The demand for cryptocurrency now has governments considering if they too could develop their own digital currency that could be used on a much wider scale. Central banks are interested in digital currency since the demand has peaked during the pandemic and the value continues to rise as investors and companies are pouring money into Bitcoin, adding to its credibility.
A few countries around the world have been experimenting and testing while others are still making research on how best to implement a system where the central banks create a digital currency. China has been working on creating its own digital currency since 2014 and massive trials were conducted in a number of cities.
It is said that when China hosts the Winter Olympics, people will be using the new digital currency to shop and stay in hotels and also buy meals in restaurants. Clearly, China is far ahead of the rest of the world and may be on its way to launch the digital Yen soon.
What is Central Bank Digital currency?
Central bank digital currency is simply the digital form of cash that would be monitored by the Central Bank. Important to note is cryptocurrencies today run on a decentralized system which means there is no central body to monitor people’s transactions. Instead of banks printing money, they would create digital coins that people keep in their digital wallets.
Why central banks are interested in digital currency
Let’s take a look at some of the benefits of such a move by central banks.
Easier cross border payments.
It is quite expensive to send and receive money across different countries worldwide mostly because of the different rates different banks will offer along with other charges. At least 5% of cross border payments goes into paying these charges. With a digital currency from a central bank like the Bank of Uganda, these charges are essentially eliminated. With them out of the way, sending and receiving money across different countries is easier which could be why central banks are interested in digital currency.
Promoting financial inclusion.
Today online transacting has been embraced on a large scale which has led to the success of Financial technology as it is incorporated into people’s daily activities. In Uganda, the percentage of mobile money account holders has grown to 43%. There are fewer people using banks because of charges that they can’t afford in the long run. With central bank digital currency, there would be more financial inclusion since it is more affordable to own and use digital currency.
Risks associated with central bank digital currency.
Commercial banks could run dry.
During economic recessions, people usually prefer to hold money in different forms since its value is down. Central banks are interested in digital currency but in case of such situations, many people could be led into withdrawing all of their money from commercial banks and preferably holding it in form of digital currency. Commercial banks rely on deposits to run daily operations and this could force many to shut down.
One of the most digital risks is the exposure to hackers. Government systems have been infiltrated a number of times by malicious people with intent to gain access to secret information for their own selfish purposes. Experts believe, if central banks developed digital currencies and experienced a cyber attack, the results would be fatal.
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