The Future of Money: 5 ways CBDCs could impact the global financial system

Published March 5th, 2023 - 06:28 GMT
The Future of Money: 5 Ways CBDCs Could Impact the Global Financial System
Source: Shutterstock

ALBAWABA- Central Bank Digital Currencies (CBDCs) have recently gained attention, with several countries investigating their potential benefits and risks. A CBDC is simply a digital version of a country's currency that is issued and backed by the central bank of that country.

The Future of Money: 5 Ways CBDCs Could Impact the Global Financial System

Source: Shutterstock

While the impact of CBDCs on the global financial system is still unclear, there are several ways in which they could affect the financial landscape. In this article, we'll explore five ways CBDCs could impact the global financial system while incorporating the opinions of crypto expert Ahmed Sharkatly and economist Wajdi Makhamreh.

5 ways CBDCs could impact the global financial system

  1. Disrupting intermediaries

The introduction of CBDC could disrupt intermediaries such as commercial banks, payment processors, and other financial institutions. With CBDC, central banks would have the ability to issue digital currencies directly to consumers, bypassing the need for commercial banks to act as intermediaries. This could potentially reduce transaction costs, increase financial inclusion, and create new business opportunities for fintech companies.

According to crypto expert Ahmed Sharkatly, this disruption of intermediaries could lead to more financial inclusion. In the Bahamas, for example, CBDC have solved the issue of having to physically travel to access an ATM or branch. CBDC could therefore play a positive role in increasing financial inclusion, particularly in remote and underserved areas.

CBDC could improve domestic payments by allowing for faster, cheaper, and more secure transactions. With CBDC, users can send and receive money instantly, 24/7, without the need for intermediaries like banks or payment processors. In addition, CBDC could enhance interoperability across digital payment platforms, allowing for seamless transfers between different systems. According to Wajdi Makhamreh, CBDC could also reduce liquidity risks if designed properly.

  1. Increased transparency and oversight

CBDC could enable central banks and regulatory authorities to exercise more control and oversight over how money moves. Distributed ledger systems can provide more transparency than traditional financial systems, making it easier to track transactions and detect fraudulent activities. This could potentially reduce financial crime and illicit activities.

However, the increased oversight and control could also result in more draconian regimes, as Ahmed Sharkatly notes. The extent of this oversight and control will likely be a subject of debate and will depend on the specific regulations put in place by each country.

  1. Reduced use of cash

The introduction of CBDCs could also lead to a reduced use of cash. As more people adopt digital currencies, the demand for physical cash could decrease. This could significantly impact the financial system, particularly for countries that rely heavily on cash transactions.

  1. Cross-Border Payment Improvement:

CBDCs could reduce cross-border remittance costs, which are currently very high due to the involvement of intermediaries and multiple currency conversions. By lowering transaction costs and allowing foreign Payment Service Providers (PSPs) to have access to CBDCs, cross-border transactions could become faster and cheaper. In addition, if CBDCs were used reciprocally with counterparts in remittance corridors, they could reduce currency conversion costs. Wajdi Makhamreh believes that cross-border CBDCs could increase exchange rate volatility due to larger and more volatile capital flows and present a heightened risk for use in illicit activity.

  1. Financial inclusion

CBDCs have the potential to enhance financial inclusion, as they can be accessed by anyone with a smartphone or an internet connection. This would allow people who are currently excluded from the traditional banking system to have access to secure and convenient digital payments. According to Wajdi Makhamreh, CBDCs could instill more trust among the population and service residents without smartphones. Ahmed Sharkatly also believes that CBDCs could increase financial inclusion by improving interoperability across digital payment platforms.

In conclusion, CBDCs have the potential to disrupt the global financial system in several ways. While some of these impacts are positive, such as increased financial inclusion and reduced transaction costs, there are also potential risks, such as increased oversight and control by central banks. As CBDCs continue to gain traction, it will be important for regulators to carefully consider the potential risks and benefits and to strike a balance between innovation and stability in the financial system.

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