Introduction:
Centralized financial institutions have begun to embrace some of the features of blockchain technology. While the notion is not decentralization, these traditional banking systems are taking up an innovative approach towards improving financial services, boosting the national economy, and regulating digital finance. Though significantly different from Defi or any decentralized concept, it is essential to understand what exactly Central Bank Digital Currencies are and the extent of their effect on society and commerce generally.
Central bank digital currency is simply a virtual currency that is backed by a central bank. It is a digital form of a country’s fiat currency that is issued by the central bank of that country and is used to make digital payments. CBDCs are relatively similar to cryptocurrencies and stablecoins. However, the difference
is that CBD has its worth fixed by central banks and is equivalent to a country’s fiat currency.

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About CBDCs
Money can be traced down history to the exchange of goods and services for a value which is barter trade. The evolution of money led to physical currency which is called fiat money. Fiat money is a form of monetary value issued by the government without being backed with commodity commodities gold. They
are widely accepted for the exchange of goods and services.

With the introduction of cryptocurrencies and blockchain technology, the government and centralized banks have the opportunity to explore digital currencies that are fully supported by government policies issuing them. Simply put together, the concept of CBDC is a virtual version of a fiat currency that, through the advantages of blockchain, has some features of cryptocurrencies.

Even in many countries with stable financial systems, there is a significant number of individuals who do not have access to financial services or even own a bank account. Also, since the spread of the covid, there has been more pressure to move towards a more cashless system. Over 70% of consumers around the world purchased items online in 2020 and there was a drop in physical cash payments. This was only a confirmation that the world was setting a new course for digital finance and a cashless future.

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How does CBDC work:
While government agencies plan for CBDCs to exist as a supplement for fiat currency rather than to completely replace it, these digital currencies work similarly to traditional funds. The virtual currency would be accessible by the users through their digital devices and stored in digital wallets. It can be also transferred between parties and any user has access to check their balance. CBDC enjoys an advantage, however, over traditional bank accounts because it utilizes blockchain technology to create currency.

Blockchain technology provides a near-instant and seamless transaction processing speed. Providing seamless transactions at a low fee, there is also a low risk of network congestion so citizens can move funds faster and cheaper. This is also the effect of removing middlemen as known as disintermediation.

The main goals of CBDCs include providing convenient financial services for businesses and customers while offering accessibility, privacy, and security. It is directed toward providing an efficient and cost-effective method designed to minimize the complexity of the traditional financial system.
Types of CBDCS
1. Wholesale CBDCs
These CBDCs are similar to holding reserves in central banks. They are granted to financial institutions to enable them to handle interbank transactions. Central banks influence lending protocols and interest rates through monetary policies and requirements.

2. Retail CBDCs
These CBDCs are made available to consumers and businesses. There are simply government-backed virtual currencies that allow users to reduce intermediary risk and transaction costs. Asides from being a safe alternative to cash, retail CBDCs promote financial inclusion among nonfinancial institutions and individuals.


CBDC and cryptocurrencies
While both currencies share some similarities as a digital representation of value, cryptocurrencies require consensus and are decentralized. The rules governing the cryptocurrency ecosystem are not determined by governmental regulations but are secured by a consensus and governance mechanism. This means that cryptocurrencies are unregulated, and their value is dictated by their user community and interest. As a result, they are volatile assets and fluctuate easily. CBDC is different because it is more stable since it reflects the value of a fiat currency that is backed by a government.


CBDCs and Africa recently:
Africa has been in the spotlight for its resilience and positive outlook toward blockchain technology and cryptocurrency. Despite regulatory setbacks, most African countries have continued to thrive and contribute largely to the crypto ecosystem, making up a large part of the cryptocurrency user community. It
may not be a short sight that the continent would experience a surge in CBD services.
Nigeria, for example, is among some African countries that have taken a major leap towards CBDCs by introducing eNaira though it has a low adoption rate. In 2022, it facilitated the eNaira project to improve cross-border transactions and efficiency by reducing merchant service charges and making enabling policies.
Kenya has been exploring and researching the adoption of CBD. It released a discussion paper to the public as a form of research in 2022, following a development project assessing the feasibility of a digital Kenyan shilling in 2021. Even South Africa has begun a study to understand and explore the prospects of a digital rand with matters of policy management and financial inclusion on national and regional levels.
Pros:
Financial inclusion:
With the world shrinking into a global village, transactions have never been so easily made across different ends of the world. As a bonus, by eliminating intermediaries and complex expensive transaction infrastructure, a direct connection between consumers and central banks can be established. Anyone
would have direct access during transaction processes.
Cost-effective:
It would reduce high cross-border transaction costs through jurisdictional cooperation between governments. By reducing the complexity level and making mutually favourable policies, it would be easy to manage cross-border transaction costs.
Accessibility:
It provides a suitable option for cash transactions and extends financial services to those who do not hold a bank account.
Security:
Since the CBC network is built on blockchain technology, it offers a secure and transparent transaction medium. All transactions are recorded and would be made available to interested parties, not the general public since it is a centralized network. Transactions are immutable and traceable so it would be possible to suspicious activities or funding.
Cons
Control:
would want less government involvement in their finance, the initiative may not be welcomed. For instance, Nigerians have put up a cold shoulder towards eNaira even in the event of Naira scarcity. CBDCs would inadvertently provide the government with firm control over the finance of the citizens.
Regulatory hurdles:
This may be the most difficult aspect of the CBDCs. There is a lot of uncertainty to be resolved to defy the position of the currencies and their implications, jurisdictional and legal.


Conclusion
Countries around the world are beginning to explore CBDC while others are already building and regulating the idea. Bank of Russia has launched its CBDC, known as the digital rube, for its pilot phase. After this phase, the Bank of Russia would continue to explore ways to improve and expand the project. China also
launched the prototype CBDC called e-CNY, which it has been working on since 2016. In Hong Kong, public sector workers were set to be paid entirely in e-CNY. This proves that CBDC is just not a passing phase in evolving finance. However, there is a need for mass acceptance and adoption. To achieve this, there is a
need for clarity and proper in the aspect of regulation

Written by Nwogu Ihuoma

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