3 ways digital currencies backed by central banks could benefit the global economy, according to Fitch

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Widespread adoption of digital currencies backed by central banks could benefit the global economy in multiple ways. In a research report released Monday, Fitch detailed three advantages of central bank digital currencies or CBDCs.

1. Societal digitalization

Fitch said retail CBDCs have the ability to enhance authority-backed cashless payments. For emerging markets, in particular, CBDCs can even bring underbanked communities into the financial system due in large part to the decreased cost of transactions.

2. New policies

CBDCs may also pave the way for new policies thanks to their programmability and flexibility. For instance, digital currencies can be taken into consideration when transferring monetary aid as part of disaster relief or stimulus efforts.

3. Crime reduction

Fitch said that widespread use of CBDCs could erode the payment-system providers of the private sector providers and, thereby, improve the capacity of central banks to more closely track financial transaction data. This, in effect, will help in the prevention of financial crimes.

Still, the credit agency discussed the various risks of CBDCs as well, from how these offer less privacy compared to cash and how these may heighten cybersecurity threats.

Throughout the past years, a number of central banks have been exploring CBDCs spurred by strong momentum in the cryptocurrency space.

China has been leading the race since developing its digital currency electronic payment CBDC in 2014 and testing a pilot in 2020. Norway, the world's most cashless country, also announced in April it will start testing various solutions for a CBDC.

In the US, Boston Federal Reserve Bank President Eric Rosengren in May said that the Fed's CBDC research is still ongoing as it continues to weigh the implications of launching digital money in the US.

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