Digital currencies can be attractive for many people for the independence that they offer.
That is true to some degree. Blockchain offers great opportunities that central banks cannot offer. But it is not that easy.
Fiat – classic financial system
Let’s start with fiat currency. Fiat operates under the supervision of central banks. The central bank provides banknote printing, regulation and sets interest rates on possible loans and savings. It is the system we currently live in and many of us do not even question its functioning. In order for a transaction to take place, the bank usually needs confirmation from a third party.
On the other hand, digital currencies are decentralized and are not controlled or supervised by a central bank or authority. They work on a blockchain that allows transactions based on smart contracts. When the transaction takes place, it is visible to everyone and is traceable. It can no longer be deleted. Every node in this network is checking that everything went well. At the same time, digital currencies can be very volatile in price.
Central Bank Digital Currencies – CBDC
In the current COVID-19 induced crisis it was proven that the central financial system with cashnotes is not as efficient. Therefore, people as well as corporations began to look for an alternative. That forced the central banks to finally act and explore the possibilities offered by blockchain technology and digital currencies. The ideal state would be to have a blockchain on which the state digital currency would work. When a transaction is needed, it will work like a cryptocurrency. But it will be regulated, safe and stable, like fiat. However it will also be completely dependent upon central authority and no transaction would be annonymous.
In the future, we could be using digital currency and that would make banknotes completely obsolete and no longer needed. It will have a lot of benefits, banknotes will not have to be printed, everything will be more transparent and manageable.
Progress is inevitable. The financial system needs to be updated and be more secure. You need to be prepared for a possible crisis situation and be able to protect your propery and savings. Digital currencies could do that, however as with everything else, there are two sides to that. Regulation means also centralization and less independence. Ideal outcome would thus be to allow everyone to choose from a variety of digital instruments, according to their preferences and needs, from central bank digital currency to completely independent digital currency with all the risks and benefits it brings.