What are CBDCs – Should Vietnam have a CBDC for digitizing transactions?

What are CBDCs – Should Vietnam have a CBDC for digitizing transactions?

Should Vietnam have a CBDC for digitizing transactions? Let’s find out the answer in this article with FinFan.

What are CBDCs?

CBDC - short form of Central bank digital currency is a form of digital money that is issued, backed and controlled by a country’s central bank.

There are currently two primary types of CBDCs available on the market: retail CBDCs, which are intended for individual use, and wholesale CBDCs, which are intended for use by financial institutions with central bank accounts to facilitate interbank settlements and transactions.

The degree of anonymity, operational availability, interest-bearing qualities, and accessibility of CBDCs vary in design.

What is the difference between CBDCs and other cryptocurrencies like stable coins?

Although created with almost the same technology as other cryptocurrencies and sometimes confused with stablecoins.

The main difference between these currencies and CBDCs lies in their centralized nature as the central bank of a country is the institution that holds the issuing authority and bears all the responsibility for it.

CBDCs are an advanced representation of money for the digital economy, combining the advantages of central bank money such as settlement finality, liquidity, and integrity, in digital form.

In general, because they are backed by a nation's central bank, CBDCs have the strength of guaranteeing the coin's liquidity and stability in addition to the benefits of cryptocurrencies due to the widespread use of blockchain technology to create it.

The benefits of using CBDCs for nations

CBDCs' superior qualities enable them to address the following issues:

  • Improved resilience of the money when the financial system in case of a crisis due to the delay in the accumulation of credit risk since all money orders from commercial banks must pass through an additional stage, the central bank's balance sheet.
  • Increased security for all forms of payments, including those made via P2P, online, and POS machines, as well as faster and more convenient transaction processing are among the benefits of using blockchain technology.
  • Accelerated cross-border payments. This is natural with current blockchain technology, the processing speed of transactions will be significantly increased as they do not need to go through the old and often lagging real-time gross settlement (RTGS) infrastructure of central banks which will be replaced by a system of 24/7 availability, anonymity, and eliminating counterparty credit risk for participants
  • *Increased financial inclusion when CBDCs will likely drive greater financial inclusion by providing digital money issued by the central bank, that people and businesses can access via their smartphones or digital cards at minimal cost, without the need for traditional government documentation and resources such as a steady income and a permanent address. They will also reduce business cycle volatility by allowing households and businesses in emerging markets to build financial buffers in the form of saving and borrowing.
  • Security in transition to a less-cash society when ash use around the world is dramatically decreasing due to more convenient options varying from credit cards to mobile apps. By its nature, cash is difficult to trace and poses a greater security risk than digital money as there is no record of exchange. Although it seems unlikely that central banks would remove cash from the financial system, they may wish to reduce its usage even more to reduce financial crimes. Less cash is not only the natural trend of the developed world but also one of the prominent opportunities for growth in financial institutions.*

*Sourced by arf

Should Vietnam have a CBDC for digitizing transactions?

For those above benefits, it is obvious that the Vietnamese government ought to possess one CBDC coin.

However, carrying out the process of making this coin will almost certainly result in the following grave errors:

  • CBDCs under development today are not sufficiently secure in the face of increasing cybersecurity and fraud risks.
  • The launch may pose a great risk to the national banking system, as well as current financial stability and monetary policies, considering retail CBDCs’ potential elimination of financial intermediaries such as banks and payment service providers.

In order to address the aforementioned issues, it is imperative that the legal corridor for CBDC be reformed and that international advisors with expertise in the blockchain market participate in order to assist Vietnamese engineers in developing the aforementioned coin.