In a recent study, analysts from the Bank of America (BoA) discussed the dangers of stablecoins and the positive adoption of CBDCs by over 114 central banks. The study presented distributed ledgers and digital currencies as necessary to advance the future of money.
CBDCs To Benefit The Unbanked Population
The BoA report by BoA states that a fully digital economy without unbanked people would promote transparency, streamline settlement systems, eliminate intermediaries, and reduce costs, thus addressing inefficiencies in capital allocation.
The study said CBDCs would bring about 1.4 billion unbanked people worldwide, including 6.5% of the US unbanked, into the financial system. By becoming part of the banked populace, they could access their money and take advantage of credit services such as payday loans, among others.
Meanwhile, implementing CBDC for the unbanked population would establish credit records, facilitate easy cross-border transactions, and create credit scores, ultimately reducing their challenges with the traditional system.
According to the BoA, if central banks do not take action to launch their own central bank digital currencies and address the use of stablecoins for international payments, they may lose control of their nation’s monetary policy. Subsequently, this lack of control could ultimately lead to negative inflation in the long term.
Per reports, stablecoins recorded a transaction volume of over $7.9 trillion in 2022. The study added that this figure could increase further in 2023 if it is not regulated or monitored.
However, the report acknowledges the possibility of a future where CBDCs and stablecoins coexist. Stablecoins may be primarily utilized in this scenario due to their smart contract capabilities.
The Issue Of Financial Instability
While banks might use stablecoins due to their smart contract functionality, they will use CBDC due to its interoperability features. Furthermore, the BoA highlighted the potential for financial instability (liquidity risk) if individuals can withdraw funds from banks and change them to CBDCs.
Hence, it advised banks to work towards closing such loopholes. As of January 2023, 114 nations are investigating the introduction of a Central Bank Digital Currency (CBDC).
The digital versions of the Chinese Yuan, the US dollar, and the Euro are among the most prominent examples of such projects. However, China’s digital Yuan is leading the race among these CBDC projects.
Recently, the country released new use cases and functionality for the CBDC to boost usage and increase adoption. However, countries like Nigeria still struggle with low adoption for eNaira despite launching a wallet and other efforts to boost usage.
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