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How Digital Currencies issued by Central Banks might affect the Digital Currency Industry

Digital Currency

The scalability and effectiveness of central bank digital currencies, government-backed digital assets, and other digital assets, along with private crypto ventures, will galvanize the cryptocurrency space soon.

Cryptocurrencies or Digital Tokens are trying to be known as global assets. They can be traced back to 2009 when Satoshi Nakamoto created the Bitcoin blockchain and gave the world a new way to transfer funds from person to person without a central authority. These tokens have become a popular investment option, especially following the COVID-19 pandemic, due to their security, transparency, and inflation protection. But because the rise of public blockchain currencies such As bitcoin (BTC) makes it more challenging for governments to operate their economies, many central banks are testing Blockchain-based Central Bank Digital Currencies (CBDCs) to create their virtual currencies that the government backs. The only thing that CBDCs and community and permissionless crypto assets like Bitcoin (BTC) and Ethereum (ETH) have widespread is that they are all based on Blockchain technology. However, there are many significant reasons why adding CBDCs to the crypto ecosystem could speed up the transition of traditional banking into its high-tech future.

Blockchain Technology Drives Digital Currencies:

Both types of digital currency are based on Blockchain technology, but CBDCs are different from other cryptos in that they will be issued and stored by a central authority. They will also use Blockchain’s time-scoring blocks to authenticate transaction activity and have network participants continuously verify the same. This feature makes believing in CBDCs like payout tokens and legal tender much more legitimate. It is meant to make transactions safe and more secure than digital money issued by commercial banks. Also, because a CBDC is directly tied to the nation’s fiat currency, the value is only affected by changes in the foreign exchange market. This makes it less volatile and lessens the effect of speculative forces. Because of these differences, CBDCs are less likely to be affected by market volatility, which is typical for most cryptocurrencies. They also benefit from being immediately backed by the central bank that issued them, just like fiat money. On the other hand, CBDCs have issues such as user privacy, compatibility with other virtual assets, blockchain scalability, and concentration dangers, which will ultimately be solved as they develop.

On the other hand, digital tokens that don’t need permission, like Bitcoin and Ethereum, are kept in decentralized public ledgers that don’t have boundaries and aren’t fully regulated yet. Due to worldwide open market activities, secondary market token values are more volatile as this asset class has only been a choice for investors for a decade. Investors are vulnerable to fraud, hacking, scams, and market manipulation due to their complexity and significant reward potential. Since anyone can make a token, some bad actors have made cryptos or NFT initiatives that do little useful. As a result, investors have lost money in pump-and-dump schemes. Crypto offers a wide range of applications that radically alter how people conduct business in the modern world. Ethereum (ETH), one of the largest traded cryptos, is driving a fast-growing ecosystem of decentralized apps (dapps) and cryptographic protocols helping crypto assets like NFTs flourish. NFTs are used more often for games, tickets, art auctions, etc. The global crypto industry will be valued at a record $3 trillion in 2021 as a result of the continuous introduction of new cryptocurrencies with innovative use cases. The industry has expanded significantly over several years, reaching a new high of $3 trillion in 2021.

How Effectively CBDCs Interact with Virtual Assets?

CBDCs will be a very excellent contribution to the ecosystem when they come out, and how well they work with virtual assets will determine how people will live together after that. In the absence of such compatibility, CBDCs will need to develop not only a blockchain-based infrastructure that is resilient and scalable but also incentive systems and use cases, enabling their widespread adoption. CBDCs will be the next big thing, and they will cause tectonic shifts in the current ecosystem of digital currencies and the global banking system even though we know it. As more central banks start their CBDCs, they will become the only middlemen for all associated financial transactions. This could mean that the main focus will move to wholesale application areas with clear benefits for the back-end infrastructures that support current payment systems. Commercial banks could then borrow money in mass from CBDCs to fund their lending activities. Competition between them would be based on how well they could bridge the gap between short- and long-term interest rates.

This will lead them to work on projects that add value and increase competition for delivering their digital wallets through new and easy-to-use methods. Thus, CBDCs will make it easier to regulate or implement financial policy, as they will encourage the introduction of new FinTech businesses that are not reliant on traditional banking systems or their paper currency outlets. CBDCs also benefit from crypto’s traceability, which makes criminal activity easy to detect because clearing institutions can see the digital ledgers. Once a worldwide communication network of CBDCs has been in place, agencies worldwide could collaborate to combat black markets in countries that deal primarily in physical money.

CBDCs and private cryptocurrencies have very different ways of making money, so as more CBDCs come out in the future, the number of people using cryptocurrencies will rise. CBDCs will grow soon because of lower operating costs, better risk management, and a push for more financial inclusion. Suppose fundamental issues like privacy, interoperability, etc., are dealt with. In that case, CBDCs will help governments worldwide create supreme digital currencies that are easier to track, run more efficiently, and make transactions occur faster.

CONCLUSION

With more control over how monetary policy gets passed, CBDCs could help central banks do what crypto has been intended to do more efficiently while still preserving the interests of the final consumer.

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