update 5 October 2021

Central Banks Digital Currencies (CBDCs) – All You Need to Know

As the crypto market continues to reach new heights, it’s more than just investors interested in the power of blockchain technology. Governments and major financial institutions recognize the benefits of cryptocurrencies, such as higher efficiency and streamlined payments. As such, Central Bank digital currencies (CBDCs) have started to emerge across the globe. A recent survey revealed that around 10% of central banks are on the verge of issuing some form of centralized cryptocurrencies.

Unlike cryptocurrencies designed to provide a reliable alternative to government-issued money, CBDCs are virtual versions of their fiat counterparts. They are designed to improve and enhance the current currency in circulation. Specifically, CBDCs improve efficiency, control, and security. In this way, they bridge the gap between decentralized currencies such as Bitcoin and traditional currency like the USD.

How CBDCs are Different than Cryptocurrencies

While both cryptos and CBDCs utilize blockchain technology as their backbone, that’s about where the similarities end. CBDCs are centralized. There is one organization that is responsible for issuing, monitoring, approving, and editing transactions. These actions are in direct contrast to most decentralized currencies that are censorship-resistant. 

The Effects of CBDCs

While some in the crypto community shun the idea of central banks issuing cryptocurrency, there is no reason to be worried. The same infrastructure that would support these digital assets could also help expand the reach of Bitcoin and other decentralized coins one day. At the very least, it will introduce more people to blockchain technology and the benefits of cryptocurrencies.

What Makes a Central Bank Digital Currency?

Central Bank Digital Currencies are issued by central organizations, in most cases a national bank. They often retain the name of their fiat counterparts with simply the word “digital” in front of it. These coins provide unmatched transparency when compared to fiat currency. 

Keenly, bankers enjoy more monitoring capabilities thanks to the power of blockchain consensus. Unlike most decentralized cryptocurrencies, CBDC transactions can be deleted, altered, or refunded depending on the central bank’s demands. Bankers also gain the ability to trace and track every transaction in real-time. Additionally, they can approve or deny your transactions as they please. 

Frictionless Global Transfer

Central banks are also excited about sending huge amounts of value globally in a frictionless manner. In a regular fiat international transaction, the funds must go through 36+ different third-party verification and regulatory groups. Each of these stops adds to the overall cost and time it takes to send money internationally. On average, these fees can eat up as much as 7% of the funds in transit. 

CBDCs change the game for banks in that they can send millions across the planet in a flash. Coins such as Ripple offer banks these services. However, they don’t provide banks with complete control over the issuance and usage of these funds like CBDCs would. Ironically, after years of claiming that cryptocurrencies were used to hide ill-gotten gains, it turns out that CBDCs could be one of the best ways to reduce money laundering activities. 

Save on the Issuance and Printing of Funds

Another significant benefit that the average person may not consider is the issuance and production costs. It costs a lot to print money. Just running the machines, personal, and supplies can reach exorbitant amounts. For example, in 2019, the US Treasury reportedly spent over $1 billion in printing costs. CBDCs eliminate this overhead and provide more security to the central banking system.

Issuing currency can be expensive as well. For example, there have been massive delays for some individuals awaiting their Covid-19 stimulus checks. These delays are brought on by various factors, including a recipient changing their mailing address. CBDCs eliminate these problems because users would receive their funds directly into their network wallet. 

People Prefer Digital

Another driving factor for developing these next-gen currencies is that people are just not using cash as much nowadays. This dwindling demand has pushed central banks to consider digital options much faster than they originally intended. In a public statement, the Deputy Governor of the Bank of Italy, Piero Cipollone, confirmed that the digital economy explosion, coupled with the current pandemic, has put CBDC plans into overdrive.

Banks Gain Supreme Control

CBDCs are on the top of many banks’ to-do lists because they enable these institutions to issue, destroy, transfer, and hold all currency on the ledger. In this way, banks are better suited to track and monitor their financial strategies in real-time. This added trackability would improve other necessary tactics such as quantitative easing and place bankers in full control over the monetary system.

CBDC testing is underway. Countries worldwide have begun to unveil their CBDCs or variants of the concept over the last couple of years. Uruguay became one of the first countries to test the concept with the issuance of their “e-peso” back in 2017. Since that time, India, Russia, Saudi Arabia, and the United Arab Emirates have all started research into local CBDCs.

Hybrid CBDCs

Interestingly, China has already begun issuing hybrid CBDCs in some cities. These coins are not full CBDCs because they are not directly issued from the central bank. Instead, three Hong Kong-based commercial banks issue the physical notes in circulation. They are responsible for holding the reserves at the Hong Kong Monetary Authority, and then the central bank issues a reserve certificate. In this way, the liability for these notes is not held by the central banks but by the commercial banks issuing the notes.

CBDCs – Love’em or Hate’em – There on the Way

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CBDCs are set to change many of the core components of today’s economy. There is still much debate on the matter concerning the added control these coins would provide bankers. Some believe it could be too much power for these already influential institutions. Regardless of your stance on CBDCs, the benefits are such that it’s only a matter of time before you encounter one of these digital assets in the market.

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