Central bank digital currencies (CBDCs) offer an innovative new form of money that facilitates monetary policy implementation and increases financial inclusion; yet these digital tokens don’t come without risks.
Programmability in a CBDC may be used to monitor consumer spending and may infringe upon fundamental rights, while also making transactions taxable and traceable, raising concerns that these transactions disenfranchise elderly or vulnerable consumers.
Stablecoins
Stablecoins provide users with both the stability and purchasing power of traditional currencies while taking advantage of cryptocurrency’s utility benefits. Like other cryptocurrencies, stablecoins can be traded like any other digital coin and used to pay for goods and services or transferred quickly across borders without incurring high bank transfer fees.
Stablecoins achieve price stability by being tied to assets with less fluctuation, such as fiat currencies or gold. Their entity creates a reserve of these assets and issues coins with equal values to them – unlike cryptocurrency such as Bitcoin which does not back itself against assets.
Some stablecoins are backed by cash and cash equivalents, while others use exchange-traded commodities or other financial instruments as backing. Stablecoin issuers make money through charging issuance and redemption fees for their stablecoins.
Some stablecoins also provide additional features that increase their utility and draw in investors, like interest earning by lending the coin back out; this staking service may not be available in all countries and users should carefully assess any associated risks before using it. Other stablecoins offer low cross-border rates – for example the digital sol based off Peru’s national currency can help consumers make international payments with minimum fees such as making international payments with only cents at stake!
Cryptocurrencies
Cryptocurrencies are digital assets stored on blockchains – public distributed ledgers that store them. Cryptocurrencies provide high degrees of anonymity and traceability, making them attractive to criminals who use them to launder money or finance terrorist acts, while central banks may encounter difficulties managing money supply control and conducting monetary policy effectively. VIKRAM HAKSAR, assistant director in the Monetary and Capital Markets Department at the International Monetary Fund; any opinions expressed herein are solely his and do not represent official policy from IMF.
CBDCs resemble cryptocurrencies in that they are controlled and regulated by central banks. Therefore, unlike their cryptocurrency counterparts, they do not run the risk of volatile prices and price volatility as easily. Furthermore, they offer households and businesses alike an alternative payment solution which makes payments easily and securely.
CBDCs offer more than financial inclusion; they also enable easier monetary policy implementation by decreasing payment system maintenance requirements and transaction costs, as well as offering cross-border payments and smart contracts services.
As global trends towards cashless societies accelerate, central banks around the world are exploring whether or not to issue CBDCs. Riksbank in Sweden recently unveiled a pilot program called e-krona that is powered by DLT and will be made available to members of the general public for testing purposes.
Stable currencies
Stablecoins serve to bridge the gap between fiat currencies and cryptocurrency by being pegged to real-world assets like gold or the US dollar, with the aim of reducing price volatility while providing greater utility benefits than traditional cryptocurrencies. Stablecoins use various stabilization mechanisms such as backing them with cash equivalents, other cryptocurrencies, commodities or algorithms – some even manage supply to ensure value stability – but ultimately its success hinges on enough reserves being held by coin issuers in case their stablecoins collapse and lose value over time – only then will its success be assured.
Fiat-backed stablecoins feature reserve assets – usually consisting of traditional currencies like dollars and euros – which act as collateral. This enables the token’s price to remain steady, while when holders want to redeem tokens they own from this stablecoin, its issuer will deduct an equal amount from its reserve account when redeeming tokens from Tether (USDT) or TrueUSD – two such examples being Tether (USDT) and TrueUSD respectively.
Supporters of CBDCs argue they will modernise payments, provide an alternative to physical cash and provide utility benefits such as fast international money transfers without expensive bank fees. But critics warn of risks to financial privacy, economic freedom and free markets associated with CBDCs.
Digital currencies
Digital currencies are a form of medium of exchange that uses cryptography to secure transactions and verify ownership, providing a fast and convenient means of paying for goods and services while also serving as an investment vehicle like savings accounts or stock portfolios. Unfortunately, security for digital currencies cannot be assured and many cryptocurrencies have been compromised and lost value over time.
Central banks have been slow to embrace digital currency technology. Now they are turning their attention towards CBDCs (central bank digital currency), a unique type of money which eliminates middlemen by directly moving funds between accounts without incurring fees; similar to cryptocurrency but more stable; CBDCs can be traded on exchanges and used for making purchases or even be deposited directly into an individual’s bank account.
CBDCs can be an invaluable asset to governments, providing a means of disbursing stimulus payments and benefits while simultaneously reducing remittance fees and expanding financial inclusion. But they may create new problems if given different functionality and data disclosure rules than commercial bank accounts – for instance Nigeria’s eNaira remains barely used two years after being introduced as one such CBDC.