Benefits, Advantages, and Pros of Central Bank Digital Currencies (CBDCs)

Apr 24, 2023
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By Leroy A. Brown

As the global financial system changes, central bank digital currencies (CBDCs) have become an increasingly popular topic of discussion among the general public, commercial bankers, economists, policymakers, and others worldwide.

CBDCs are digital currencies created by central banks.

CBDCs are the digital versions of the fiat currency in that country and have a similar function as physical money.

Some of the benefits, advantages, and pros that central bank digital currencies (CBDCs) may help to take place are:

  • CBDCs may help reduce the time to complete cross-border payments by having instant settlement, reducing or eliminating the need for intermediaries like commercial banks and payment processors.

  • may reduce the cost of cross-border payments by reducing the need for intermediaries and lowering the time it takes to complete financial transactions.

  • CBDCs may have greater inclusion by enabling people in remote areas who may not have access to traditional banking services to store and transfer money on devices like mobile phones.

  • Central bank digital currencies (CBDCs) may help the government have a more effective monetary policy.

For example, instead of using interest rates alone to stimulate the economy, the government may send money directly to households and businesses.

This is similar to what is being done in Hong Kong through the Consumption Voucher Scheme (CVS).

  • Because the banking system is dependent on commercial banks creating money through loans, it may cause systemic risk as banks may engage in practices that may not be prudent in order to increase loans.

As such, CBDCs will reduce or eliminate the need for banks to create money, as central banks can make money directly, thus helping to reduce financial instability.

  • Central bank digital currencies (CBDCs) may reduce the cost of currency production by eliminating or reducing the need to make and distribute physical money.

  • CBDCs may help the government through the central bank to improve data collection as more information may be received as users’ transactions are tracked more and in real-time.

  • Central bank digital currencies (CBDCs) may reduce counterfeit physical money by having a digital version. This digital money may be more secure as digital currencies are easier to track and may have security features such as encryptions.

  • Central bank digital currencies (CBDCs) may provide more transparency as transactions may be easier to track.

  • CBDCs use a digital ledger to record transactions which makes it easier to track. Therefore, this may help to prevent fraud and financial crimes.

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