What is Central Bank Digital Currency

 

What is Central Bank Digital Currency

A Central Bank Digital Currency (CDBC) is a virtual currency backed and issued by a central bank. As cryptocurrencies and stablecoins have grown in popularity, central banks around the world have realized that they must provide an alternative to physical money or risk missing out on the future of money.

Thousands of digital currencies (often known as cryptocurrencies) have already been created. While cryptocurrencies may be centralized, the government doesn’t pay the role. In addition, Bitcoin and its competitors are examples of decentralized cryptocurrencies.

Cryptocurrencies are based on distributed ledger technology (DLT), which means that a transaction’s accuracy is being constantly validated by devices throughout the world rather than by a single central hub.

CDBC is managed on a digital ledger (which may or may not be a blockchain), speeding up and security payments between banks, institutions and individuals. Digital currencies issued by central banks are currently one of the most revolutionary innovations in the global financial ecosystem. Let us look at various concepts surrounding CDBC and a comparison between cryptocurrencies and CDBCs.

What is the point of CDBCs?

Cryptocurrencies have been heralded because of their ability to bring in a new era of global financial infrastructure which is a simplified version of financial services. However, they are (cryptocurrencies) rather a store of value rather than a medium of exchange. Thus, with both monetary authorities and commercial entities issuing stabilized cryptocurrencies and CDBCs is seen as a viable mainstream payment options.

However, the core concept of a digital currency (replacing the need for paper notes and coins with computer-based money-like assets) has been around for more than a quarter-century. Central agencies were the first to issue digital currencies, such as DigiCash in 1989 and e-gold in 1996.

Nonetheless, Bitcoins introduction in 2009 brought in two concepts viz., i) decentralized (blockchain-based) ledger for transaction execution and record-keeping, and ii) created a currency which is independent of any sovereign monetary authority.

The growing significance of digital money during the COVID-19 pandemic, the shift to digital payments, ambitions to employ foreign CBDCs in cross-border transfers and concerns about financial exclusion are all bringing CBDCs into sharper attention. For example, China is experimenting with a digital Renminbi that allows users to make payments using their mobile phones. Similarly, Europe announced the creation of a digital euro.

CBDCs appear to be more than just a digital-native replica of traditional notes and coins, according to several public statements. Some government see CBDCs as programmable money-vehicles for monetary and social policy that might limit their use to fundamental necessities, specific areas or defined periods-in addition to solving the challenge of more comprehensive financial inclusion.

CBDC can take many forms, each having various implications for payment systems, monetary policy transmission and the financial system’s structure and stability. 

 

Source: cointelegraph.com

Which countries have a CBDC?

With the rise of cryptocurrencies, central banks around the globe realized the need to make evolution out of money. According to the Atlantic Council, 81 countries (90% of global GDP) considering forming a CBDC. Only 35 countries were exploring a CBDC in May, 2020.

China is ahead of the game, enabling foreign visitors to use digital Yuan to provide passport information to the People's Bank of China for the upcoming Winter Olympics. The United States Federal Reserve is the furthest behind the other large central banks, the European Central Bank, the Bank of Japan, and the Bank of England.

A digital currency has now been wholly launched in five nations. The first CBDC to become widely available was the Bahamian Sand Dollar. Fourteen nations, including large economies like Sweden and South Korea, are currently testing (i.e., at a pilot stage) CBDCs for a full launch.

CBDC vs Cryptocurrency

Digital currencies issued by central banks are commonly mistaken for other types of cryptocurrency. As stated previously, central bank digital currencies have central banks at the heart of every transaction. However, cryptocurrencies, such as Bitcoin, are digital tokens created using cryptographic methods by a distributed network or blockchain.

Cryptocurrencies employ permissionless (public) blockchains, whereas CBDCs use permissioned (private) blockchains. Anyone can join and participate in the blockchain network's essential operations in a public blockchain. The ongoing operations on the public blockchain network can be read, written and audited by anybody, which helps a public blockchain preserve its self-governed nature. A private blockchain, on the other hand, is a distributed ledger that functions as a closed, secure database based on cryptography concepts and is not decentralized.

The restrictions on CBDC networks are set by a central bank. The authority is assigned to the user base on crypto networks, which makes choices by achieving a consensus.

Therefore, while cryptocurrencies are decentralized, CBDCs are centralized. Moreover, cryptocurrencies provide anonymity; CBDCs allow central banks to see who owns what. CBDCs are more likely to run on distinct technological platforms than cryptocurrencies, which are often established utilizing blockchain. 

CBDCs are also not stablecoins, which are currencies that are pegged to a fiat currency like the U.S. dollar. A CBDC would not be pegged to a fiat currency; instead, it would be the fiat currency itself. For instance, a CBDC dollar bill would be identical to a dollar bill.

CBDCs can only be used for payment, and any stockpiling or investing is outright prohibited. Nonetheless, cryptocurrencies can be used for both financial transactions and speculation purposes.

In comparison to cryptocurrencies, a CBDC would be less concerned about data and privacy. The crypto sector is unquestionably autonomous with a peer-to-peer paradigm, whereas certain restrictions bind central banks.

Users can choose how much and what kind of data they wish to disclose because cryptocurrencies are peer-to-peer. On the contrary, CBDC transactions will automatically send vast amounts of data to tax and regulatory agencies.