The head of the International Monetary Fund, Kristalina Georgieva, stated that 110 countries are considering the development of a central bank digital currency (CBDC). Among them are advanced economies, like China and the United Kingdom, and developing ones like Tanzania and Nigeria. However, the production of central digital currency is bringing significant changes to the modern financial sector. Read on to learn the three most important ones.
Rebalancing of Financial Systems
The implementation of CBDC will have a wide-ranging impact on people and companies as well as banks and central banks. At this time, it is simply not possible to predict all the specific risks and benefits of this. There are too many factors to consider, including: (1) who has access to the currency and on what terms, whether the currency will be secure, how it’s exchanged for other types of money, and much more. This will have an impact on the banking architecture and the banks’ ability to perform their functions. Moreover, the widespread use of CBDC could lead to a significant reduction in the role of commercial banks in the state’s financial system, which would inevitably affect the country’s financial stability.
Decreased Anonymity of Users
The anonymity of transactions using digital currency is a major attraction factor for most users. But it is precisely this anonymity that regulators oppose. For example, the Indonesian Central Bank has openly identified the development of CBDC as one of the tools to combat the growing influence of Bitcoin. It is assumed that when using CBDC, each operation will be documented. But is this needed by a modern user? Banks already have a great amount of information about their clients. If CBDC becomes the primary means of payment, there will be no privacy at all. The regulators will be allowed to monitor and control all transactions.
Increased Risk of Cybertheft
In analyzing the future of CBDC, we assume that it will be a reliable and secure tool. However, this is not necessarily the case. In terms of the technical readiness of some potential users, the release of CBDC may be premature. Experts estimate that the global cost of cybercrime could be as high as $600 billion per year. Central banks can also become victims if they do not pay sufficient attention to cybersecurity risks. In February 2016, cybercriminals were able to steal $80 million from the Central Bank of Bangladesh. Almost another $1 billion was at risk. In the case of cyber attacks, the entire state’s financial system will be jeopardized. That makes the introduction of CBDC in countries with weak financial institutions extremely risky. Moreover, in times of war or conflict, digital money can be used as a weapon because of its programmable functions.
The peculiarity of technological progress is that obsolete tools gradually become less popular. Of course, no one will stop people from using banknotes or other traditional methods of payment. But in the current reality, CBDC implementation is no longer a question of probability but of time. However, before introducing new technological solutions in the financial sphere, all possible risks must be clearly presented. Such systems should be designed with the goal of maximizing user benefits, improving the effectiveness of the monetary policy, and reducing the risks to the state’s financial stability.