Central Bank Digital Currency (CBDC) is a digital fiat currency issued by the central bank of a country that makes virtual transactions reliable and safe.
Need for Central Bank Digital Currency
The need for digital currencies by central banks is growing. The central bank digital currencies are monitored by the central bank of the country issuing them. Cryptocurrencies are considered risky as they do not have proper regulatory bodies, and banking authorities are unable to monitor cryptocurrency transactions. CBDC’s are different from cryptocurrencies as they will be reliable and backed by government regulations.
Countries to Launch Digital Currency
The Bank of England was the first to propose the CBDC. The CBDC is under consideration by other countries like the Bank of Canada (BoC), People’s Bank of China (PBOC), the European Central Bank, and also in countries like Singapore, Venezuela, Sweden, and India.
Digital wallets like WeChat Pay and Alipay are adopted in China as a trial for electronic currency. The central bank of China may launch its own digital currency by the end of this year. Beijing has intentions of expanding its pilot program in the digital payment system, similar to bitcoin, ethereum, and other cryptocurrencies.
The crypto-ruble in Russia was introduced in 2017 by President Vladimir Putin.
The Federal Reserve chairman Jerome Powell says that more work has to be done before a digital currency is launched in the US.
Central banks are not in haste to launch their own CBDC’s, as there is a fear of destabilizing the economy and their financial system. Banks may lose their stable funds through savings and current accounts without proper regulations.
Cryptocurrency Usage in Recent Times
Common cryptocurrencies like Bitcoin, Ethereum, and Litecoin are some well-known cryptocurrencies.
The pandemic has encouraged the use of digital currencies. People are interested in transferring money conveniently and easily. Digital currency is the easiest way of making and receiving payments in the fastest and cheapest manner.
The value of bitcoin has gone up almost 190% in 2020 and continues to surge in 2021, which attracts investors to the crypto market.
Two big firms PayPal and Square have contributed to an increase in bitcoin value. Visa is another big company that has a large market cap and encourages the use of cryptocurrency. Visa, PayPal, and MasterCard are trying to become key players in cryptocurrencies, by allowing cryptocurrency payment.
Elon Musk, the CEO of Tesla, brought a 200% surge in the value of Dogecoin by a single tweet disclosing his ownership in the crypto. Polkadot saw a 41% surge in prices when Binance announced its intention to support Polkadot projects by $10 million.
Cryptocurrency is gaining acceptance from individuals and companies. The virtual currencies work on a Blockchain network and are gaining importance, especially by the young generation.
Central Bank Digital Currency Requires Legal Regulations
The US regulatory officials have limited power over cryptosystem operations. The lack of proper regulations and the need for digital currency is increasing the need for a CBDC.
Cryptocurrencies like Bitcoin, Ethereum, Litecoin, Dogecoin, and many more, are not monitored by the central banks and lack regulations. They are not used for ordinary, everyday transactions as there is no guarantee for easy exchange of the cryptocurrency. Cryptocurrencies are not reliable as prices are very volatile, while traditional forms of money have a fixed price. The cryptocurrency user is not identified and can remain anonymous. Anyone who knows to use a computer and the internet can download the software.
US Treasury Secretary Janet Yellen has raised concern over the misuse of bitcoin. Crypto values are skyrocketing and then facing a sudden pullback that is not good for investors.
Privacy is a growing concern in digital currency, as the government can keep track of payments using digital currencies. Cyberattack and fraud are some dangers associated with cryptocurrencies that may affect the financial stability of a country.
Top Cryptocurrencies Used by Investors
Some of the top cryptocurrency types that are gaining momentum this year are Chainlink, Cardano, Litecoin, Polkadot, Stellar, and EOS. Bitcoin, Ethereum, and XRP have values that have skyrocketed. They can be exchanged across countries using the internet, where the transfer is done within minutes.
Bitcoin was at $5,000 in March 2020 during the pandemic but crossed $58,000 in the last week of February 2021. Bitcoin lost almost 11% on Friday, though it recovered later. In March 2020, the decline was 33% during the pandemic. However, it is up by 55% from last year.
Ethereum crossed $2,000 in mid-February 2020 and moved lower to $1,370 by the end of February. The 52-week range for the second-largest crypto is between $95 and $2,036.
Investors prefer cryptocurrencies as they can make easy money, with a sharp increase in value in a single day. The more users a crypto coin has, the higher is its price and usage.
Once regulations are established in cryptocurrency usage, it will be the best competitor to the traditional form of money. Though cryptocurrencies are a form of financial transfer, they cannot replace the actual currency.