The rise of blockchain technology and its products like cryptocurrencies and smart contracts have forced governments to look for more innovative financial services. Governments all over the world are trying to develop some solutions like cryptocurrencies to benefit from technology. They are also looking for ways to keep their control over people’s money. Central Bank Digital Currency or CBDC is the result of this movement. There are many CBDC projects in progress worldwide, and some of them are ready to launch.
What Is a CBDC?
CBDC is the digital form of fiat money in a country. Although cryptocurrencies like Bitcoin inspire this digital money’s main concepts and features, there are many differences between a Central Bank Digital Currency and a cryptocurrency.
The most important spec of a CBDC is that the central monetary authority of a country controls it. In simple words, CBDC is not centralized, even though many use blockchain technology as the fundamental network of control and distribution.
No country has issued an official CBDC yet. But many authorities in big countries like China are seriously working on the concepts, and issuance may not be that far. After all, CBDCs are different from cryptocurrencies and can be considered a new way for governments to control people’s money.
Various countries and their central banks have different features in mind for their CBDC. Some of them are working on digital currencies restricted to their region, while others want to issue international CBDCs.
You can consider CBDC as an alternative to cash. It has many similar features to cash like P2P exchange, being universal and anonymous, etc. But CBDC offers other characteristics that make it an innovative alternative to national currencies.
Using blockchain – DLT to be specific – as the primary technology of CBDC makes it similar to decentralized currencies. But some governments are looking for ways to keep their control on DLTs that somehow changes the concepts and features.
CBDCs can be issued and used for different goals. As a result, their use-cases can be categorized as:
- Interbank settlement
- An alternative to cash
- A new policy tool
- Public deposit in central banks
Governments issue CBDCs for different reasons. One of their most common reasons is improving the wholesale payment systems. By using a CBDC for wholesale payments, the speed and security of transactions can be improved.
Replacing cash is another important reason for issuing a CBDC in a country. Central banks can attract more regular people to use digital money by offering an easy alternative to cash.
CBDC In Process
As mentioned before, many countries are working on CBDC projects, and it has become a vital race among the big economies. They’re looking for efficient ways to provide a digital currency to citizens entirely under the control and monitor of central banks.
Furthermore, the first central banks that issue a successful CBDC can claim supremacy in the new economic era.
China is one of the leading countries in developing CBDC. The government embraced blockchain technology in 2019, after some years of banning and strict regulation over cryptocurrencies. They started working on the concepts of Digital Yuan then, and the testing phases are now seriously going on. China plans to issue Digital Yuan as an alternative to cash.
Many use cases are considered for China’s CBDC, and one of the most important ones is replacing the old money for cross-city transactions. Shenzhen is one of the first cities to test the Digital Yuan internally.
Cryptocurrency users in the US are some of the most active ones. The government has decided to initiate some projects aimed at CBDC to regulate using the new money. US Federal Reserve is now actively working on Digital Dollar, and they are comparing multiple ongoing projects.
Digital Dollar Project is one of the most active projects working on American CBDC. It’s a partnership between Accenture and the Digital Dollar Foundation and focuses on research and promotion.
European Central Bank (ECB) has started developing and issuing a Digital Euro for the region. The final aim of this project is to increase the speed of digitalization in the European economy.
The bank is currently studying and working on the initial concepts, and some practical examinations have been done. The central bank claims that the final decision regarding the issuance of Digital Euro will be announced by mid-2021.
Differences Between A Cryptocurrency And A CBDC
Although CBDCs use some of the same technologies like cryptocurrencies, there are many differences between them. The most crucial difference between cryptocurrency and CBDC is decentralization. Cryptocurrencies are often decentralized, and no company, organization, or government can control them. On the other hand, CBDCs are issued and managed by central banks – governments, to be exact.
Financial autonomy and privacy are other different factors between CBDC and cryptocurrency. Moving money with cryptocurrencies often doesn’t need that much personal information. But when you use a CBDC, the chances are high that the central bank can trace your identity and connect it to tax processes.
How Can CBDC Affect Cryptocurrencies?
Central banks started to work on CBDCs to provide a digital alternative to citizens. They acknowledged the power and importance of cryptocurrencies and wanted to have a similar solution.
Although there are considerable differences between them, CBDC can affect the cryptocurrencies in some aspects. When average citizens understand digital money concepts – by using CBDC – they will indeed look for similar solutions that don’t need that much control or monitoring from governments. As a result, CBDC informs ordinary people – those who don’t use cryptocurrencies about digital money.
Another effect can be the increased regulation on cryptocurrencies. When governments issue their own digital money, they may force citizens not to use cryptocurrencies and even stablecoins.
The rise of CBDC projects in multiple countries shows the success of cryptocurrency. Decentralized money has been successful in forcing governments to put away their traditional financial services.
On the other hand, central banks will indeed try to compete with cryptocurrencies using their CBDC. They won’t encourage citizens to use cryptocurrencies like Bitcoin or Ethereum and promote their own digital money.
CBDC will soon become a common fact in the global economy. It has many philosophical differences compared to cryptocurrencies – especially Bitcoin. But there are still numerous people looking for more anonymity and security in the long run and will stick to crypto yet. Maybe governments will look for alternatives then, too.