Almost everyone would agree that cryptocurrencies are digital assets with the potential to disrupt the global financial system. However, one drawback that most people find troubling is the need for more regulation. The absence of regulatory bodies in the crypto market has always been an issue with centralized bodies, and most believe these digital assets could attain higher potentials with proper control from central authorities. This has led to experiments on a new digital currency called central bank digital currencies (CBDCs). Presently, 11 countries have introduced their CBDCs, and 114 others, including the United Arab Emirates, are working on theirs. This article details the potential effect of this new digital currency on businesses and how they will adapt.
CBDCs: A Centralized Approach to Digital Currencies
A central bank digital currency (CBDC) is digital money issued and controlled by a country’s central bank. It is a digital form of the country’s traditional currency that can facilitate cross-border transactions and online payments. The introduction of digital currencies came as a by-product of the increasing popularity and transformation of the financial sector to a more digitized system. The world is becoming cashless, and these currencies would play a significant role in easing this transformation.
Although CBDCs share some similarities to cryptocurrencies, the significant difference is that the country’s central authority highly regulates them. In addition, blockchain technology, which powers cryptocurrencies, has a more extensive reach in terms of investment, including NFTs, CFD trading, options, and futures.
CBDCs are strictly digitized modes of transactions for consumers and businesses. Also, transactions done here are neither facilitated by blockchain technology nor anonymous or open to the world. Transactions using digital currencies clearly show the sender’s personal information and are restricted to the sender, the bank, and the receiver.
About 11 countries have successfully launched their CBDC. The list includes Brazil, China, Thailand, France, Russia, Ukraine, Grenada, The Bahamas, Ecuador, Venezuela, and Malaysia. Some countries have successfully implemented their digital currency, while others are in the pilot phase, monitoring the citizens’ response to the currency. China was one of the pioneers. They began exploring the potential of digital currency as early as 2014.
The UAE initiated its plans towards a cashless society in 2022 and has since been working on launching the digital Dirham. The country aims to use this currency to strengthen payment infrastructure and overcome obstruction in domestic transactions and cross-border payments. They would begin with the first pillar of the project, the side launch of mBridge, followed by the proof-of-concept for reciprocal transactions with India and domestic issuance for wholesale and retail usage of CBDCs.
Digital Currencies And The Future of Businesses
Clearing House Bypass
The first advantage of CBDCs for businesses is that transactions do not require an Automated Clearing House (ACH); therefore, they can eliminate overhead costs on transaction fees.
When transactions are carried out, the ACH has to confirm the validity before verifying it. During this verification process, the clearing house deducts 0.5% to 15% from the senders’ accounts, depending on the amount. Senders do not require a clearing house and can bypass transaction fees through CBDCs.
Wider Customer Reach
Another widely discussed model of adapting to this digital currency is that these businesses get to explore a new customer base and a wider audience. Digital transactions have one significant advantage. That is, they come with zero restrictions in terms of demography. With the UAE’s plans to bring mBridge and a proof-of-concept for cross-border and domestic transactions, businesses can explore more audiences within and outside the region.
Traceability and Transparency
People are concerned with security when implementing new technology. Unlike the decentralized financial system notorious for being susceptible to hacks and illicit activities, CBDCs have better security and protection capabilities for businesses and consumers. They are fully traceable and under the Central Bank of UAE (CBUAE) jurisdiction.
The relationship between CBDCs and companies is not restricted to the positives, which means there are also some potential risks it poses to companies. The first and most prominent is increased exposure to cyber-attacks and security issues. Although the system could do better than other digital assets like cryptocurrencies, the focus of a digital approach to transacting comes with some level of exposure to hacks and theft.
Technological and infrastructural challenges are another issue of concern here. CBDCs might require investment in expensive infrastructure, which could pose financial challenges to businesses. At the same time, consumers might find it more complex compared to traditional methods of transacting.
Lastly, companies and consumers might be resistant to the changes caused by disrupting the existing financial system. In this case, adaptation would take longer than expected, potentially affecting the implementation.
How Businesses Can Adapt to The New Digital Currency
Source: Christina Morillo, via Pexels
CBDCs represent a giant leap in applying digital transformation to businesses’ financial transactions. One major way companies adapt to this is through adaptive scaling.
Understanding The Technology
Companies can achieve adaptive measures only when they know the technology behind CBDCs. The crypto market is a practical case study that shares significant similarities with this digital currency. Companies can learn from this or employ experts in the field and understand the technicalities accompanying this new system upon implementation.
Accessing Its Impact on Their Business
Another adaptation method is conducting proper research on how these CBDCs can affect their business operations. This includes consumer interactions, supply, demand, and payment speed. They could also look into how this affects their liquidity and cash flow and whether they need to update their payment systems.
Furthermore, adopting CBDCs might require businesses to look more into the risk of cyber attacks. Although CBCDs are more secure than the decentralized system, their online operation still exposes several cyber vulnerabilities.
The Future of Finance Is Digital
Although one cannot entirely determine the pace at which this transformation will occur, we can be confident that it is inevitable. The CBUAE plans to launch its digital currency as part of its 2023–2026 strategy. Businesses can utilize this time to prepare in advance and make plans for adapting to the change bound to come with this innovation. The future is digital, and only those early enough to the party can wholly maximize its potential.