Bitcoins can be considered as the biggest disruption to the structure of physical payments throughout the world, it not only developed the technology but also paved in the way for the future by changing the way the traditional payments gateway work transforming the blockchain technology in central banks by taking care of all the loopholes in the system through blockchain technology but can this system take over the traditional central banks across the globe which have played a crucial role in development across the globe?

The Central Bank:

Each country has a central bank which is the apex bank of all the banks in the country and plays a key role in formulating the guidelines for the financial system in the country and is also responsible for many functions such as keeping inflation in control, maintaining the cash flow in the country maintain forex reserves and many more.

The role of Central Banks in financial systems became important after the great depression as the money circulation was carried out by retail banks and merchants which often had different exchange rates and would often lead to fraud so it became important to have control over the money supply in the market

The extensive technological development across the world has forced the central banks to make the financial systems more efficient and competent and after the introduction of blockchain technology in central banks many countries have started using central bank digital currency technology but how will blockchain technology be used by central banks and financial systems and why it cannot be done with its current framework

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Benefits of Blockchain Technology in Central Banks:

Digital assets – blockchain technology in central banks allows the users to create digital copies of assets that are easy to transfer, maintain and monitor since the transaction directly takes place between the parties of trade the transfer process becomes quick and easy

Data security & tampering – Each transaction is protected by block (algorithm) which comes with date and time stamp and once a transition is completed and closed in a block it cannot be changed which gives protection from data tampering due to its immutability

Track and trace – Each transaction is time and date stamped on real-time basis which enables the users to track the payments in case required and would boost the process a lot also due to this feature the problem of double payment would be solved once and for all as all transaction can be viewed by the parties at their end

Trustworthy – blockchain technology in central banks is gaining trust due to its transparent nature its feature such as track and trace, immutability, data security Blockchain proves to be trustworthy in improving the operation efficiency of central banks and financial systems

Issues with the Current Framework:

• Extreme decentralization – The blockchain technology in central banks is extremely decentralized and this is its biggest advantage as well as its biggest disadvantage as due to this the prices are skyrocketing in present times
• Legality – Even though it has been over a decade since its development the legal acceptance of blockchain is still a big question as it is based on an algorithm and no physical evidence of security to support its current prices
• Private players – currently there are multiple private players in the blockchain industry where the main motive is to increase personal profits and if it is allowed under the current framework there can be large scale implications
• Guidelines – decentralization is Great to increase the speed of the process but there should be well defined guidelines that helps in regulating the use, prices and acceptance of this technology in the markets
• Limited – The Bblockchain works via solving the complex mathematical problems on advance computers and receiving rewards but it is limited to a specific no and cannot cross it which would shoot up its prices more than they are currently

Central Bank digital technology

Bitcoins have been the most sought investment across the globe and the no of individuals investing in it is increasing over time which makes it extremely expensive if under the current framework the central banks and financial systems legalese them the private players in the market would look at a personal profit more than public welfare so it becomes important for the central banks to adopt CBDC technology.

Benefits

• First, the central banks have access to terabytes of sensitive information about the transaction in the country and of the parties involved in it the data security provided by Blockchain technology will give them an extra edge in data security
• Second, the immutability provided by Blockchain will give the financial institutions to have a grip on fraudulent transactions since the data is protected by blocks it is immutable
• Third, blockchain allows the users to have digital assets which will improve the transfer process across parties and increase the efficiency for banks
• Fourth, smart contracts feature of blockchain would reduce the paperwork required in approving the contracts and payments through the bank since if the preset criteria are met in the transaction the contracts are auto-approved

It wont be wrong to say that blockchain cannot be the central bank under the current framework but it is a matter of time to see how the CBDC technology will change the way Central banks and financial systems run and how can it boost the development over the long run

BALAJI KANDREGULA

Director - Products and Solutions

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