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State-Backed Digital Currencies: Why Are World Governments Looking Towards Them?

Governments always seek ways to make their economies more efficient. And with the rapid growth of the cryptocurrency market, they turned their eyes to this field in search of new solutions.

With the continuous advancement of crypto acceptance by traditional companies, we can now observe the trend where central banks across the world are increasingly looking into the matter of digital currencies backed by a state – namely, CBDCs (central bank digital currencies).

The question many of them are trying to unravel is how central bank digital currencies could influence their economies, help them transform and progress? What benefits are there to adopting CBDCs? 

Let’s take a closer look at this issue.

Unlike cryptocurrencies that operate in a decentralized manner on blockchain, a CBDC is, by its nature, a digital representation of a country’s fiat currency. 

In many ways CBDCs hold the same benefits as cryptocurrencies – faster and cheaper transactions compared to traditional money, greater transparency, high security, etc. But seeing as how they are state-issued, CBDCs are developed in a way that preserves the state's control over them.

A major advantage that CBDCs can provide to a government is the ability to observe the real-time macroeconomic situation in a country, thus creating avenues for more effective implementation of monetary policies.

The downside to this is the potential deprivation of privacy that users of CBDCs could experience, seeing as how such currency would be much more controlled than cash and offer real-time insight into people’s personal finances. 

That said, the world is moving towards digitalization more and more, and cash will in all likelihood come out of usage eventually one way or another. In turn, greater oversight would allow governments to use CBDCs to combat illegal activities, such as money-laundering and frauds, more efficiently, allowing people a greater chance of keeping their money out of the hands of criminals. 

In addition to all that, CBDCs represent a viable financial solution for the unbanked and have the potential to greatly improve cross-border transfers, seeing as how application of the DLT technology would eliminate any need for intermediaries, making transactions go much faster at lesser costs.

Of course, all of these advantages will only become possible in the event that any government actually makes a decision to issue a CBDC and distribute it among its population. And while there are many ideas in consideration around the world, this is not yet a definite possibility.

Central bank digital currencies could potentially pave the way to a new worldwide financial infrastructure, but for now all we can do is wait and see which road governments will decide to walk.

 

 

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