If the Fed (Central Bank) issued CBDC, individual citizens will have a Central Bank wallet to receive your money immediately, according to Yahoo Finance News.
It sounds fantastic, yet concerning. The Central bank can reach out to each individual citizen now. What data they wish to keep and how much power they have in case you violated their rules? Before we answer those questions, we need to understand how banks actually process your cash or your payment.
How does payment work?
There are 4 different types of payment works in the banking system:
- Payment within same banks
- Payment within different banks
- Payment cross border with same currency
- Payment cross border with different currency
We will introduce each payment process.
1. Payment within same banks
This is the most straightforward method of payment. When you pay someone money in the same bank, your account will reduce the amount while the receiver of your payment will increase that amount. The bank does not need to do anything on their asset but just update their accounting transaction.
2. Payment within different banks
If you pay someone in one bank and the other will receive the same amount from the different bank, then it gets a bit difficult with only two banks involved. The problem is their assets will need to be updated from someone else who controlled their accounts, said the Central Bank. However, the Central Bank has other important things to do rather than keep track of all banks activities. So the Central Bank hired the Clear Bank who kept those bank accounts and helped settle their asset transfers.
This payment method involves a third party and it is relatively straightforward after the third party has the power to settle.
3. Payment cross border with same currency
If you want to pay someone with US dollars from the US to the UK while your currency will stay in US dollars, you will need to convert your US dollars to UK pounds and convert back to US dollars? Nope! Actually, each country has its subsidiary banks located in other countries who control foreign currency. So when you pay someone outside your country, your money did not go overseas but stayed in the country. Your bank reaches out to the subsidiary bank to help transfer money within the receiver's country. How about if your bank did not have subsidiary banks? Then it will reach out to bigger banks who did have and it cost more to transact such amounts.
4. Payment cross border with different currency
In this case, we need foreign currency exchange as a middle man to help convert different currencies while the process is the same within banks’ subsidiary banks that hand out currency into the receiver's bank and your currency does not go abroad.
Wait, why do I explain all these to you? Because there is a system called PayPal that exists now.
PayPal: the private banking corporation
PayPal, unlike banking with regulations, is a company who handles payments across the globe. Why can they do it with cheaper fees and faster ways? Because they only show your transaction on paper with digits movement, the money did not go anyway simply the company owns enough money that enough to back more money transactions. They own foreign currency so that when you pay someone within PayPal, it just moves from their own account of one foreign currency into another without exchanging between two parties.
However, the shortfall of PayPal is they cannot issue loans or issue money like banks did to consumers.
At least, PayPal can do all 4 types of payment and crash them into Method 1.
CBDC is not so perfect solution
CBDC or Central Bank Digital Currency can be issued directly from the Central Bank and it can do up to 3 out of 4 types of payment except international different currencies conversion.
The Bank of International Settlements finally published a potential solution called Nexus. It is simply a CBDC foreign exchange system to help convert each foreign currency.
The Ultimate Fiat Currency
Here is my opinion. None of the above can reach a pure 4 types of payment yet created money except Stablecoin.
If you called Bitcoin the beginning of cryptocurrency then Stablecoin is the beginning of digital pegged currency that truly threatens fiat currency and its backed financial system.
Photo credit: Illustartion: Ikon Images/Portraits: Martin Neeves
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Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose cryptocurrencies are mentioned in this article. This information is only for educational