As digital payment tools become increasingly widespread, traditional finance is also seeking to create a worthy alternative to the existing means. That is why numerous countries are exploring the potential of Central Bank Digital Currency (CBDC).
There have even been speculations about the possibility for CBDC to completely replace cash. The European Central Bank stated that it could become a good solution in case cash is no longer used. Deutsche Bank, which is the largest financial institution in Germany, believes that CBDC will be used instead of cash in the long run owing to the pandemic.
But despite the perspective of a complete replacement is quite real, the process would take a long time in order not to cause another economic crisis. At the initial stages, the coexistence of digital currency with cash is necessary for the health of the global finance industry.
There is the burden that comes along with using cash. For instance, transporting or carrying paper-money makes the carrier a potential target for thieves, cash doesn't come with a zero-fraud liability guarantee, it can be lost or misplaced anytime, the holders are missing out on credit card or digital transaction rewards, and many other issues.
With CBDC making transactions is eased, and this means sales in a business will increase, new products and services will be introduced. The businesses using CBDC will eventually increase productivity to meet demand hence an economic boom. CBDC services can enable social transfer payments from governments to nationals for humanitarian uses and other stimulus package plans.
Nevertheless, the world is going increasingly digital. For this reason, a variety of central banks across the globe are busy researching the potential of central bank digital currency (CBDC), according to CoinIdol, a world blockchain news outlet. Some countries such as China and the US have created and internally tested their own digital currencies, the digital yuan and the digital dollar. Currently, they are on the verge of launching these CBDC, probably before the end of 2021.
According to the new report by Bank for International Settlements, central banks need to integrate CBDC together with cash into the current payment systems if they want to achieve their public policy objectives. There is a need for the CBDCs to coexist with cash plus other forms of money in a more secure, flexible, transparent and effective innovative payment system. CBDC users would benefit from low fees especially when conducting cross-border transactions.
Despite the obvious benefits of digital money, it will not be adopted overnight. People tend to be cautious about things they don’t understand. This probably harks back to fundamental biological instincts, when everything new is treated as potentially dangerous. Society needs time to get enough awareness about the new instruments. To accept something, people need to understand it.
For this reason, the adoption of CBDC will most probably be slow. While some part of society is already willing to embrace the innovation, numerous people will be unwilling to abandon cash all at once.
Here, simultaneous use of cash and CBDC will allow people to get used to the innovation, to become aware and understand the mechanisms of its work. Only then, society might become willing to abandon the old form of money for an obviously more advantageous new one.
Besides, to adopt CBDC as the only money, countries would need to build proper frameworks and adjust the existing financial system to the innovation. This would also take enough time, as possible mistakes might cause a crisis instead of a boost in the economy. For the switch to the digital realm to become smooth and beneficial, it must be slow.
Beyond dispute, digital currency has numerous advantages. However, it does not mean that its adoption will harm cash. Perhaps, over time, digital money could completely replace fiat. But now, the peaceful co-existence of various payment tools is vital for the healthy functioning of the finance industry.