Researchers at the Bank of Japan (BoJ) are the latest to share their thoughts on whether central banks should issue national cryptocurrencies also known as central bank backed digital currency (CBDC).
In this article, we cover the opinions expressed by the bank’s researchers on the issue of CBDCs as well as the advantages and disadvantages of going down the path.
First, the report acknowledged that the controversy around whether central banks around the world should issue CBDC’s is gathering momentum in recent times. However, it adds that the Bank of Japan doesn’t plan to release such a national cryptocurrency soon, a stance that other developed economies have also adopted.
Moving forward, the report asserts that CBDC’s can exist as either —
Digital currency for mainstream use in the same form as bank notes
Digital currency to facilitate large-value settlement between the central bank and local banks.
Dwelling majorly on the first application which is the major bone of contention among countries contemplating CBDC issuance, the report cited the following merits and demerits.
Advantages of Issuing CBDC
Enhancing efficient management of central bank reserves as well as reducing costs for issuing currency to members of the public.
Tapping into the increase in mobile payment adoption to bank the unbanked.
Mitigating the risk incurred by citizens when they hold fiat currencies
Ensuring that central banks continue to fulfill its role of providing a payment tool especially at a time when citizens are embracing the use of digital money for in-shop and online purchases.
Giving citizens alternative payment options that will draw their attention from highly volatile cryptocurrencies like Bitcoin.
Providing the option for central banks to choose whether or not to have real-time information about individuals and organizations holding the national currency. This is impossible with fiat currency and will increase AML compliance since the bank can easily track token holders.
Disadvantages of Issuing CBDC
Reduction in the capitals controlled by commercial banks since individuals can access money directly from the central bank.
A liquidity crisis could arise since depositors could withdraw their deposits and purchase CBDCs on the Internet or through smartphones without rushing to bank branches or ATMs.
Issues of data security because a lot of user data will be tied to CBDC transactions.
In conclusion, the BoJ report notes that if CBDC’s are implemented in the right way, then it could “maximize the benefits of digital technologies to the economy.”
In similar developments, Stmarket.co recently reported that the Bank of Korea warned about the dangers of issuing CBDCs. But even that, has not stopped countries like the Marshall Islands and Venezuela from going down that path.
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