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CBDCs (Central Bank Digital Currencies) aren’t a new idea, but they are beginning to gain more traction in today’s online economy. Despite their popularity with central banks, many questions remain about these virtual currencies. If you want to learn more about CBDCs, keep reading as we tell you all about them.
We know that CBDC stands for Central Bank Digital Currency, but that doesn’t really tell us what they are. Are they cryptocurrencies? Are they stablecoins? How are they issued? Who controls them? Questions abound, but let’s start with the first.
There isn’t a definitive answer to this question. Hard-core crypto enthusiasts will tell you the answer is no, because, by their nature, CBDCs are not decentralized, while true cryptocurrencies are. Others will argue that they are since they’re a virtual currency residing on a digital ledger.
Bitcoin and other cryptocurrencies tout their decentralized distribution model, which creates a trustless environment. That means no centralized authority, institution, or government has control over it. This is not the case with CBDCs. Sure, they’re managed on a digital ledger, but they’re governed by a central authority that can or cannot withhold, freeze, or retain funds at its whim.
The idea behind CBDC stems from the core concept associated with cryptocurrencies. One of the strongest benefits of digital currencies is their ability to create global inclusivity from a financial standpoint while simultaneously simplifying the infrastructure.
When it comes to CBDSs, the idea is that they are providing a store of value, as opposed to a medium of exchange. As more banks and governments join the CDBC train, these digital assets are becoming more of an option in the mainstream.
As competition to provide a genuine digital currency continues to grow, so are the efforts governments are putting into place. Many countries, like China, are using CDBCs as a way for users to perform transactions using nothing but their mobile devices.
Europe and the United States aren’t far behind, as they research and engage citizens on thoughts about digital currencies, especially in light of the recent Covid-19 pandemic. Many people prefer a way to buy goods and services digitally, without the need to exchange physical monies.
If a digital currency wants to be known as a CBDC, it must meet certain criteria. Here are a few of the systemic characteristics associated with CBDCs:
Not all CBDC systems look alike. Some are for wholesale purposes, while others are meant for general transactions. Here are a few of the more common types of CBDCs.
General-purpose systems
A general-purpose CBDC system is one that is available and distributed to the general public. Elements of a general-purpose CBDC include many of the features listed above, including availability, scalability, interoperability, and immediacy.
The idea of a general-purpose CBDC is becoming more and more popular as centralized banks show a willingness to employ this type of technology. Plus, these systems promote inclusivity that other printed and fiat currencies can’t match.
Wholesale CBDCs
Wholesale CBDCs are used by smaller banks that want to store reserves in a larger, centralized bank. These types of CBDCs help promote efficiency for payments while also reducing risks often associated with liquidity.
Additionally, digital tokens associated with wholesale CBDCs would be used as a replacement for reserves often stored by centralized banks. These restricted-access assets would allow sends to directly transfer value without the need for an intermediary.
This is where the rubber meets the road. What do Bitcoin and CBDCs have in common? How are they different? Well, we can start with the fact that Bitcoin is the OG of cryptocurrencies. It is the first cryptocurrency to gain widespread adoption, is nearly synonymous with the word crypto, and at the time of writing is worth nearly $30,000. Additionally, even though there are thousands of cryptocurrencies available today, Bitcoin’s position has not been weakened.
With the rise of Bitcoin, we get a glimpse into what an alternative system of finance would look like. Its transactions are recorded on a public ledger, available to anyone. Every transaction on the Bitcoin blockchain is viewable. Of course, many consider Bitcoin’s biggest drawback to be its lack of backing from governments or banks.
On the contrary, CBDCs exist as a substitute for cold, hard cash. The thought is that CDBCs give users the knowledge that the digital currency they’re using isn’t going to suddenly spike or crash. It’s backed by financial entities and exists in a well-regulated environment. CDBCs are designed to be stores of value, just like a bank account.
CBDCs are gaining in popularity, but they aren’t quite as ubiquitous as Bitcoin…yet. These digital currencies have a long row to hoe, but that doesn’t mean it can’t be done. As more and more governments and financial institutions come on board, fiat currencies as we know them may slowly fade away.