‘The End of Physical Currency, Cash, is Certainly Drawing Near’: Economist

Digital currency or cash: 'The objective is financial inclusion'

Prasad believes that government-backed digital money may be an equitable benefit to a successful private economy by allowing for greater financial inclusion. "Banking the unbanked" has long been a favorite aim for digital currency and other fintech aficionados. According to enthusiasts, the internet has made available to the general public numerous financial instruments that were previously only available to experts, and new advancements in financial technology have given ordinary individuals greater power and control over their finances.

"In many nations, the goal is financial inclusion," Prasad explained. "The concept is that the central bank creates a low-cost digital payment system that is easily available to everyone, even low-income people who may not have access to a credit card or a bank account." This will assist in bringing individuals into the financial system as well as serving as a portal for fundamental banking goods and services such as credit, savings, and so on."

China launched its own digital currency earlier this year, although in a series of experiments, beating the United States to the punch in becoming the first country to develop its own digital currency.

However, this does not necessarily imply that they are well ahead of the United States in the contest to choose which country serves as the global reserve currency, as Prasad pointed out.

"I don't believe there is a first-mover advantage here," he added. "Certainly, if the digital yuan becomes extensively utilized both within and outside the nation eventually... The renminbi may be utilized increasingly for foreign payments, as well as to settle trade and financial activities. But, ultimately, as a store of value, as a reserve currency, it is not simply economic size or the depth of financial markets that matter, but also the institutional framework of a country."

According to Prasad, the United States has numerous advantages over China, including an independent central bank, a norm for rule of law, and an institutionalized system of checks and balances. "I believe China has a long way to go on all of these categories." So I'm not concerned that even a digital yuan would challenge the dollar's dominance as the world's reserve currency."

Pumping the brakes on CBDC hype

Nonetheless, substantial doubts about the feasibility and merits of a CBDC persist. According to a European Central Bank poll, privacy is the top fear for a possible digital euro among both the general public and financial experts. Data security and privacy regulations have been hotly debated subjects in the EU legal realm, particularly in recent years.

Issues have also emerged with China's new digital currency, the renminbi, despite the fact that it is still in its infancy. In a 2021 Bank of International Settlements (BIS) assessment, systemic risk for bank runs was recognized as one of the main areas of risk detected in China's CBDC implementation. Concerns about confidentiality may also arise when a centralized body issues digital money.

"I believe that, in the end, no central bank wants its money to be used for illegal reasons," Prasad added. "Auditability and traceability of transactions, and hence loss of privacy, is, I believe, a feature we'll have to live with."

In order for a CBDC to be successful, a balance of concerns and power between private and public interests must be found, according to the BIS analysis.

"In order for central bank digital currencies (CBDC) to function effectively, public and private institutions must collaborate to ensure integration with existing payment systems; anticipate customers' future needs; and support innovation while preserving public trust, privacy, and stability in the broader financial system," the authors of the BIS report wrote.