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Reserve Bank of India has a plan to change the fundamental knowledge of money transactions with Central Bank Digital Currency.
Let us understand what exactly CBDC is. It is the virtual or digital currency that the central bank will issue. It is equivalent to a fiat currency because its value will depend on the country's economic strength. But, the difference is that it is in the electronic (or digital) form. In simple words, CDBC is the digital form of a nation's existing currency.
Central banks are thinking about the substitution of digital currency by the bank-issued digital money, which people can use for their daily use. All this has been initiated by China's digital yuan projects. Recently RBI has given a clear indication of launching digital currency, and they are examining the use cases of CBDC.
On the contrary, the US and EU are not convinced by the requirements for a bank-issued digital currency. The Bank of Canada also doesn't find any use case for a Central Bank Digital Currency.
CBDCs are actually required when the usage of cash declines or when digital currency usage suddenly increases. For instance, in the case of Sweden, the use of cash has declined. So, Sweden needs bank-issued digital money to improve spending through e-currency. Also, these currencies are thought to replace the currently dominating cryptocurrencies, including Ethereum and Bitcoin.
It is said that payments using CBDCs can reduce the settlement risk during the financial systems. Also, transactions will be cost-effective because the cost of storing, transporting and distributing the currencies will be eliminated.
However, an influential group of individuals still prefers the payment made in cash, and the reason could be the comfort while making payments. Apart from those group of individuals, CBDCs can be helpful in making payment because it is aimed to maintain the anonymity. Now, the use of commercial banks will be reduced because individuals can directly invest with the Central bank.
Talking about the risks involved in CBDCs, there are the chances of scams and frauds because these can be a potential target for cyberattacks. Secondly, from a country's point of view, CBDCs can bring currency substitution in countries with high inflation.
Firstly, talking about the stablecoins, a cryptocurrency class, these are not under threat by the central banks because these are backed by fiat currencies. But, other dominating cryptocurrencies are not backed by fiat currencies, and they attract investors due to their anonymity and novelty.
But, the USP of cryptocurrencies is that they do not involve any third party, including banks. On the contrary, CBDCs will be issued by central banks only. This is the reason why crypto supporters are against the launch of CBDC.
But, the question is that can CBDC affect the existing dominating cryptos? The answer to the question is probably no. Cryptocurrencies like BTC and ETH already hold support from the more prominent investors. It will be very unlikely for the investors to suddenly switch over to bank-issued digital currency. The second reason is that the government will regulate CBDCs. So, it still doesn't solve the purpose of decentralization, which is a significant drawback compared to decentralized cryptocurrencies.
Talking about trading with CBDCs, won't be fascinating because these are under the control of the government. So, it is doubtful that the launch of CBDC will affect the trading of currently present cryptocurrencies.