Cryptocurrencies had a great year in 2021. In this period, we have seen the market go from being classified as a billion-dollar economy into a trillion-dollar economy. Aside from that, cryptocurrencies are gaining visibility in the mainstream world with, for example, El Salvador's adoption of Bitcoin as the official digital currency. As a result, investors are looking for the "new Bitcoin" on the market, hoping to find a great alternative in so-called altcoins. Unfortunately, many traders value an altcoin exclusively…
Tao Zhang, the Deputy Managing Director of the International Monetary Fund (IMF), has voiced his perspective on a central bank digital currency (CBDC). Zhang spoke about CBDC after assessing its merits and demerits during a keynote speech at the London School of Economics.
Benefits and Demerits
The deputy managing director’s major highlight of the CBDC’s benefits was its efficiency and lower costs. Several nations experience high costs of currency management with lower access to payment systems in rural and poor regions.
He noted that the CBDC could be instrumental in the enabling of higher financial inclusion. It may provide a public digital means of payment to both the banked and unbanked. The CBDC also has the ability to strengthen and stabilizing monetary policies.
Besides, the creation of a CBDC could be crucial to the sovereignty of a nation’s currency. A state launched crypto in local units minimizes the expansion of private cryptos. Private cryptos are a risk to financial stability and monetary policies due to the difficulty in their regulation.
On the other hand, Zhang notes how a CBDC could drive customers away from the banks. Crypto’s nature of overcoming the need for a third party could also strain the central bank’s balance sheets.
The central bank’s troubles don’t end there, a CBDC is quite costly to the bank while also potentially damaging to its reputation. For them to be issued, the central banks must actively participate in the various steps of the payments value chain. Participating in such steps increases the susceptibility to cybercrime, damaging the central bank’s credibility and reputation.
IMF Hybrid Solution
In light of all these, Zhang’s potential hybrid solution called a synthetic CBDC (sCBDC) comes into play. It requires cooperation between the central bank and the private sector. The private sector gets to issue coins that are fully backed by central bank reserves while being under the Central bank’s supervision.