Can CBDC Boost Financial Inclusion? If so, How Will that Happen?

The CBDC is the digital form of fiat currency that is issued by the central bank. It is designed to be the digital form of the physical currency. It reduces the cost of printing, storing, and transporting physical cash. Banks and governments are exploring ways to incorporate CBDCs because it is a more secure alternative to crypto.

CBDC operates on blockchain which is secure and transparent per se. The aim of using a CBDC is to enhance the efficiency of payments. It creates an immutable record of transactions. This means the records are recorded on the decentralized ledger which makes it extremely difficult to tamper with the data.

Blockchain uses the distributed ledger technology to store the data that allow secure and fast transaction storage recording. It consists of a decentralized network of computers.

How Can CBDCs Transform Economies?

Whenever a new transaction is recorded on the ledger, a complex cryptographic algorithm is used to verify the transaction through a network of computers. It is bein seen as a promising technology due to transparency and efficiency by reducing the probability of fraud drastically, enabling secure peer to peer transactions without third party involvement.

CBDCs could be the future of payments. It can be used to create programmable money that can be spent on specific things. As per the World Bank, around 1.7 Billion adults did not have bank accounts in 2017. CBDC can could reduce this number rapidly because it provides easy access to digital currency. Those who have smartphones and access to the internet, can use virtual currencies without the need for banks.

CBDC enables a reliable identification procedure. By linking the person’s unique digital identity to the CBDC wallet, the central bank can authenticate their identity and establish trust in the digital payment system. It reduces the risk of fraud and terrorist financing.

It can enhance ease of access to financial services. Since it can be used through smart phones, it will increase inclusion.

CBDC can enhance the security of online transactions. Transfer of money needs authentication of identity. The verification reduces the chances of fraud and misuse of the currency.

It also increases interoperability. Using a digital identity, CBDC facilitates interoperability across various digital financial services. Without the need of third party involvement, users can transfer money from one platform to another.

CBDC has improved the payment system and made it more secure, safe, fast, and low cost. This has also resulted in increased efficiency and enhanced monetary policy. With CBDC there will be more control over the money supply and the velocity.

Businesses will certainly find electronic currencies more useful given the resounding success of internet payment options in both developed and developing countries. Digital wallets can make it easier for consumers and businesses to interact. It will be interesting to see how central banks begin to explore and adopt this technology.

CBDC in developing countries have the potential to bank a large unbanked population and boost financial inclusion which can increase overall lending capacity and reduce bank disintermediation risks. Notably, banks could increase their capital pool if the unbanked sections of the population are banked.

It is valuable to the households as a means of payment or for credit building. CBDC can still be important for household welfare even when overall lending decreases as households benefit from the value using CBDC payment.

Most of the countries are considering a 2 tier CBDC model where central banks issue CBDC to commercial banks, which in turn offer them to consumers. If a non bank payment system provider can distribute CBDC, less funds will flow into deposit accounts from the unbanked because a bank account is no longer needed to access the CBDC.

If CBDC data is shared with banks, those without bank accounts can still get access to credit and lower interest rate loans. Central Bank Digital Currency will democratize finance. The financial and digital literacy program should be enhanced so that the unaware population of this sector is educated about CBDC.

This will help millions create a financial identity, transform the payment ecosystem by adding the eazyness by fast and secure transactions. It increases the interoperability between the platforms. The accessibility is increased with valid transactions thus it boosts the financial inclusions.

Summary

CBDC has the potential to address the loopholes of traditional finance without weakening monetary authority of a country. It can improve financial inclusion and enable secure and transparent economic activity. Also, an economy that is primarily digital would be easier to monitor and police.