Why Central Banks Are Wary Of Privately-Held Crypto Coins And Want Their Own Digital Currencies?

As more and more people weigh their options to invest in crypto coins, a debate is gaining ground on Central Bank Digital Currency (CBDC). Authorities all over the world are exploring the possibility of introducing their own crypto coins, which are backed by the country's central bank or reserve. But why is there a need to do so? There are already thousands of crypto coins in circulation, including the prominent ones like Bitcoin, Ethereum, etc. One of the main reasons for a central bank (for instance, Reserve Bank of India) thinking of its own crypto is necessitated by the uncertainty about the privately-held coins.

When the debate was heating up, the RBI had made clear it was against private crypto coins and was exploring ways to issue its own coin. The RBI wants to leverage the blockchain technology that powers the crypto world to offer a safe, robust and convenient alternative to cash.

In December last year, the RBI said it was in favour of adopting a basic model of CBDC initially and using the country's payment system architecture as a backbone to transition to a state-of-the-art CBDC system. With a basic model, the transition will be smooth with minimum impact on monetary policy and banking system, it added.

Similarly, the US Federal Reserves has also released a paper that it said examines the “pros and cons” of a potential CBDC. The paper noted that a CBDC could provide a secure, digital payment option for households and businesses as the payments system evolves, and could also result in faster payment possibilities between countries. However, it added, that there could be downsides as well.

Some of the benefits of cryptocurrency are.

1) Removes Third-Party Interference

Currently, when we transfer money from one account to another, the sender's bank validates that transaction at the end of each day with the receiver's bank. This means the amount sent or received travelled from one ledger to another only as data and not physical money exchanged hands. What if we are able to send actual money over the Internet? That's how CBDC can help the RBI. With CBDC, users would be able to transact in actual “digital” money and thus would not need an intermediary.

2) Reduces Cost

Having a CBDC allows the central bank to cut down the cost of printing and distributing money. It is also efficient, making it easier to track the money trail.

3) Mode of Payment

People see crypto as an asset and so are investing in it in hordes, reposing faith that these coins will eventually lead them to a windfall. On the other hand, CBDC is likely to be seen as a mode of payment, like fiat money.

But there's also a fear that CBDCs could disrupt the current financial system based primarily on banks to facilitate trade and transactions. Central banks also fear that with cryptocurrency their role as the custodian or guarantor of the money in circulation would be diminished.