Blockchain technology has completely changed the banking industry by enabling peer-to-peer transactions without the need for middlemen. The advent of Central Bank Digital Currency (CBDC) has given blockchain technology a new angle that is revolutionizing how people and companies will make payments in the future.
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Governments and banks began focusing more on integrating digital assets into their operations and economies some time ago. One example of how the public has acknowledged the necessity for responsible development of such assets is the executive order issued by the US president titled “Responsible Development of Digital Assets.” Because CBDC is a more safe option than cryptocurrency, banks and governments are aggressively seeking it out.
Blockchain technology and digital money increase efficiency and integrity
A digital version of fiat, or money issued by central banks, is called CBDC. It is intended to function as a digital equivalent of the nation’s paper money. In contrast to cryptocurrencies like Ethereum and Bitcoin, CBDC is legal money and supported by the government. The goal of CBDC is to lower the cost of printing, holding, and shipping actual currency while also increasing payment efficiency.
CBDC employs blockchain technology to establish an immutable record of all transactions and runs on a transparent, safe blockchain network. As a result, all transactions are kept on a decentralized ledger, which makes data modification and tampering impossible.
Blockchain, on the other hand, makes use of distributed ledger technology (DLT), which makes transaction recording safe and transparent. Each machine in the dispersed network of computers that makes up the system keeps a duplicate of the ledger. The network of computers makes use of sophisticated cryptographic methods to validate each new transaction before adding it to the chain of transactions, guaranteeing the ledger’s integrity.
The characteristics of blockchain technology are immutability, security, and transparency. All network users may view transactions recorded on the blockchain, which makes it an extremely transparent system. Numerous potential uses for this technology exist in the voting systems, supply chain management, and financial services sectors, among other areas. It is thought to be a potential technological advancement that will boost transparency, lower fraud, and allow safe peer-to-peer transactions without the need for middlemen.
CBDC and the safe, inclusive payments of the future
CBDC has the power to change how payments are made in the future. It may be used to generate programmable money that is limited to certain purchases. For instance, a government may introduce a stimulus package that is limited to specific products and services. This would lower the possibility of fraud and guarantee that the funds are used as planned.
CBDC can also enhance financial inclusion. Roughly 1.7 billion people lack access to fundamental financial services, according to the World Bank. By offering a digital currency that anybody with a smartphone may use without a bank account, CBDC can help with this issue.
It is essential to create a solid connection between a CBDC holder’s digital identity and the device they are using when they use their phone for transactions. In order to minimize the risk of fraud and foster confidence in the digital financial ecosystem, this connection is necessary to guarantee that the correct party is participating in the transaction. Having said that, financial inclusion may be increased by combining CBDC with digital identification. Here are some things to think about:
Identification that can be trusted: Digital identities offer a way to identify people taking part in financial transactions with confidence. The central bank may verify an individual’s identify and build confidence in the digital payment system by connecting their distinct digital identity to their CBDC wallet.
Financial services accessibility: A large number of people, especially those living in underserved or isolated locations, do not have access to typical banking services. Without a real bank account, people can engage in the official financial system by authorizing CBDC transactions on their phones. This promotes financial inclusion by providing financial services to underbanked or unbanked communities.
Secure transactions: CBDC transactions are made more secure by verifying the device and protecting digital identities. By limiting who may access and use the CBDC wallet on their phones, it lowers the possibility of fraud and identity theft. By increasing user confidence in the system, this security encourages people to use CBDC and conduct digital financial transactions.
Inclusive digital ecosystem: CBDC can facilitate interoperability across different digital financial services when combined with digital identification. It enables users to link their CBDC wallet to other online services including digital financing, e-commerce, and insurance. Through this connectivity, people may easily and securely access a variety of financial services, fostering an inclusive digital environment.
Additionally, CBDC can lessen the possibility of financing terrorism and money laundering. An unchangeable record of every transaction may be produced using blockchain technology, which facilitates the tracking of money transfers and the detection of questionable activities.