Friday, March 29, 2024 | Ramadan 18, 1445 H
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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

The Central Bank Digital Currency: Between the reality and the future

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Money and payment systems have changed constantly over time. From barter economy to digital currency through different forms of money: bills and coins, checks, plastic money (credit and debit cards), etc. This development was motivated by two main objectives: low transaction cost and improvement of economic efficiency, and consequently more opportunity for economic growth. In the era of digitalisation, this is still valid.


With the rise of cryptocurrencies, such as Bitcoin, the idea of central banks launching their version of a digital currency has been on the horizon for quite a while. The Central Bank Digital Currency (CBDC) is a digital form of fiat currency issued by the central bank of that country. The issuance of this form of currency circumvents commercial banks and creates accounts for its' citizens directly controlled by the central banks. For instance, cryptocurrencies run on distributed ledger models that are operated through blockchain technology. They may be considered the most decentralised form of currency.


Issuance of CBDCs may be considered a paradigm shift in the evolution of money in human society. This is because CBDCs are a direct liability of central banks, and the citizens would hold the accounts directly with the central bank, without any intermediary role of commercial banking organizations.


The advent of CDBCs is expected to bring a lot of advantages for both governments as well as citizens such as the elimination of transaction costs of using financial intermediaries.


The first characteristic of CBDC is that it is a central bank currency, hence having the same benefits as currency: in terms of payment methods, the CBDC is a completely liquid and secure payment method. By placing a strict security constraint on the central bank, the issuance of a CBDC would also enable the avoidance of the potential distortions brought on by an oligopoly, which runs the risk of excluding private businesses.


The CBDC is frequently seen as a means of promoting financial inclusion by providing widespread access to digital payment methods.


For both the central bank and the banking industry, the development and management of a CBDC's circulation need to be noticeably lower than those induced by fiduciary currency. From the perspective of consumers, a detailed CBDC would enable them to reduce the costs associated with the time it takes to travel to an exchange location, and withdraw their currency.


Furthermore, it might facilitate cross-country transactions and lower transaction costs for people and small enterprises with little or expensive access to financial institutions. The volume of transactions using digital currency won't be capped like it is with conventional money.


Additionally, a system of CBDC might function as a secondary payment method in addition to cash, enhancing operational resilience. The CBDC reduces transaction costs for individuals and small businesses with limited or expensive access to financial institutions and enables long-distance transactions. Contrary to physical currency, the number of digital currency transactions will not be restricted.


The introduction of CBDCs presents three major challenges that must be addressed: first, the expanding threats to people's privacy; second, selecting the technology which should be used to strengthen privacy and security; and third, the regulatory framework that must be set up to address problems like a cyber-attack. The issue is one of scale: it concerns the central bank's reputation, or more specifically, its most significant role in directing monetary policies.


Deep-seated consequences of CBDC. They may cause alterations that affect the development of monetary policy, financial stability, financial sector intermediation, the exchange rate, and the operation of the payment system Before introducing an CBDC, and as with any significant modification, rigorous evaluations and examinations are required, which are crucial to the smooth operation of the financial system, and also to ensure that commercial banks, which are an important player in this system, continue to play a dominant role as economic actors.


Launching a CBDC help to obstruct the growth of crypto-assets under its significant form of units issued on public blockchains, cryptocurrencies present several risks, including high operational risk, strong volatility, and liquidity risk.


In this regard, comes the role of the Basel Committee on Banking Supervision (BCBS), which is working continuously to meet new challenges of the digitalisation of crypto assets.


The committee postulates that a comprehensive and forward-looking regulatory and supervisory strategy is required given the rapid innovations in decentralised finance and crypto assets. Therefore, the Basel Committee's work in this area will be influenced by its goal to improve global bank regulation, supervision, and practices to improve financial stability.


The rise of CBDC could benefit the economy and would raise some interesting questions, primarily regarding the distribution of responsibilities between central banks and the private sector in the provision of currency in the event of the issuance of a CBDC, whereas a CBDC might be harmonised with the expectations of highly globalised financial institutions.


Additionally, international collaboration may prove crucial for safeguarding international payments and supporting developing countries on this issue. In the absence of one with such collaboration, this group of countries that issue CBDC may observe their risks to cyber security are significantly rising, and issues like data theft are becoming more prevalent.


Furthermore, there is a need to assess the future role of accounting in the new digitalised currency era, where the definition of assets and liabilities is likely to change. Global organisations such as FASB need to look into the impact of digital currencies on accounting practices in the future.


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