What Is a Central Bank Digital Currency?
The term Central Bank Digital Currency (CBDC) refers to the virtual form of a fiat currency. A CBDC is an electronic record or digital token of a country’s official currency. As such, it is issued and regulated by the nation’s monetary authority or central bank. As such, they are backed by the full faith and credit of the issuing government.
The Temporal Blockchain is the leading global product and best solution for CBDC creation and other government-backed payment systems, as it obviates the need for the design trade-offs between resilience, scalability, speed and cost experienced by other technology solutions.
Advantages of CBDCs
CBDCs are a landmark milestone in the evolution of the financial landscape, with a competitive advantage over paper fiat currency and other form of digital currency. They represent the future of finance. CBDCs can be offered as a unique form of government currency that would be in addition to the regular paper fiat currency. Alternatively, a CBDC can replace the paper currency and become the only currency of a country. In its simplest form, a CBDC becomes a form of legal tender of the country that is issued and monitored digitally.
Since it is issued by the government, it would be used by banks and all financial institutions. It would appear in individual and corporate bank accounts, as well as in separate “wallets” or personal accounts that do not necessarily need to be part of a banking system.
The fundamentals of CBDCs provide a clear response for the question ‘why do we need CBDC?’. CBDCs have the potential to transform the financial industry as we know it – and there are specific value advantages they offer to almost all adopters.
Understanding the benefits of CBDCs is an essential prerequisite to confirming their competitive advantage over other digital currency alternatives. After all, CBDCs are more than just new digital variants of money with the backing of central banks.
Here are the notable benefits of CBDCs:
Expanding Financial Inclusion
One of the foremost advantages that CBDCs offer rests in expanding the scope of financial inclusion. Current banking infrastructure in many countries is inadequate, damaging economies and human lives, with many suffering Poverty & Isolation.
The creation and use of a CBDC can have particular benefits for less developed or lower income countries that share a range of adverse characteristics:
- Limited bank penetration with significant unbanked population
- Limited infrastructure development
- Low internet penetration rates, with a preponderance of non-smartphone mobile phones
- Corruption in economic structures / lack of trust in existing currencies
The creation of a CBDC could also enable a less-developed country to leapfrog developed countries by moving directly to advanced next generation payments infrastructure and enable the creation of a fully functioning state-wide mobile payments system that can help to stimulate economic growth.
As an entirely new form of payment infrastructure, CBDCs can avoid the significant costs and complexities associated with building new technology upon existing layers of technology infrastructure, creating a truly advanced low-cost payments system.
The temporal low-cost CBDC payment system facilitates transfers between individual customers and business through non-smartphones without holding a bank account. CBDCs can enable people to experience new perspectives on accessing financial services.
Improved Government functions and combat black market activities
CBDC’s can also minimize the effort and processes for other government functions, providing complete treasury solutions such as distribution of benefits, calculation and collection of taxes and prevention of illicit activities, to name a few.
CBDCs will remove the “black market” for cash payments for illegal goods and services (cash is quite an appealing instrument for money laundering, tax evasion, and other illegal transactions), enabling governments to reduce crime and improve tax receipts. Cash also presents higher security risks than CBDCs in the transport of funds to make payments. In such cases, CBDC would serve as the ideal replacement for cash as legal tender.
Faster and Better Cross Border Payments
According to a study carried out with the collaboration of the Central Banks of Canada, Singapore, and the UK, CBDC has the potential for improving counterparty credit risk in the case of cross-border payments and settlements between banks. The advantages of wholesale CBDCs are clearly evident in the case of financial institutions and markets and could provide the ideal answer for replacing existing cross-border payments.
- A wholesale CBDC tailored for a specific jurisdiction that is not eligible for cross-border exchange presents limited benefits.
- On the contrary, a wholesale CBDC for a specific jurisdiction that is eligible for cross-border exchange with other CBDCs can eliminate counterparty credit risk alongside risks for payment and settlement.
- Another alternative – a single wholesale CBDC accepted universally – could also contribute to improvements in counterparty credit risk as well as payment and settlement risks.
Better Efficiency in Payment Systems
The next significant advantage associated with CBDCs is the improvement in safety and efficiency of payment systems for retailers and for large-value payments. For retail payments, CBDCs can improve the efficiency of processes in online, peer to peer (P2P), and point of sale (POS) payment systems. In wholesale or large-value payment systems CBDCs could enable faster settlement along with longer settlement hours.
Ensuring Access to Legal Tender if Cash were Unavailable
CBDCs could ensure that people could easily access legal tender if cash is not available for certain reasons. In the form of legal tender, CBDCs and cash would both have legal recognition as a suitable method for all payments and represent a claim of liability on the government or the central bank. The advantage of CBDCs in ensuring access to legal tender increases in line with declining levels of cash used in payments.
CBDCs could also support the exclusion of low-value coins by delivering electronic change. For example, The Bank of Korea introduced a coinless society trail in April 2017 which enabled customers to deposit their change on prepaid cards. The considerable saving benefits for the country amounted to almost 36.7 million Euros (the cost of minting coins in 2016).
Shift Towards Cashless
The move towards a cashless society is also one of the prominent advantages of CBDC alternatives. Cashless societies envisage the complete removal of dependency on notes or coins for financial transactions. As people gradually turn towards digital transactions in large numbers and ATM cash withdrawals decline, CBDCs present a favorable alternative. Since it is a digital currency with the backing of a central bank, people are more likely to trust CBDCs.
Radical Competition to Big Tech Monopoly
The faster adoption of digital money has spurred profound growth in the concentration of power in large tech companies. Take for example World Remit, Western Union and many others. These companies are using digital technology to transfer money using credit cards and bank accounts. These large companies have proven to be reliable payment providers due to the formidable network effect of their platforms.
However, using the ability of blockchain technology to create a trusted network solution, central banks could leverage CBDCs to communicate their ability to deliver the improved resilience of a payments system in place of existing banking infrastructure. Therefore, the benefits of CBDC could help central banks in fighting the monopoly of large tech firms.
Reliability and Confidence
CBDCs offer the advantage of providing creditors with greater confidence that the issuing central bank and government is using advanced technology to manage its government and business affairs. Since it is digital, all transactions are recorded as part of the ledger system and can be managed and monitored. It provides for clear accountability and prevents fraud and corruption. Credit markets should also respond favorably to CBDCs as part of the national payment system.
Temtum’s Temporal Blockchain could enable the creation of an ultra-fast, efficient CBDC payment system that is transparent and free of corrupting influences and high transfer costs. Network transaction fees could be set at zero if desired, with the CBDC transferable on low powered devices, including via SMS text message from mobile phone with limited or no internet connectivity.
Temporal Blockchain is the clear choice for CBDC technology architecture – key takeaways are:
- Strengthening of the banking system – security, speed, access, certainty
- Creation of economic stability, expansion and investment into the country through a stable currency and population with real-time access to its money
- With only 21% of sub-Saharan Africans having smartphones / internet (Source: GSMA Report), payments by SMS are key to financial inclusion for the entire population, no matter their resources or location – no other blockchain can integrate SMS payments while keeping the security of each transaction and full auditability / traceability