Digital currencies are becoming more popular by the day. Today, banks are more interested in cryptocurrency and are considering the creation of their own.
With the acceleration of the pandemic, the use of physical money, especially in developed economies, has been almost replaced by easier-to-use methods such as cryptocurrencies. This led central banks to explore the potential of creating their digital currency, one that is convenient to use, available and trusted by people for their payments and transactions. They believe that introducing digital currencies can make moving money easier, faster, and cheaper.
It is believed that if countries adapt and create their digital currencies, this can make them the new form of money that is issued by central banks, instead of the traditional money. This could lead to posing a threat to policy makers’ ability to convey monetary policy.
Bitcoin is one of the most popular digital currencies. It does not look like the money we hold in our hands but instead is defined by being a computer program allowing the exchange of value currency over the internet in a matter of minutes. Cryptocurrencies are not issued by a country or a central bank but are instead known for not being regulated by a central authority. Bitcoin and other cryptos are mined or extracted using a powerful specialized computer to do so. So far no major central bank has introduced its digital currency.
Cryptocurrencies have not yet become a popular payment method because of many factors. First, they are not easily exchanged for more traditional forms of money at a predictable price. Also, their volatility makes their price unstable, therefore, many suppliers and business owners prefer not to accept crypto payments yet. Furthermore, one thing has given them a negative reputation, and that is the fact that anyone who has access to the internet and a computer can use them. It is nothing compared to opening a bank account where you need to provide lots of information to do so.
Cryptocurrencies are used as financial assets instead of money to make payments and exchanges. There is a bet that the value will increase.
When it comes to central banks, there are many reasons why they would like to explore electronic payment systems.
Traditional American banks were slow to introduce solutions to transfer funds between peers for simple things such as splitting the bill. For this reason, some apps did so, for example, PayPal Holdings Inc.’s Venmo. However, their transaction has a fee that needs to be paid aside and requires few days to be transferred. To solve this problem, central banks can issue their digital currencies that are directly transferred into the online wallets of the users when needed, without the need for middlemen or other banks, therefore, reducing the fee. Americans will be able to potentially have accounts at the Fed that will allow them to make transactions with the digital dollar, and this will simplify the process and lower the cost of the payments.