Central Bank Digital Currencies and Their Role in the Financial System

What’s the background of CBDCs?

According to the BIS, the idea of CBDCs has been around for many years, predating Bitcoin by over two decades. However, the concept has gained prominence over recent years. This has been mainly due to advances in the fintech arena, including developments in blockchain technology, allowing the issuance of digital tokens that represent a store of value.

What are the benefits of CBDCs?

CBDCs offer many comparable benefits to cryptocurrencies, such as Bitcoin. Hours of operation for banks limit the availability of transactions, whereas CBDCs could be available to transact on a 24/7 basis. Banks could decrease their reliance on clearinghouses, which would save costs.

What are the risks of CBDCs?

Along with various benefits, CBDCs also come with some considerable risks on the part of central banks, governments and individual citizens.

Which central banks are close to issuing their own digital currencies?

Although many central banks use some form of digital money as reserves or settlement account balance, no central bank has yet issued any general CBDC. However, several banks are already in various stages of research and development, including the five major currencies of the world — the U.S. dollar, the euro, the Japanese yen, the British pound and the Chinese yuan.

How the U.S. government is applying a new view of crypto, and how new bills are laying the groundwork

In late July, the U.S. Office of the Comptroller of the Currency issued a memo giving the green light to all federally charted banks to offer cryptocurrency custodial services. This effectively allows hundreds of OCC-member banks to integrate crypto services. The Federal Deposit Insurance Corporation insurance for crypto holdings is also now within the realms of possibility.

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