Bank of America released a report on Tuesday that digital currencies like stablecoins and central bank digital currencies (CBDCs) are the logical next step in the evolution of money and payments.
Central bank digital currencies, according to analysts led by Alkesh Shah, “do not change the definition of money, but will probably change how and when value transfer is over the next 15 years.” They also have “the potential to revolutionize global financial systems and may be the most significant technological advancement in the history of money.”
CBDCs frequently use blockchain technology to boost productivity and cut costs. A stablecoin is a cryptocurrency with its value tied to another asset, like the US dollar or gold.
Bank of America anticipates that central banks in rich nations will concentrate on payment efficiency. While those in developing economies will concentrate on financial inclusion. The advantages and hazards of CBDCs depend on how they are designed and issued.
However, there are hazards associated with CBDCs. Increase in competition amongst bank deposits, resulting in a loss of monetary sovereignty and rising inequality between nations worldwide.
The development of this novel form of money is still in its infancy. Most nations, like the United States, have begun to consider it, as with the digital dollar technology, demonology has a complete, and a few ambitious countries, like China, are piloting it.
Each nation looking at a CBDC has a unique strategy. The same fundamental ideas and blockchain technology that underpin Bitcoin, the original cryptocurrency, provide the foundation for several CBDCs.
Significant Technological Innovation in CBDCs
CBDCs might “revolutionize global financial systems and may be the most significant technological innovation in the history of money,” the analysts’ research note stated, according to the newspaper.
Bank of America also expects financial regulators and central banks in wealthy and developing nations. This to take notice of CBDCs’ potential for greater efficiency and lower costs.
BoA acknowledge there is a chance this type of currency will increase competition for bank deposits, hence loss of monetary sovereignty and inequality among nations.
The BoA emphasizes that central banks should keep up with technology advancements even though it is not hopeful that all nations will implement CBDCs within the next ten years and warns that doing so “risks irrelevance over the longer run.”
The memo concludes by stating that governments and central banks worldwide should rely on the private sector to support innovation in digital assets such as CBDCs and stablecoins.
Furthermore, the BoA predicts that financial regulators and central banks in developed and developing nations will take notice of the potential for improved efficiency and reduced costs provided by CBDCs.
Despite this, the team acknowledges that this type of currency might still increase. The risk of driving rivalry with bank deposits, a loss of monetary sovereignty, and the promotion of inequality among nations.
Fintech Companies and Banks Play Their Part
CBDCs may reduce the influence of the current financial system, particularly banks. BIS report, we risk systemic bank runs if many people rush to convert their money into CBDCs rapidly. However, that doesn’t negate that banks and fintech companies can participate in the uptake of CBDCs.
A hybrid approach for CBDCs is being investigated by many central banks worldwide. Where by central bank distributes CBDCs to a regulated organization like a bank or fintech firm. While intermediate organizations would conduct the fundamental know-your-customer (KYC), anti-money laundering, and transactional checks. CBDCs would be governed and supervised by the central bank.
Banks must drastically restructure their teams and organizational structures to do this. Bank staff need to receive basic distributed ledger technology training to evaluate their current facilities should improve with CBDC technology. A bank will also need more technical people if it charges and creates the foundation for a CBDC.
Further, if the nation’s banking infrastructure is weak, private companies will recruit to handle CBDC onboarding. For instance, Jamaica and technology company eCurrency have partnered to integrate the nation’s financial institutions.
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