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Five potential effects of CBDCs on the global financial system

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CBDCs have the potential to completely transform the financial system by lowering the usage of cash while boosting efficiency, transparency, and financial inclusion.

Digital fiat currencies supported and issued by central banks are known as central bank digital currencies (CBDCs). These are five potential effects of CBDCs on the world financial system.

Digitalization of payments

Because they wouldn’t require intermediaries, CBDCs could make payments more quickly and effectively. As a result, costs may be reduced in addition to financial inclusion and a better system for international payments.

According to their independence from the constraints of the established financial system, CBDCs might potentially make cross-border payments quicker and more effective. The cost and simplicity of performing cross-border business transactions might significantly affect world commerce. Moreover, CBDCs might help to reduce the risks associated with payment systems, such as fraud and cyberattacks, because they would be supported by the central bank and subject to stringent security standards.

Decreased use of money

With the advent of CBDCs, the use of cash might decline as more people start using digital payment methods. The monitoring of currency transactions and the prevention of fraud and other criminal activities may become easier for central banks as a result.

As more people use digital payments, there could be less need for ATMs to release cash. This may lead to a decrease in ATM usage and a decrease in maintenance costs. Moreover, CBDCs could make it possible for individuals and businesses to make peer-to-peer payments, eliminating the need for in-person cash transactions. This would make it easier for individuals to send and receive money as it wouldn’t require actual currency.


More stable financial situation

CBDCs may improve financial stability by granting central banks more direct control over the amount of money in circulation and interest rates. While CBDCs may provide an alternative to traditional bank deposits, they may also help to reduce the danger of bank runs.

During difficult economic circumstances, people may remove their money from banks, which might cause a bank run. CBDCs would give people another way to withdraw money, decreasing the likelihood of bank runs.

CBDCs may strengthen payment networks since they are backed by central banks and are subject to stringent security requirements. This would help to prevent payment system failures and reduce the possibility of cyberattacks.


New tools for monetary policy

CBDCs may enable central banks to employ fresh tools for monetary policy, as described below:


Interest rate management

CBDCs might be used by central banks to enact negative interest rates, in which case commercial banks would be required to pay the central bank interest for keeping their reserves as opposed to receiving interest on those reserves. Then, commercial banks may impose fees on their customers, including depositors, to cover this cost.

Holding actual cash outside of the banking system is the only way for individuals to avoid paying negative interest rates. Negative interest rates are challenging to enact with traditional currency because people may simply keep real cash to avoid paying the negative interest. To encourage spending rather than saving, central banks might potentially use CBDCs to levy negative interest rates on deposits.


Digital wallets with limitations on spending

CBDCs may make it possible for central banks to introduce digital wallets with spending restrictions. At times of stress, such as a pandemic, these wallets might be used to deliver targeted assistance to particular economic sectors. For instance, to encourage spending and strengthen the economy, the central bank may give households hit by a recession digital wallets with spending caps.


Actual data

CBDCs might offer real-time information on spending trends to central banks, allowing them to make better monetary policy choices. This might assist central banks in responding to changes in the economy more swiftly, lowering the likelihood of recessions.

Automatic adoption of policies

CBDCs may enable central banks to conduct monetary policy independently. For instance, a central bank may decide on a target inflation rate and then automatically adjust the money supply to achieve it. As a result, less manual monetary policy action would be required.


Impact on the world’s financial system

The adoption of central bank digital currencies may have an impact on the worldwide monetary system, even if stronger CBDCs may have a bigger influence on global financial markets. Moreover, CBDCs could help to diminish the dominance of the US dollar in international commerce and banking.


One example of a CBDC in use is the Sand Dollar, a digital version of the Bahamian dollar that is created by the central bank and supported by the government. The Sand Dollar is designed to promote financial inclusion in the Bahamas because those countries lack access to traditional banking institutions. It also attempts to reduce the cost of providing financial services while improving the efficiency of payments.

It is yet unclear how the Sand Dollar will impact the world monetary system because it is a relatively new currency. Yet, it can be in rivalry with other cryptocurrencies like Bitcoin and Ether.