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How digital currency paves way for helicopter money

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The growth of central bank digital currencies (CBDCs), is set to rise to a point where there will arise changes in the making of economic policies in societies. This is according to leading expert Eswar Prasad, graduate of Cornell university, who has also led China’s International Monetary Fund team in the past.

Prasad says the end of physical currency is here. Digital payments have dominated the world economies ranging from developing to advanced. This is making it inevitable for central banks’ retail  system to disappear in the near future . Central banks will however remain functional without retail payments, but rather with the use of a CBDC.

Advantages

CBDCs make it harder to use counterfeits as it reduces the use of cash for illegal purposes, such as money laundering and terrorism financing. It brings to light more hidden activities which is also useful for the collection of revenues.

The central bank digital currency also diversifies the making of monetary policies. CBDCs are useful in that they enhance transparency and allow for monitoring of digital crimes. One disadvantage however is that they reduce privacy.

Risks

Implementation of CBDCs may roll out the banking system. The presence of the currency would mean people in an economy would have access to digital payments without the use of a credit or debit card, nor a banking account. The bank would not be needed  as an intermediate between people’s deposits and their digital currency.

It would also limit innovation in the payment system by the private sector as they would not be able to compete with the government.

How the CBDCs will change the economies

The currency world is headed to a point where digital payments will be more accessible than now. China, for instance has digital payments available to everyone on their phone. The United States has 5% of its adults unbanked with some people still needing a bank account, as well as debit and credit card.

This implies that even some advanced economies have potential for the use of CBDCs to enhance accessibility to digital payments. This still means that payments of purchases is still under the control of some form of digital currency offered by either a private provider or government, as the use of cash shrinks gradually.

Settlement of cross boarder trade 

Once a country starts issuing CBDCs, there is a possibility of these currencies being available for use outside the country. Most payments across the boarders are already digital and it would be beneficial to have a cross boarder payment system, CIPS, that allows for growth of the local CBDCs.

CBDC’s impact on monetary policy

CBDC creates new opportunities for monetary policy. For instance, it makes it possible to implement negative interest rates  by adjusting balances in in CBDC accounts, if everyone had one.

Helicopter drops of money would also be made easy to undertake as it would be faster to increase the balances of digital accounts, compared to manual accounts.

Basically, central bank will still have a purpose even if the use of their money stops at retail level. They will run monetary policies as they still will have an impact on cost of funds in an economy through management of interest rates.

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