In an effort to mitigate the fear of potentially losing monetary control, several central banks across the world are now focusing on developing and issuing a Cryptocurrency. Tech giant IBM sees a serious future for a central bank digital currency (CBDC) as the company’s commissioned report reveals that a CBDC could be ready for consumers’ use within the next 5 years.
The OMFIF-IBM report titled ‘Retail CBDs: The next payment frontier’ emphasizes the challenges the central banks are facing due to the arrival of Bitcoin and its underlying technology, blockchain. The report noted that “Advances in financial technology are compelling central banks to react to emergent challenges from the private sector and address weaknesses in payment systems.”
The technological advances are not only worried policymakers, but researchers also assert that individuals do not trust financial institutions anymore, since the 2008 financial crisis. As a result, the distrust of central banks in developed economies is increased. And this is the reason the central banks globally are now going to launch digital currencies within the next five years.
Researchers define central bank digital currency as a digital asset issued by a central bank for the purpose of payment and settlement, in either retail or wholesale transactions. They said, “A retail CBDC would be used like a digital extension of cash by all people and companies, while a wholesale CBDC could be used only by permitted institutions as a settlement asset in the interbank market.”
As a big player in technology space, IBM and the independent think tank for central banking, OMFIF, carried out the study during the summer of 2019, where they included contributions from 23 leading central banks. The OMFIF-IBM report also indicated a continuous decline in the use of cash, mainly in developing countries, while the use of private, decentralized cryptocurrencies continues to rise. The costs of handling cash and related logistical difficulties also will grow.
Thus, maintaining control of public means of payments, policymakers are turning their focus to blockchain and other technologies. The report further states “73% of central bank survey respondents would require retail CBDCs to be available under all circumstances and for all types of payments where cash is currently used.”
At the present time, there is a very limited base of users preferring digital currency. It is a method of payment which exists only in the electronic form. The digital currency has a wide range of advantages, including easy and timely payments, lesser transaction costs, safer transactions, among others. It can assist financial sector companies by eliminating the risk of exposure as they are highly secure. However, due to risk factors such as volatility of the currency, identification of payment beneficiary, regulatory compliance, and transaction risks, the acceptance of this currency by the financial institutions is limited.