5 ways CBDCs could impact the global financial system

Mar 14, 2023 | wjb news

Central bank digital money (CBDC) is a data version of currency that is strongly supported and publicly issued by the central bank. Here are five ways CBDC could affect the world's financial system.

Informationization of payment

CBDC may make payments faster and more efficient because it will eliminate the pursuit of the right middleman. With financial diversification and improvements in the international payment system, costs may be reduced as a result.

CBDC can also make cross-border e-commerce payments faster and more efficient because it is not restricted by traditional financial management systems. The convenience of trading cross-border e-commerce business services and reducing costs may have a significant impact on world trade. In addition, because CBDC will be applied by the central bank and subject to strict security management, they can help reduce the risks associated with payment systems, such as fraud and hacking.

Reduce the use of cash

As more people switch to data payment, the use of cash may decrease with the accession of CBDC. This could make it easier for central banks to monitor cash liquidity and deter fraud and other crimes.

As more and more consumers switch to data payments, the need for ATM machines to pay cash may be reduced. This can lead to lower ATM machines and less money to overhaul them. In addition, CBDC can make point-to-point payments between individuals or businesses, eliminating the need for zero-distance cash transactions. In the absence of specific cash, this will make it easier for people to accept money.

Improvement of financial reliability

CBDC could improve financial stability by giving the central bank more intuitive control over the money supply and interest rates. While CBDC can provide alternatives to traditional deposits, they can also help reduce the risks associated with bank runs.

In difficult financial times, people are likely to get assets from financial institutions, which could lead to a bank run. You are about to usher in another option, you can also withdraw money in CBDC, thereby reducing the probability of a bank run.

Related: wholesale price CDBC and retail CDBC: key differences

Because CBDC is applied by the central bank and is subject to strict security management, CBDC may improve the scalability of the payment Internet. This will reduce the probability of hacker attacks and help avoid payment system anomalies.

A new tool of fiscal policy

CBDC could make it possible for central banks to apply a new fiscal policy tool, as shown below:

Annual interest rate management method

The central bank can use CBDC to implement negative interest rates, which means that the banking industry should pay interest to the central bank for holding risk reserves instead of obtaining loan interest from risk reserves. Subsequently, the banking industry is likely to deduct this fee from customers, including depositors, etc.

However, people can prevent negative interest rates by having physical cash outside the institutional system. For traditional cash, it is difficult to implement negative interest rates, because people can simply have physical cash to prevent the payment of negative interest rates. But with CBDC, the central bank can essentially deduct negative interest rates on savings and support transactions rather than deposits.

Digital wallet with expenditure limit

CBDC enables the central bank to implement spending-limited digital wallets. This kind of wallet can be used to provide purposeful application to specific sectors of the economy during periods of job stress such as fashion. For example, the central bank can provide spending-limited digital wallets to households affected by the economic downturn, stimulate spending and boost economic development.

Real-time dynamic

CBDC can provide central banks with real-time dynamics on spending patterns, enabling them to make fiscal policy management decisions in smarter situations. This may help central banks respond more quickly to economic changes, thereby reducing the risk of decline.

Implementation of automatic technical countermeasures

CBDC enables central banks to implement fiscal policies independently. For example, a central bank can set a desired rate of inflation and then automatically adjust the money supply to achieve this goal. This will reduce the importance of manual fiscal policy behaviour.

Impact on the international financial system

Although China with strong CBDC may cause great harm to the international financial sales market, the choice of digital currency of the central bank may lead to changes in the international financial system. In addition, CBDC is likely to help weaken the hegemonic influence of the dollar in global trade and finance.

Related: CBDC Control in Asia: novice Handbook

The sand dollar, which matches the Bahamian currency data, is sold by the central bank and guaranteed by the government. It is an example of CBDC implementation. Because it is difficult for the Bahamas to gain access to traditional banking, Jincheng is committed to encouraging financial diversity in the country. In addition, it also aims to improve the efficiency of payment while reducing the cost of giving financial services projects.

As the sand dollar is a relatively new loan currency, it has not yet been determined how this will affect the global monetary management system. However, it will face competition from other digital currencies, such as BTC (BTC) and ethernet (ETH).