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CBDCs have issues that must be resolved before public adoption: Blockdata study

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(Kitco News) -  Central bank digital currencies (CBDCs) are a popular topic among government regulators and proponents of traditional finance as they integrate the security and efficiency of blockchain technology with the traditional fiat system, increasing their level of control.

At the same time, long-term crypto holders and a growing cohort of private stakeholders have voiced their opposition to the introduction of CBDCs, arguing instead to allow the private sector to innovate in the realm of stablecoins and payments.

Blockchain insights firm Blockdata has released a new report titled “The State of CBDCs in 2022,” which looked at some of the major developments over the past year and discussed the reasons why some private companies stand opposed to the integration of CBDCs.

One of the staunchest opponents to emerge in the anti-CBDC camp is Circle, the company responsible for issuing USD Coin (USDC), the second largest stablecoin by market cap .

According to Dante Disparte, head of policy for Circle Internet Financial, CBDCs are a “preposterous idea,” with the company adopting the stance that the issuance of digital currencies would be better if the private sector were left to innovate with regulatory approvals, the report said.

The American Banking Association (ABA) joined Circle in its opposition, saying that “a US Fed-issued CBDC lacks 'compelling use cases’ and would 'fundamentally rewire' the banking system.”

The ABA cited the upheaval that releasing a U.S. CBDC would create as it would enact a host of “fundamental changes in the responsibilities and roles of the US Fed” and diminish the standing of private sector banks. The association also believes that innovation in the digital currency realm should be handled by the private sector “through the evolution of real-time payment systems and a mechanism of well-regulated stablecoins.”

Other concerns voiced by private stakeholders include issues related to anonymity and privacy, interoperability, scalability, technological structure and balance between design and central bank policies.

And judging by the level of uptake, it appears the public at large, and even some banking institutions, aren’t too keen on the idea of CBDCs.

The Reserve bank of India recently launched a trial for a wholesale version of its digital rupee, which is used exclusively by banks to facilitate interbank transfers. After a month of testing, the country’s bankers were unimpressed, saying that the new system offered no advantages while having several key drawbacks.

In Nigeria, one of the first countries in the world to launch a CBDC back in October 2021, the public’s uptake of the eNaira has been dismal, with only 0.5% of Nigeria’s population currently using the digital currency in their everyday lives.

This has forced the Central Bank of Nigeria to take the drastic measure of reducing the amount of cash that citizens can withdraw from their bank accounts in an attempt to push its “cash-less Nigeria” policy and increase the use of the eNaira

According to the directive released by the bank, individuals and businesses are now limited to withdrawing $45 (20,000 Nigerian nairas) per day and $225 (100,000 nairas) per week from ATMs. For bank accounts, the limits are set at $225 (100,000 nairas) per day and $1,125 (500,000 nairas) per week. If they exceed the prescribed limits, individuals will pay a 5% fee while businesses will be charged 10%.

Needless to say, if the people were more interested in using the country’s CBDC, they wouldn’t have to be forced to do so by limiting their access to physical cash.

Pakistan reveals its CBDC plans and Indonesia says the digital rupiah will operate in the Metaverse

Main issues holding back CBDCs

According to the report from Blockdata, there are five key issues that need to be resolved before the widespread adoption of CBDCs will take place.

The first is the need to address stakeholders’ concerns regarding anonymity and privacy without limiting the ability to monitor for illicit activities. Second, the issue of interoperability between payment systems needs to be addressed to help improve efficiency “via increased interconnectedness with both foreign and domestic payment systems.”

A third factor is the need for the technology to be scalable and capable of achieving a high transaction throughput. Slow transaction times won’t work when millions of transactions are occurring on a regular basis.

The fourth issue to be addressed is the need for “each CBDC to be unique and tailored to the specific circumstances and requirements of the issuing nation.” And finally, Blockdata said that “central banks need to find a critical balance between developments in technological design and the central banking policy fronts.”

“The technological design would call for close collaboration with private technology providers to successfully distribute CBDCs, add new features, and build e-wallets, among others,” the report said. “At the same time, developments on the policy front are vital. These include the passage of new legislation and regulations and up-to-date case laws.”

As it stands now, roughly 110 central banks around the world are at various stages in the exploration and development of a CBDC, so it's only a matter of time before they are widely distributed throughout society. It remains to be seen if central banks and governments will be forced to implement measures promoting their uptake, as seen in Nigeria, or if the general population will openly welcome digital fiat in lieu of physical notes.

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