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

Bitcoin live price
price change

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.

Stay up to date with our latest articles

More posts

Smart Contracts Vulnerabilities Specific to The DeFi Space

As the financial world moves increasingly online, it's becoming more and more essential to ensure that all transactions run securely. One way this is possible is through the use of smart contracts.  Smart contracts are computer programs that automatically execute the terms of a contract. They provide a secure way to conduct transactions without relying on third-party intermediaries.  While the use of smart contracts offers many advantages, they are also vulnerable to attack. In this blog, we will explore how…

Malicious Attacks on Smart Contracts that Auditors Can Easily Identify

With many businesses adopting blockchain technology and Smart Contracts, offering reliable security audits in the industry has become increasingly important.  Businesses may protect their assets and contracts by recognizing and preventing harmful assaults. This blog post will explore the different attacks a group of criminals can carry on Smart Contracts. We'll also look at real-world instances of assaults to help you secure your contracts. What are Smart Contracts? Understanding the Benefits of This Technology What are smart contracts? They are…

How Smart Contract Audit Can Help Prevent Hacks

As companies move toward implementing smart contracts, the need for technical audits becomes increasingly essential. Having a third-party auditor check your contracts for vulnerabilities can prevent your company from suffering from a hacking attack.  What are Smart Contracts? A smart contract is a script that automatically carries out a contract's provisions. Smart contracts are self-executing, meaning that once the system verifies the meeting of pre-determined conditions, the contract will automatically execute. This eliminates the need for intermediaries such as lawyers…

Top 10 Ways to Earn Free Bitcoin in 2022

Here are the best ways to earn free Bitcoin when your purse is light. --- Are you interested in Bitcoin, but still hesitant to risk putting money towards it? Alternatively, are you looking to sat every sat possible, but lack the dry powder to buy more? Here’s a secret: you can put more bitcoin in your pocket without spending a dime – or even doing any real work.  That’s not to say you’ll earn much bitcoin without either of those…

Are Gold-Backed Tokens Worth Investing During Crypto Bear Market?

The crypto market is under the complete control of bears, investors taking short positions to profit from declining prices. In this unstable environment, new capitalists are fearful or skeptical when funding projects. Instead, they turn to more reliable assets that would not wipe out their portfolios when or if they flop. Gold-backed tokens represent a category of assets ready to provide portfolio stability and allow investors to overcome the bear market without too many losses. On the contrary, gold-pegged tokens…

What is Taro? Trading Assets and Currencies on Bitcoin

Taro leverages Bitcoin, lightning, and Taproot to enable the peer-to-peer transfer of currencies and assets beyond just BTC. —  Worried that Bitcoin is too boring to play within the growing digital asset economy? Fret no longer.  Using Taro, the original blockchain network can support the decentralized exchange of multiple assets – including fiat currencies. Moreover, the protocol works together with the lightning network, letting users transact – instantly and for free – with non-BTC-denominated balances.  Read below to learn about…

What is Fedimint? The Custody Solution to Bitcoin Privacy

Fedimint combines distributed custody with blind-signed ecash tokens to let Bitcoin users transact in private. --- Despite its growth, Bitcoin still faces some glaring limitations to reaching mass adoption as a fully censorship-proof payments network. One of them is privacy. Bitcoin’s ledger is fully open and public, meaning anyone can track another person’s transactions if they know his public address.  The other is a custody problem. While wallet software UX has improved considerably over time, many Bitcoin holders still store…

What Is a Crypto Bear Trap?

Cryptocurrencies are often incredibly volatile and can see massive price swings in a short time.  This makes them ripe for bear traps. A bear trap is a situation where traders wrongly think a coin is about to reverse a downtrend. These events often result in significant losses.  This guide will discuss crypto bear traps, how to identify them, and the risks involved in these situations. Introducing Crypto Bear Traps A bear trap happens when a trader buys assets, expecting the…

Understanding the GameFi Phenomenon

The GameFi industry is changing the way people think about gaming and finance. It provides a new way for gamers to interact with each other and earn money. It is also giving people a new way to invest their money.  The GameFi industry has the potential to change the way these industries operate. This guide will look more closely into this new business, covering several features. What Is the GameFi Sector? The GameFi sector is a crypto-based industry that uses…

The Buyback and Burn Practice Explained

In a constantly evolving and growing crypto market, it is difficult for investors to know where to put their money. One popular investment strategy in the crypto space is buying tokens of teams that conduct a buyback and burn program.  This guide will explore what a buyback and burn practice is, how it works, and its benefits and risks. What Is a Crypto Buyback and Burn Practice A crypto buyback and burn practice happens when a company buys back its…