Why Are Central Banks Trying To Create Their Cryptocurrencies?
The coronavirus outbreak has accelerated the cryptocurrency’s exit from the marginal state and pushed it to the center of the economic agenda.
Today, the global economy more than ever needs a payment instrument that one can pay quickly and cheaply without unnecessary intermediaries such as Visa or Mastercard.
China has already been testing its “digital yuan” with the US, UK, France, South Korea, and other countries working on similar steps. Currently, 20% of 66 central banks reported that they would issue a Central Bank Digital Currency within the next six years. With all these actions behind the scenes, it seems inevitable that state digital currencies will become widely available to ordinary citizens in the coming years.
However, few understand what this will change, so let us explore why centralized digital money is wanted to be produced by states and how it will evolve in the not too distant future.
What is a central bank digital currency?
Central Bank digital currencies are traditional currency, but in digital form, issued and managed by a country’s central bank. A national central bank digital currency is designed to meet the needs of local economies at different development stages for a variety of purposes.
However, before discussing the need for a national digital currency, it is useful to briefly mention the characteristics of decentralized cryptocurrencies.
When we look at the emergence and working structure of cryptocurrencies, we see that the digital money market has three main features:
1-Security — Crypto coins use robust cryptographic algorithms while transferring with a decentralized structure.
2-Transparency — All transfers made are public so that everyone can verify the transactions made
3-Anonymity — The identities are anonymous, and no third party can see which user transferred to which user.
For this reason, it can be said that the public offering of crypto coins under a central bank structuring does not match with the spirit of the crypto money.
So why are countries so eager to issue their national digital currencies?
National Currency Revolution: Central Cryptocurrency
The state digital currency’s revolutionary nature may first suggest that national authorities believe digital currency is an effective alternative to the US dollar payment system of a “sovereign digital currency.”
It is thought that the use of national digital currencies will reduce the impact of other countries’ monetary policies and sanctions and can be used as a tool to create a strong economy.
Advantages and Disadvantages
When we pay for any product or service, we give an average of 1 to 5% of the money to payment systems as a commission. However, cryptocurrencies — like QR codes — allow the buyer to pay directly to the seller.
Of course, payments using the state digital currency will not be free, but commissions will be significantly reduced. In this way, the amount will be allocated by the producer of a central digital currency, that is, by the state, not by international companies who want to maximize profits at all costs.
The disappearance of intermediaries, such as Visa or MasterCard will make goods and services cheaper. With the participation of national central banks as a player in the digital money market, states will be able to collect the commission and even the tax of the commission-free money already circulating in the digital money market.
Digital currency is not only money in the usual sense, but also an ideal technology for providing financial resources to the state.
Simply put, a government will be able to increase and simplify tax collection by up to 100% with the introduction and use of its digital currency. Parallel to this, of course, the state will obtain a large amount of data on the transfers and transactions made through the use of centralized crypto technologies about its citizens and their financial situation.
At the same time, the inclusion of cryptocurrencies into the national economy by the state will create more transaction volumes for the players, as it will expand the financial market, so that it will be possible to establish a solid ground for investments in the country at both national and private companies level and to create a safe market area for investors.
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