Blockchain Is Changing the Game: Why Do Central Banks Need Digital Currency?
CryptoBit News Today2 min read
In recent years, a series of banks and financial institutions around the world have been looking closely at blockchain technology - the distributed, decentralized ledger system that underpins cryptocurrencies like Bitcoin. The technology could transform the way central banks operate, eliminating paper currencies, and speeding up anything from remittances to stock market trades. ## Can Blockchains Replace Fiat Currency?
In theory, blockchain technology could replace traditional paper currencies. Unlike Bitcoin, a digital currency is in many ways an ideal version of fiat cash. It's even more portable and secure than the mocey we've been using for millennia. Central banks could issue an encrypted digital token - a central bank digital currency, or CBDC. Courts and governments already widely accept Bitcoin and several other digital currencies in transactions. The likes of Bitcoin and Monero have even been decoupled from central banks, and they have proved their value and viability during years of market volatility.
Many consumer-oriented financial services, including several cryptocurrency exchanges, are already in place to bridge the gap between digital cash and paper money. These include merchant payment services, savings accounts, and crypto-to-fiat exchanges. These all support digital currencies as valid, usable units of exchange in the modern economy. ## Why Do Central Banks Need Digital Currency?
The main reason the industry has been looking at CBDCs is to promote financial inclusion. A central bank digital currency, issued by a government, would serve the 'unbanked' - the millions of people worldwide who face barriers to opening a bank account. Perhaps they do not have a required identity document, or they live far away from the nearest bank branch. With a digital currency, users would only need a smartphone and an internet connection to participate in the economy.
To prevent the digital tokens from being spent multiple times, the central bank would maintain a blockchain, enabling each token to be digitally signed. When one person spends a token to another, it is then logged on the blockchain, which maintains a permanent record of every transaction and only allows tokens to be spent once. The central bank could create tokens as needed, destroying them when people pay taxes or receiving them at banks. Just like fiat money, a CBDC would always be worth the guarantee of the central bank, which can always print more. ## Looking Ahead
Policymakers are still in the early stages of investigating the idea. Several central banks, including the People's Bank of China and the European Central Bank, are researching how to implement a digital currency. The EU bank is currently engaging in the "stakeholder dialogue", a consultation process to obtain input from policymakers. In the States, Federal Reserve governor Brainard is also researching digital currencies, and has spoken publicly about them. We will be watching this story for further developments.
