The Role of Central Bank Digital Currencies (CBDCS) in Modernizing the Banking System: A Study of Opportunities and Challenges

Abstract

This review paper examines the pivotal role of Central Bank Digital Currencies (CBDCs) in modernizing the banking system, exploring both the opportunities and challenges associated with their implementation. It begins by providing an overview of CBDCs, tracing their evolution and distinguishing them from cryptocurrencies. The paper highlights the potential benefits of CBDCs, including enhanced financial inclusion, improved payment systems, and strengthened monetary policy implementation. However, it also addresses significant challenges, such as regulatory and legal hurdles, technological and cybersecurity risks, and privacy concerns. Furthermore, the impact of CBDCs on traditional banking and financial institutions is analysed, focusing on disintermediation risks, changes in banking operations and profit models, and the evolving role of commercial banks within a CBDC ecosystem. The paper concludes with an exploration of future prospects and global trends in CBDC adoption, including case studies of countries currently implementing CBDCs, potential collaborations between central banks and the private sector, and policy recommendations for a successful transition to a digital currency landscape. Through this comprehensive analysis, the paper aims to contribute to the understanding of how CBDCs can reshape the financial system while addressing the associated complexities.