A digital transformation of the flow of money is a natural evolution from the current inefficient and risky dependence on physical cash, to a more efficient and secure digital payment system. By harnessing the potential of DLT and blockchain technology, it is possible for central banks to make this transformation.
Benefits of a Central Bank Issued Digital Currency (CBDC)
Through the issuance of Digital Dollars, the Central Bank could save an estimated 90% on the costs associated with minting and issuing physical notes and coins, secure transportation, storage and distribution, and the collection and replacement of damaged notes and coins. This means that seigniorage has the potential to increase by as much as 90%. The possible gradual obsolescence of paper currency could push this even higher.
Each Digital Dollar has its own digital serial number that the Central Bank can track and audit. Each transaction is recorded and can also be viewed and tracked in real-time, facilitating better compliance with Anti-Money Laundering (AML) and Combating of Financing of Terrorism (CFT) frameworks.
Cryptographically produced CBDC cannot be counterfeited. Each Digital Dollar will have its own digital serial number and the Central Bank digital watermark. The Digital Dollar money supply will be exclusively issued and monitored by the Central Bank. The system proves authenticity constantly through digital verification, and every transaction taking place in Digital Dollars, is instantaneously verified by the distributed ledger for authenticity and will not be processed unless it is issued by the Central Bank.
Bitt’s Central Bank Management Panel software is designed to provide real-time detailed information and reports on transaction activity including number of transactions, speed of transactions, and velocity of circulation of money. This gives the Central Bank the ability to accurately monitor the effect of monetary policy actions and make adjustments accordingly. Further to this, “an interest-bearing CBDC could provide a secure store of value, with a rate of return in line with other risk-free assets, such as short-term government securities. The CBDC interest rate could serve as the main tool for conducting monetarypolicy”.
Instant Central Bank issuance and distribution of Digital Dollars will eliminate thetime, costs, and other challenges of distributing and managing physical cash. “Anaccount-based CBDC could serve as a practically costless medium of exchange. Such accounts could be held directly at the Central Bank or made available via public-private partnerships with commercial banks.”
Central Banks will be able to monitor and exercise a measure of control in order to effect, for example, freezing and/or blacklisting of accounts/wallets as necessary. “The widespread use of CBDC and the obsolescence of paper currency would be helpful in discouraging tax evasion, money laundering, and other illegal activities” according to the National Bureau of Economic Research.
The real value of CBDC would remain stable over time, in terms of a broad consumer price index. Such a framework would facilitate the systematic andtransparent conduct of monetary policy. Further, a CBDC “could significantly enhance the stability of the financial system. In a financial crisis, the Central Bank would be able to expand the supply of digital cash as needed to carry out its role as lender of last resort, while the interest rate on digital cash could be adjusted downward to discourage runs from other financial assets intodigital cash.”
Because universal financial inclusion underpins eight out of the seventeen 2030 SDGs (particularly those related to poverty and inequality), the World Bank has set itself a goal of achieving universal financial access by 2020. Traditionally, commercial banks have had prohibitive costs and requirements for products and services, resulting in the exclusion of many, especially the most vulnerable in society. Digital Dollars will enable all users to access a broad range of affordable financial services, but this could potentially be most meaningful for the unbanked, underbanked and underserved.
Globally, many Central Banks are considering CBDCs, and experimentation and adoption rates are increasing. According to the Bank of England, a CBDC has numerous macroeconomic benefits - CBDCs are likely to cause lower real interest rates, reduce monetary transaction costs, grow the economy, stabilize the business cycle, and improve monetary policy effectiveness and financial sector stability. There are also likely to be benefits for existing licensed financial institutions and account holders, according to the Federal Reserve Bank of St. Louis.
Central Bank-issued Digital Dollars will be able to facilitate lower cost transactions,compared to existing mechanisms such as wire transfers, cheques, inter-bank transfers, bill payment, etc. lowering the overall cost of doing business.
Central Bank Brochure
An Introductory Guide to Bitt's Central Bank Digital Currency Issuance Solution
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