have access to them unless they are authorized by the person who owns those accounts. This can be done by only allowing authorized users access to their own accounts.
The lack of skilled staff specially in blockchain is a major challenge. CBDC will require an additional set of skills that are not yet developed and implemented across all banks. These include blockchain developers, who will be required to work on cross-cutting tasks such as designing new platforms and applications, testing, and other areas that are not necessarily related to their core area of expertise but still need to be addressed by them.
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While CBDC can run without blockchain, managing it on a digital ledger such as blockchain can greatly increase the security of transactions between banks, institutions, and individuals, and can further support CBDC as well.
A CBDC backed by blockchain allows central banks to control the currency while protecting the privacy of CBDC’s consumers by not having them have to rely on intermediaries. CBDC rules can also be hard-coded in the blockchain to ensure security measures as well, such as wallet thresholds or third-party access to the system.
The security of blockchain means consumers can put more trust into the CBDC, and are more inclined to use it when switching from fiat currency.
Blockchains distributed system ensures data availability, and reinforces transparency and trust in a transaction of CBDC . Many forms of blockchain, such as Ethereum, have proven their capacity to support very large networks with hundreds of thousands of users, and still maintain data availability throughout.
Performance via the blockchain system means CBDC will be supported when it comes to increasing the load of transactions, as well as increasing the number of nodes in the network. This means more efficient and quicker execution of CBDC transactions are done when they are served by blockchain. In addition to this, increasing amounts of data that will come when there are more consumers who are using CBDC can reliably be managed through the blockchain system.
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