Centuries ago, money was associated with various values, mainly precious and semi-precious metals. In modern times, they can be in the form of coins or banknotes, but also accounting entries in accounts. But what is digital money? It does not necessarily have to be identified with cryptocurrencies. Moreover, the market of digital coins is constantly developing and thus financial services that are based on blockchain technology. It is worth getting acquainted with the famous one - DeFi.

DeFi - Decentralized finance

What is it?

DeFi is a term for financial services that are based on blockchain technology (primarily Ethereum). They allow you to perform traditional transactions: purchase, sale, you can also trade assets or take out loans. In other words, they offer practically everything that traditional banks offer. The difference is that DeFi is decentralized – it is peer-to-peer. Transactions take place directly between two people, so there is no need for an intermediary such as a bank.

Strengths

Decentralized finance has undoubted advantages that traditional financial institutions cannot boast of. When using DeFi, you don't have to enter your full details: name, surname, home address, and the transaction is almost instantaneous. Speed and privacy protection can be considered as the main advantages. To use DeFi, you don't have to submit any applications or fill out documents to, for example, open an account. However, the exclusion of intermediaries means that costs such as commissions disappear.

Disadvantages

Decentralized finance has the potential to revolutionize the financial market, but that doesn't mean that it doesn't have flaws. Among the most important ones, it is worth mentioning that blockchain technology is complicated and still available only to a small group of people. Many DeFi applications also have bugs and need optimization, which is due to, among others, from the early stages of product development. What's more, there is no 100% guarantee against hacking.

CBDC

What is it?

Giving up the physical form of money in circulation and introducing only digital money is a postulate put forward by economists around the world. It is related to the concept of CBDC. an abbreviation of the English phrase "Central bank digital currency".

It is a monetary policy tool already used by central banks around the world. It is used to carry out transactions between commercial banks. The accounts of such entities, which are kept by central banks, have been using the aforementioned digital currency for years.

CBDC and cash are not the same

CBDC should be treated as a modern, completely different form of central bank money, different from cash and money available to selected entities on accounts maintained at the central bank.

CBDC differs a lot from money in the form of cash. Among others: digital form, possibility of programming - thanks to the use of automatic transaction execution after meeting the set conditions, easy to use for payments, anonymity, universal availability.

There is no one, always-proven, universal model of CBDC emission. Everything depends on the conditions and socio-economic goals

Consequences of the introduction of CBDC

There is no doubt that serious consequences of the introduction of CBDC await us. Digital currency may become the basic and only means of payment. Its implementation will have a specific impact on the functioning of: banking system, countries in terms of financial stability, the country's monetary policy, payment system.

Economically, central bank digital money carries many potential risks. The introduction of CBDC will have numerous consequences from the point of view of the society and the banking sector, which will concern the sources of financing of the undertaken projects. The importance of deposits may be marginalized, which will result in an increase in the importance of issuing securities of a certain type.

Another consequence of the introduction of CBDC may be a reduction in the importance of banks as intermediaries in payment systems. As a result, their financial results may decrease.

If the central bank's digital money is introduced, the natural consequence will be a change in the current banking business model.

The social consequences should also be emphasized. It should be remembered that changes must also take place in financial education from the earliest age. And speaking of age, also in developing economies or developed societies, the society is getting older, and thus there is no willingness of older people to change or difficulties in educating new technologies. There are other social consequences that central banks have to consider before introducing CBDC into circulation.