Since cryptocurrency was introduced into the financial ecosystem in 2008, it has proven to be much more than a novelty. In fact, it was able to provide faster peer-to-peer payment. It was also a lot more convenient, safe, cheaper and much more efficient than the traditional “legacy-based” banking systems. Since then, cryptocurrency has become a vital tool for central banks to harness the development of a “central bank-backed digital fiat currency (DFC / CBDC)”.
Benefits Of Digital Fiat Currencies
Not only will the digital fiat currencies or (DFC) have access to the benefits relevant to cryptocurrencies, it will also vanquish the higher price volatility and eliminate the lack of “universal acceptance” widely associated within its current, private supply.
DFCs have the potential to:
- Facilitate all payment processes via mobile phones as “primary financial services instruments”.
- Promote the digitization of traditional, cash-based societies.
- Commercial banks and businesses can save costs that are tied to bulk cash management, logistics, and cash distribution.
- The use of DFCs will allow bank customers to avoid expensive ATM cash withdrawal fees. This can typically amount to 2% to 5% of the withdrawal value.
- Ensure the safety of transactions through decentralized ledgers. Where the history of all transactions and private user information does not stay on one site but is duplicated over a wide range of sites or participants on the ledger.
Possible Risks Connected To DFC
Although the use of DFCs offers a wealth of benefits to both the financial sector and its customers, it would be dishonest to say that DFCs do not possess some risks.
- DFCs can still be threatened by theft at the hands of hackers. Private key identities can offer “pseudo-anonymity” and as such, DFC users can fall victim to Ponzi schemes or even fraudsters. This can eventually expose consumers to security threats and central banks can risk their reputation. All this can happen if attacks on the DFCs are proven successful.
- “Low technical interoperability and obsolescence” are also significant threats. Especially if efforts are not made to update current technological systems to make sure that there is “interoperability” to manage large volumes of DFCs. This oversight can lead to increased payment vulnerabilities that can be abused by cybercriminals.
- Both financial and banking regulations may need to be revised in order to explain the role and functions of DFC. Furthermore, it needs to specify how it is to interact with current payment systems, and who can distribute and store “account-based DFC on the customers’ behalf. Without this clarity, the risks will likely be “delayed adoption” and it could even sabotage confidence.
DFCs Offer Both Benefits And Risks
There are a wealth of risks and benefits with the adoption of DFC. In order to tackle consumer privacy and financial stability, the steps to take include creating a solid regulatory framework on issuing DFCs as a national currency, creating consumer privacy laws, and having robust “cybersecurity” programs.