Central banks play an important role in the modern world. Interestingly, central banks all over the world are willing to gather information about central bank digital currencies or CBDC. For example, some countries are only exploring the idea of a fully digital currency, while others are already testing out implementations.
It is worth noting that, many governments are actively developing a new type of digital currency. Interestingly, the main benefits would be to increase the efficiency of payment systems as well as to lower costs for all sides. People could think of central bank digital currencies as digital fiat money built on a new technological layer inspired by advancements brought forth by blockchain.
This is not the end of the story as it is likely that many countries will adopt these digital currencies in the next decade.
Let’s have a look at CBDC. People should take into account that, a central bank digital currency (CBDC) is a digital form of fiat currency. As such, it is established as money by government regulation. It is worth mentioning that, the approach to designing a CBDC will likely vary a lot based on the country that will establish this CBDC. Interestingly, some implementations will likely be based on blockchain or some other type of distributed ledger technology (DLT). However, others could likely be just a centralized database. Importantly, the blockchain-based ones will use a token to represent the digital form of fiat currency.
People should keep in mind that, cryptocurrencies are quite different from central bank digital currencies. Notably, CBDCs are issued by a state and declared legal tender by the government.
Central bank digital currencies and important details
It is worth mentioning that, cryptocurrencies such as Bitcoin are borderless. Of course, that does not mean that people won’t be able to make cross-border payments with a CBDC. However, Bitcoin doesn’t even know what national borders are.
Interestingly, many central banks are considering or even actively experimenting with a proof-of-concept for central bank digital currencies.
For example, China is working on project DC/EP, standing for Digital Currency/Electronic Payments, since 2014. Moreover, the European Central Bank (ECB) issued a report in October 2020 that proposed a digital euro as well as assessed the merits of such a digital currency.
People should take into account that, from a technological standpoint, a CBDC is essentially a database run and controlled by the government (or possibly approved entities in the private sector). Notably, this way a CBDC is a secure database as only actors with proper approval have the ability to transact on the network.
As a result, the centralized entity that controls the database also has the ability to take various measures.
CBDCs and cryptocurrencies
As mentioned earlier, CBDCs are different from cryptocurrencies. It is worth noting that, true cryptocurrencies are different from central bank digital currencies. A government is not in charge of Bitcoin or other cryptocurrencies. Notably, they are permissionless, trustless, as well as censorship-resistant. Moreover, there is no centralized entity that controls the network. Thus, no one can blacklist your Bitcoin address from sending a transaction to another Bitcoin address. Both of them has its advantages and disadvantages. Authorities should work with experts as well as enthusiasts to find the best solution when it comes to the implementation of a CBDC.
To sum up, central bank digital currencies are a digital form of fiat currency. It is worth mentioning that, many of the implementations for CBDCs will likely use blockchain technology. Hopefully, thanks to a CBDC it will be easier for governments as well as central banks to track illicit activity.