Digital currency - Risks and opportunities of Central Bank Digital Currencies (CBDCs)
Context
In recent years, digitalisation has made considerable progress, which has had an impact on many areas, including the financial sector. As a result, cryptocurrencies have emerged, causing changes in traditional behaviours making cryptocurrencies a new popular digital payment method. The significance of cryptocurrencies as a financial innovation is highlighted by this growth trend and drawn the attention of financial institutions. Consequently, central banks have launched Central Bank Digital Currencies (CBDCs).
These new developments in the financial sector and the emergence of new digital forms of money have also brought significant disruptions. This has caught the attention of central banks around the world, who are now considering the implementation of CBDCs. However, this raises various complex challenges and critical questions. The problem statement for this thesis revolves around understanding the implications and potential impact of CBDCs on the existing financial system and examining the potential benefits and risks associated with their introduction.
Objectives
The aim is to provide an in-depth analysis of digital currencies and their impact on society as a whole. The purpose of this research is to examine the development of digital forms of money, assess the opportunities and risks associated with CBDCs, and provide an evaluation of their impact if implemented. In addition, a literature review will be conducted to identify relevant research gaps.
This study seeks to provide an overview and understanding of CBDCs, the corresponding models, the associated advantages and disadvantages, relevant actors, and technologies, based on several literature analyses. The research for this thesis will explore the possible introduction of CBDCs and evaluate the associated opportunities and risks.
Methods
In order to address the research questions an extensive review of relevant literature is essential. The acquisition of a comprehensive understanding of the subject matter is the initial and most important step in this process. Since the sources used form the basis for the data and the analyses performed, it is crucial to find trustworthy and factually accurate sources. Finding relevant literature and online sources is thus one of the most important procedures in the early stages of this study.
The sources found were critically reviewed and studied in detail. Furthermore, to ensure the validity and reliability of the research findings, this search involved searching academic databases. Academic papers and case studies relevant to the topic were selected, and thoroughly examined and analysed in the literature review. This approach to literature review was adopted to ensure that the study was based on authoritative and peer-reviewed sources and that the research findings were robust and trustworthy, so that self-reflection and evaluation could be carried out based on the information obtained and knowledge gained.
Results
The research findings have shown that CBDCs offer numerous potential benefits associated with the implementation of CBDCs. CBDCs have the capacity to enhance transaction efficiency by facilitating faster payment settlements. Due to their digital nature, CBDCs are also more cost-effective compared to conventional payment systems, and their availability ensures continuous processing capabilities. Furthermore, CBDCs could promote financial inclusion by extending financial services to individuals who currently don’t have access to traditional banking channels. The introduction of a CBDC could also increase the stability of the financial system and empower central banks in their pursuit of effective monetary policy implementation. This, in turn, may also have an impact on transparency and security, as central banks would have greater control and influence within the monetary system.
However, it is imperative to acknowledge and address the potential challenges and risks that accompany the implementation of CBDCs. The increased control exerted through CBDCs can both serve as an advantage and a disadvantage, because it compromises user privacy. Furthermore, CBDCs could be vulnerable to cyber-attacks which may result in the compromise of users' sensitive data. Equally important is the recognition that the introduction of CBDCs holds the potential to disrupt the financial system, potentially causing imbalance. A rapid transition to CBDCs could also destabilize traditional banking systems and lead to bank runs as individuals would withdraw deposits from banks. Consequently, such a scenario could lead to private payment providers being forced out of the market.
Therefore, the implementation of CBDCs requires extensive research, planning and a comprehensive evaluation of the potential. In order to proceed judiciously, it is essential to undertake a careful examination of all the opportunities and risks associated with CBDCs, allowing for an informed decision on the most suitable model. Therefore, meticulous pre-implementation research is imperative to ensure a secure and mutually beneficial outcome.
The literature review has also demonstrated that a substantial body of research dedicated to exploring the potential implementation of CBDCs have already been conducted. Numerous studies have extensively investigated the various possibilities associated with CBDCs, with particular attention given to the opportunities and especially the risks. Nonetheless, despite the research conducted thus far, there are still many unanswered questions regarding CBDCs. Especially with regard to the social and economic impacts of CBDCs. Given the intricate nature of the financial system, accurately assessing the effects resulting from the introduction of CBDCs requires further advancements and research.