May 27, 2023

Basic requirements for digital currencies of central banks (CBDC)

Basic requirements for digital currencies of central banks (CBDC)

About 80% of central banks are working to create their own CBDC. So, East Caribbean the central bank announced the launch of a pilotthe world's first CBDC project for the East Caribbean dollar, and the World Economic Forum created the CBDC for politicians. A consortium of major central banks, consisting of the Bank of England, Bank of Canada and the European Central Bank, is also working on a CBDC study.

It will probably take several more years for this adoption, but the mechanism has already been launched.

What are the goals of the Central Bank?

First of all, consider the objectives of central banks regarding the CBDC. The following is a chart from a study by the Bank for International Settlements that answers this question:

Basic requirements for digital currencies of central banks (CBDC)

The main ones are:

  • Financial stability;
  • Implementation of an effective monetary policy;
  • Local cash settlements;
  • International cash payments;
  • Security.
  • What is the central bank digital currency (CBDC)?

    So, instead of having central banks print paper money, they could issue a digital token on the blockchain, the value of which exactly matches the value of one physical banknote.

    The difference between this new form of currency andexisting payment applications in that these funds will not be managed by a third-party company responsible for the safety of money until it is withdrawn. Instead, the user will own money, like cash.

    CBDC Requirements

    In order for CBDC to be interesting not only to regulators, but also to citizens of countries, it needs to meet the following requirements:

    Open public network

    A network (blockchain or similar) must be accessible to society anywhere in the world. When interacting with her, the need for third parties should be absent.

    However, the network may be private to thosewho is responsible for checking and signing blocks. Anyone should be able to be part of a network for verification and monitoring, but nodes that accept transactions to the network can be a closed group. CBDC can manage a consortium of several organizations. For example, the CBDC blockchain network for the euro, issued by the European Central Bank, may consist of eurozone countries. Each country will have a node in the network, plus the central bank itself.

    Easy currency access

    The audience should be able to accesscurrency in the same way as when using cash. Transactions are made without intermediaries, that is, the user does not need to go to the bank or even own an account at a bank or on a payment service in order to use the currency.

    Do not be afraid of supervision by the government and bankers. Banks will continue to do their job by providing loans and other financial services.

    And for 1.7 billion people who do not have accessfor banking services, for safe storage and operations with money you only need a phone. And the same people can get access to many other financial services that were not available to them before, such as investing or receiving interest on their money. This would be a turning point in the life of most of the world's population. Even in relatively developed countries, it is not always possible to invest in the stock market or even earn interest on your bank accounts.

    The ability for financial services to build their own applications on the network

    Programmable currency is an amazing benefit,and its launch will simplify the problems of interaction with existing fintech companies, the main requirement of which is prepayment. This reduces the risk of using financial services, which may not be in the interest if there is no need to insure bank accounts. Thus. You no longer have to worry about your bank failing.

    Consider how you use a payment service,such as Venmo. To use the services of the service, you must have an account with this company. With CBDC, you could use an application like Venmo and send money to completely different services. Such services are needed so that everyone can openly and freely accept and interact with this new digital currency.

    The above items are in the best possible satisfy the key motivations behind the CBDC, including financial affordability, cheap global payments, and sharply reduced costs of issuing and administering currencies. And, perhaps, just as importantly, this will ensure the future of financial technologies, simplifying their use and integration without any barriers to entry.