State-backed digital currencies: Why do world governments look at them?

Governments are always looking for ways to streamline their economies. And with the rapid growth of the cryptocurrency market, they turned their attention to this field in search of new solutions.

With the continuous development of cryptocurrencies by traditional companies, we can now observe the trend where central banks around the world are increasingly looking at the issue of digital currencies supported by a state – namely the CBDC (the central bank’s digital currencies).

The question that many of them are trying to solve is how can the central bank’s digital currencies affect their economies, help them change and develop? What are the benefits of adopting CBDC?

Let’s take a closer look at this issue.

Unlike cryptocurrencies that work decentralized on the blockchain, a CBDC is by nature a digital representation of a country’s fiat currency.

In many ways, the CBDC has the same advantages as cryptocurrencies – faster and cheaper transactions compared to traditional money, greater transparency, high security, etc. But given how they are issued by the state, the CBDC develops in a way that preserves state control over them.

A major advantage that the CBDC can give a government is the ability to monitor the macroeconomic situation in real time in a country and thereby create opportunities for a more effective implementation of monetary policy.

The downside to this is the potential deprivation of privacy that CBDC users may experience, given how such a currency would be much more controlled than cash and provide real-time insight into people’s personal finances.

With that said, the world is moving towards digitization more and more, and cash will probably come out of use eventually in one way or another. In turn, greater surveillance would enable governments to use the CBDC to combat illegal activities, such as money laundering and fraud, more effectively, giving people a greater chance of keeping their money out of criminal hands.

In addition to all this, CBDCs are a cost-effective financial solution for the unbanked and have the potential to greatly improve cross-border transfers, as the application of DLT technology would eliminate the need for intermediaries, making transactions much faster at lower costs.

Of course, all these benefits will only be possible if any government actually makes a decision to issue a CBDC and distribute it among its people. And although there are many ideas predominantly around the world, this is not yet a definite possibility.

The central bank’s digital currencies could potentially pave the way for a new worldwide financial infrastructure, but at the moment all we can do is wait and see which road governments decide to go.