The World is rapidly transforming into a digital era of banking and finance, A hundred years ago our world was transforming into the paper currency that we call money or cash today, paper currency is not a centuries-old matter, the point to make here is that transformations keep happening, once the need of the time arrives it makes reforms itself in the existing norms and cultures. Presently we are ongoing the cryptocurrency development era and now we are heading towards the digital currencies introduction phase, imagine the cashless economy of digital currencies and financial freedom from conventional banks, we really don’t know what it will be like but we are sure that digital currencies are coming to life as most countries around the globe are figuring it out about implementation of Central Bank Digital Currencies (CBDCs) to the economies, don’t know what is CBDCs? Check Finwise article Central Bank Digital Currencies.

CBDCs have garnered attention because of their potential benefits, but there are also skeptics who express concerns and reservations about their implementation. we are going to review them one by one in the following article.

CBDC Challenges

Financial Stability & Bank Disintermediation

The primary concern of economists is that if CBDC is publicized it will impact commercial bank intermediation. Skeptics worry that individuals might prefer holding digital currencies directly with the central bank because bank accounts will no longer be required for digital currency ultimately resulting in fewer fund flows and consequently disrupting the overall supply of credit, potentially impacting the traditional banking system and its role in lending and financial intermediation.

Privacy Concerns

Another negative of CBDC that is distressing theory makers is the security risk that is associated with the digital currency, the digital pattern of CBDC is meant to be for centralized control and this will eventually disrupt the privacy of users. Digital economies will enable businesses to sell online and at the same time banks will be enabled to collect information that flings anonymity, online distribution of goods and services will give central banks and governments unprecedented access to individuals' financial transactions hence compromising financial privacy.

Cybersecurity Risk

The digital nature of CBDCs introduces cybersecurity risks, large amounts of sensitive payments, and user data available on CBDC system is vulnerable to security risk and this can be one of the primary reasons for central banks to not develop CBDCs. Critics argue that the increased reliance on digital infrastructure could make the financial system susceptible to cyberattacks which can potentially compromise an entire nation’s financial system. CBDC has the potential to significantly increase the breadth and scale of many of the security and privacy flaws that currently exist in today's financial system. leading to unauthorized access, theft, or disruption of the digital currency system.

Implementation Challenge

CBDC has to overcome various challenges before Implementation which include the development of technological infrastructure, constituting a legal framework that will enable the common usage of CBDC, Public awareness programs, and setting up a controlled environment for launching CBDC as a pilot project before launching it up to the full scale for real-world usage.

Impact on Monetary Policy

The introduction of CBDCs could have implications for monetary policy. For instance, if more people prefer the usage of digital currencies rather than holding traditional money in bank accounts the deposit reserve will decline and this can result in shaking up the price controls and value of currency. The critics argue that the ability to implement effective monetary policy is a challenge with CBDCs the common problems have to be addressed before the execution of a digital form of currency and the balance has to be maintained between the usage of currency holdings in response to interest rate changes.

Cross Border consideration

The main challenges of CBDC for cross-border payments are the binding legal system of a country and standard policy compliance, for instance, an expat who wants to remit CBDC to his country has to align the transactions according to the laws of both countries, and the systems may or may not have the similar rules to govern events or contingencies. Consider if the rules for both countries are same then the international standards apply to both systems. The conflicting national policies impose risk for the materializing of the cross-border CBDC transaction. Critics are also concerned about the potential for local and foreign currency competition and the following consequences.

Technology Risk

The technology underpinning CBDCs, such as blockchain or distributed ledger technology, may face technical challenges, including scalability, security vulnerabilities, and potential issues related to network congestion and transaction speed.

Impact on Innovation

Some skeptics argue that introducing CBDCs could suppress innovation in the private sector by creating a government-backed digital currency that competes with existing private digital currencies and payment systems.

In addition to the above, Critics also express concerns about the unintended consequences of introducing CBDCs, such as changes in consumer behavior, potential impacts on financial stability, and the broader economic system.

It's important to note that these concerns do not apply universally, and the specifics can vary based on the design and implementation of CBDCs in different jurisdictions. Central banks and policymakers are likely to carefully consider these issues and address them as part of the decision-making process surrounding the potential introduction of CBDCs.