5.12 Centralized vs Decentralized Systems

1. Centralized Systems:

Centralized systems are systems controlled by a single central authority or entity. Examples include traditional banking systems and government-run databases.

Advantages: Centralized systems can offer efficiency and streamlined decision-making.

Disadvantages: Centralization can lead to a single point of failure, lack of privacy, and potential abuse of power.

2. Decentralized Systems:

Decentralized systems are systems that are distributed across multiple independent nodes or entities. Examples include blockchain networks and decentralized cryptocurrencies like Bitcoin.

Advantages: Decentralization enhances security, transparency, and resistance to censorship.

Disadvantages: Decentralized systems may face challenges related to scalability and coordination.

Central Bank Digital Currencies (CBDCs)

CBDCs are digital currencies issued by central banks, designed to complement or replace traditional fiat money. They are digital representations of a country’s currency and are backed by the central bank.

Characteristics of CBDCs

1. Fully Digital: CBDCs exist solely in electronic form, with no physical counterpart like bills or coins. They are accessible through digital wallets and can be used for transactions electronically.

2. Centralized Control: Unlike decentralized cryptocurrencies such as Bitcoin, CBDCs are issued and regulated by central banks, providing governments with direct oversight and control over monetary policy.

3. Enhanced Monitoring: CBDCs enable unprecedented visibility into financial transactions. Governments and central banks can monitor transactions in real-time, potentially improving regulatory oversight and combating illegal activities like money laundering and tax evasion.

4. Policy Tools Utilization: CBDCs facilitate more precise deployment of monetary and fiscal policy tools. Central banks can adjust interest rates, control money supply, and influence economic activities with greater efficiency and speed.