Digital Currency Issuance by Central Banks: CBDCs and Monetary Policy

CBDCs are one of the most important developments that has transpired in the future of global financial systems as it reflects a shift to the creation of digital money. CBDCs are the digital form of a sovereign fiat currency owned by and issued, as well as controlled by a nation?s central bank. CBDCs are centralized and are anchored on the institutional credibility of the issuing central bank unlike Decentralized cryptocurrencies such as bitcoins. The most obvious reason for CBDC is to replace current structures of payment systems and to address issues of financial exclusion as well as strengthening the mechanisms of monetary policy. The overall benefits of CBDCs include the following; It can help integrate the payment systems of different countries as well as domestic payment systems hence reducing transaction costs and settlement time and ultimately promoting economic growth. It also gives central banks more direct influence over the money stock which in turn enhances the ability of the country to implement its monetary policy and offers extra weapons to fight fluctuations in the Business cycle. During emergencies CBDCs may be used to directly disburse to citizens, thereby enhancing the efficiency of monetary gear shifts ? fiscal stimulus. Also, CBDCs can allow the central banks to address the threats posed by private digital currencies and stablecoins that emerged recently and are an attempt to disrupt conventional financial systems. But the use of CBDCs also has its challenges, as will be discussed below. As it will replace traditional currency or integrate into it, it will lead to tension in the financial sector by disintermediating the banking sector which in turn will lead to decreased credit access and heightened risk level. The risks of privacy and cybersecurity also arise because CBDCs are programmable and can hence be attacked by hackers and or suffer data breaches. Further, use of CBDCs as a global financial system can jeopardise international trade and currency competition on a large scale. All in all, there is a prospect for CBDCs to transform the fundamentally current vent with central banks at the forefront. The advantages of CBDCs are huge, however the challenges must be thought of, designed, tested, controlled and its risks must be mitigated to obtain successful outcomes in the banking systems across the world.