Subhendu Panigrahi and Ashish Fafadia’s paper, Future of Money, provides insight into the changing environment around Central Bank Digital Currencies (CBDCs) and their function within the monetary system. We undertake a thorough investigation of these subjects in this two-part thesis, putting up a strong argument backed up by facts and analysis.
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In our view of the future of money and payments, Central Bank Digital Currencies (CBDCs) will play a key role and are expected to displace hard currency over the next ten years. CBDCs, which are powered by blockchain technology and backed by central banks, offer more financial inclusion, security, and efficiency while revolutionizing local payment systems throughout the globe.
114 nations are investigating CBDCs, accounting for more than 95% of the world’s GDP. Merely 35 nations were contemplating a CBDC as of May 2020. 60 nations, a record number, are now engaged in an advanced exploration phase (development, pilot, or launch). A heatmap of the nations that now work at CBDC and their respective levels of development can be found in the exhibit below.
In order to create CBDC, which goes beyond the present digital money, which is commercial bank money, central banks are collaborating with the BIS, IMF, and other industry organizations. CBDC is not merely a digital native version of conventional notes and coins. It’s interesting to note that central banks all over the globe have been inspired to investigate and develop in the field of digital currencies by the emergence of cryptocurrencies and the problems they present.
With the goal of addressing some of the shortcomings of conventional cryptocurrencies and establishing a more regulated and safe digital monetary system, CBDCs provide a government-backed digital alternative to cryptocurrencies. The exhibit that follows demonstrates how CBDC is portrayed as the money of the future.
“The best stablecoin available is CBDC.”
Leading nations in the Central Bank Digital Currency (CBDC) movement include China, Singapore, and India.
In December 2022, India too began the experimental program. P2P and P2M transactions are both possible for the users. The question of why India needs CBDC when it already has a strong UPI ecosystem is still up for debate. We have addressed it in our thesis and have discussed the UPI and CBDC ecosystems.
In fact, RBI Governor Shatikanta Das recently explained the distinctions between UPI and CBDC, saying that the former allows you to draw digital cash and save it in your mobile wallet. Payments made to other people or at a store will transfer from your wallet to their wallet. The bank is not being routed or mediated.
The main technology behind CBDC
We explore the possibilities of blockchain technology and distributed ledger technology (DLT) as a crucial component of this revolutionary environment. Our research shows that blockchain technology has the potential to completely transform a number of facets of the financial system, acting as the new digital counterpart of paper. We examine how commercial banks are becoming leaders in the changing financial landscape as a result of blockchain technology.
The greater transparency that blockchain technology offers the financial industry is one of its biggest benefits. Because blockchain technology is decentralized, all parties involved may observe and record transactions on a common ledger. This degree of openness can greatly lower the possibility of mistakes and fraud, making the financial system safer and more effective.
Our thesis aims to provide insightful information on the future of payment methods and financial services as we investigate the dynamic relationship between blockchain technology and the future of money. We hope that the information we have gathered will encourage individuals, companies, and governments to use blockchain technology as the driving force behind a more sophisticated and just financial system. Our goal is to make a meaningful contribution to the current conversation about the future of money and its unavoidable connection to blockchain technology through careful investigation and analytical thinking.
Advantages of CBDC
By giving those without access to regular banking services a cheap and safe way to send money, CBDCs have the potential to improve financial inclusion. This is especially important in developing nations, where a sizable fraction of the populace does not have access to banking services. Through the utilization of CBDCs’ programmable and secure capabilities, businesses may create inventive financial solutions that address the needs of this neglected sector.
Deposit tokens and CBDCs have the potential to revolutionize the banking industry. These digital currencies provide a wealth of prospects for innovation in the fintech sector because to their programmability, security, and efficiency.
Furthermore, our thesis emphasizes the critical role that commercial banks play in promoting cross-border payments through the use of deposit tokens, a novel approach that has been adopted by significant companies such as JPMorgan Chase (JPMC). The blockchain-powered digital versions of fiat money facilitate quicker and more effective cross-border transactions, demonstrating the revolutionary potential of blockchain and DLT in the financial industry. By imagining a financial ecosystem powered by deposit tokens and CBDCs, we highlight the importance of these technologies in promoting a more equitable and effective monetary system on a global scale.
Because of interoperability problems amongst various CBDCs, deposit tokens in particular may be able to seize the cross-border and B2B payments market more quickly than CBDCs. However, companies may still use CBDCs to develop a variety of financial services and products, including decentralized exchanges, cross-border remittances, and purpose-bound money platforms.