Why are governments showing interest in CBDCs? Possible ways digital coins can help you

There is growing interest in introducing a Central Bank Digital Coin (CBDC) by governments worldwide. While the answer might seem obvious as cryptocurrencies are rapidly emerging as an alternative transaction method, the need for a regulated digital coin seemed like a logical progression for central banks. In addition, the emerging blockchain technology has opened endless opportunities in various sectors of the economy. Central banks are therefore responsible for ensuring the security and stability of the global financial systems.

There has been a lot of talk this year about CBDCs and other distributed ledger technology (DLT) products. The concept of CBDC was introduced as a digital version of fiat currency, the records of which can be stored on a blockchain using DLT.

The Government of India’s Digital Rupee Initiative (CBDC) has laid the groundwork for the next stage of the country’s digital payments revolution. As the world moves more towards digital than physical, “CBDCs can serve as digital banknotes in the digital economies of the future,” said Arun Krishnan, global head of engineering, Infosys Finacle, the fintech subsidiary of IT company Infosys (INFY ). .

How will CBDC help you?

Promote India’s financial inclusion: A significant proportion of India’s unbanked population has access to mobile phones but no bank accounts, according to a report by the World Bank. Rahul Advani, Policy Director, APAC region, Ripple, a blockchain-based payment solutions company, says CBDC can help in this regard. Advani said: “The key here is accessibility – being able to access funds without having to physically visit a bank is vital. To meet the needs of the unbanked, a retail CBDC can be integrated with e-wallets, giving more people access to formal financial services at the click of a button.”

“Such a CBDC system will also help the banked and unbanked to establish a financial identity and receive government aid more easily, ultimately creating a more inclusive and equitable financial system,” added Advani.

Efficient cross-border payments: Cross-border payments are one of the most important use cases for CBDC for most countries, including India. Krishnan said Indians could capitalize on opportunities globally by taking advantage of the increased efficiencies in real-time cross-border, cross-currency settlement and increased liquidity provided by CBDC.

Reduce Money Laundering: Since CBDC will use DLT technology like blockchain, its usage can be better tracked. Krishnan said CBDC could help reduce counterfeiting. CBDC would “discourage illegal activities and encourage anti-money laundering efforts, creating fairer opportunities for honest, hard-working people in India,” Krishnan added.

What drove countries to blockchain solutions like CBDC?

Although blockchain technology has been around for a decade, its use cases have recently increased. A report released by Ripple in August 2022 entitled “New Value Crypto Trends” showed that 30 percent of consumers worldwide believe that the impact of CBDC on the financial sector could be massive in the next five years. According to the report, around 85 percent of consumers worldwide believe their countries will adopt CBDC in the next four years. The report found that consumer sentiment is in line with central bank sentiment around the world.

One of the catalysts for implementation, according to a report titled Payments Trends Book 2022 published by IT company Capgemini in December 2021 CBDC was that more than 45 percent of consumers worldwide want to use cryptocurrencies as a means of payment in the next one to two years. However, governments are concerned that private cryptocurrencies such as Bitcoin, Ethereum, etc. could become a money laundering and terrorist financing threat, threatening monetary policy. “As private cryptocurrencies gained momentum, central banks began experimenting and working on CBDC use cases,” the Capgemini report states.

A recent IMF blog highlighted the same trend. Governments are now recognizing and trying to regulate crypto, blockchain, and other Web 3.0 products as these technologies surged from niche to mainstream about a decade ago.

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