Central bank digital currencies (CBDC) are not a new concept in the market. Lot of countries like Venezuela and Iran are legitimately trying to keep their economy afloat via CBDC. Amidst such conditions, the central bank of Russia has published a policy brief, which reviews the potential benefits and drawbacks of CBDC.
So what is a CBDC? A CBDC is a digital currency issued by a central bank, that is considered a legal tender and is ascertained with other properties of centralized, fiat money.
The document, titled “Is there a future for central bank digital currencies,”aims to provide a neutral and empirical analysis of whether there is any value in CBDC. The Central Bank of the Russian Federation has enumerated quite some advantages and disadvantages of CBDC in the document.
In the context of advantages, the document talks about how CBDC has the capability to reduce transaction costs in the economy, plus they are way more stable than cryptocurrencies that are not backed by the state. Hence they make for a less risky asset.
Additionally, they pointed out the usefulness of CBDC in ease of payments and savings, especially considering how it drastically reduces the transaction costs, in comparison to fiat money and debit cards. The one disadvantage that the document does point out is the lack of anonymity of CBDC.
One of the primary USP of digital currencies like Bitcoin is the guaranteed anonymity that it provides. If that shield is taken away, then that massively deters most people from investing in the currency. Cash offers more anonymity in this case, than CBDC.
The document notes:
“CBDC de facto cannot provide the same level of anonymity that is provided by cash. This is certainly an advantage for regulators, but can be considered a disadvantage by users, not only those who are involved in suspicious activities, but those who are concerned about privacy.”
It is true, that a lot of central banks are considering replacing cash with cryptocurrency. The Bank of Russia via this document, has outlined all the reasons why that might be a good idea. The document also states that CBDCs are better for maintaing low inflation and moderate interest rates, as opposed to commercial bank deposits.