CBDCs: A blessing for developing countries and a curse for developed countries?

CBDCs: A blessing for developing countries and a curse for developed countries?

Central banks are increasingly looking at digital currencies as a way to make their existing payment systems more efficient and process payments faster. However, the issues associated with central bank digital currencies vary from one central bank to another, and their respective governments have a range of different goals in mind for their CBDCs.

A chance for less developed countries

The needs of smaller countries with CBDCs and the leeway to disrupt current financial protocols can differ from those of larger nations where prominent stakeholders in the financial system may be more change resistant. 

The Bahamas, a small chain of islands with under 400,000 people, became the first country in the world to officially launch a central bank digital currency, the Sand Dollar. After Hurricane Dorian blinded much of their banking services in late 2019, they were forced to confront how they would manage their money if an event like this limited access to traditional banking methods.

A successful pilot project in India

The Reserve Bank of India (RBI) launched a digital rupee pilot project in the wholesale banking sector on 1 November 2022, with nine banks taking part. The aim is to test multiple technologies, including a hybrid CBDC with some layers added to the bank’s centralized system and others to the distributed ledger networks (blockchain). The ultimate goal is to upgrade financial inclusion rather than replace the current form of money, given that 20% of India’s population of 1.4 billion does not have a bank account.

Privacy a key issue in the EU

The Reserve Bank of India (RBI) launched a digital rupee pilot project in the wholesale banking sector on 1 November 2022, with nine banks taking part. The aim is to test multiple technologies, including a hybrid CBDC with some layers added to the bank’s centralized system and others to the distributed ledger networks (blockchain). The ultimate goal is to upgrade financial inclusion rather than replace the current form of money, given that 20% of India’s population of 1.4 billion does not have a bank account.

The hesitant approach of the UK and the USA

According to the Atlantic Council, the US and UK have the least developed CBDC programs of the G7 nations. The Bank of England has established a CBDC division to focus on the development of what’s been called “Britcoin”, though several financial authorities are less keen. US President Biden issued an Executive Order titled “Ensuring Responsible Development of Digital Assets” in March 2022, and both governments appear to be wary of introducing a CBDC too swiftly, though they remain committed to doing so.

CBDCs can be beneficial to less developed countries and countries suffering from natural disasters. India and China have already implemented pilot programs and are assessing their benefits and drawbacks. The Western countries are emphasizing the potential risks, focusing on security and regulation.

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