Cryptocurrencies are associated with high volatility, high power consumption, low throughput, fraud, and difficulty to use without the support of service providers. However, the underlying blockchain technology is highly secure, and financial organizations and governments are exploring ways to leverage it to improve and simplify the payment experience for users. This is where Central Bank Digital Currencies (CBDCs) come in.
CBDCs are powered by blockchain technology while possessing the same characteristics as the country’s sovereign currency. They eliminate liquidity risk, and credit risk as the central bank manages them directly. If your current bank becomes insolvent, you may lose the money you currently have on deposit with it; but in the case of CBDCs, your funds will always remain protected. The digitization of currencies will therefore renew the confidence of citizens.
CBDCs can be accessed from any corner of the world and are a great way to make the financial ecosystem more inclusive. They will usher in a decentralized operations framework and contribute to user privacy.
India is also working on a digital rupee which is expected to be rolled out in early 2023.
However, it remains to be seen how the role of commercial and national banks will take shape once CBDCs come into play. The introduction of CBDCs is expected to have broad implications for the banking system. Experts believe that the entire financial framework may have to reinvent itself.