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What Is CBDC In Crypto?

The cryptocurrency trading revolution exploded more than ten years ago and led to an almost unprecedented economic and financial earthquake. As a result, people are learning to change their approach to payment and investment systems, pushing up the price of many cryptocurrencies.

Such a rapid change has not gone unnoticed on the boards of the world’s major central banks. In fact, in an increasing number of countries, central banks are working on launching centralized digital currencies, known as CBDC.

This article will provide more information on the phenomenon of CBDCs, analyzing the characteristics and opinions of the central governments and central banks in the world.

CBDC – A definition

We can see the idea of the Central Bank Digital Currency (CBDC) as the digital version of the fiat currency of a country or economic area. Like paper money, a CBDC is issued and regulated exclusively by a central bank.

Therefore, from an economic point of view, the CBDC falls under the liabilities of a central bank’s balance sheet. It has all the legal requirements of a currency, a medium of exchange and a store of value. Its centralization is, in essence, the real big difference between a CBDC and a cryptocurrency.

Major central banks such as the Bank of England have begun to produce interesting documentation on CBDCs. Moreover, as we will explain shortly, many countries have launched technical feasibility studies on this digital currency.

CBDC – Pros and Cons

The main advantage of CBDCs is the reduction of maintenance costs within an economic infrastructure. For example, just think of the cost of printing banknotes and producing coins.

Aside from that, there are less obvious but equally important benefits associated with these digital tools, among which we mention:

  • Trying to answer that part of crypto enthusiasts who strongly demand the creation of a digital fiat currency
  • Create a more efficient and easier to monitor payment system for tax purposes
  • Improve the effectiveness of the monetary policy, with the ability to reach areas of the economy that have benefited less from the issue of banknotes

Of course, after seeing the pros, we can’t ignore the different cons of CBDCs, such as:

  • One of the most important aspects of cryptocurrencies, the decentralization of the system, is completely ignored
  • Those who use unencrypted digital currencies find themselves enjoying fewer privacy rights
  • Finally, we must not forget that shops, bars, and restaurants do not yet accept payments by credit or debit cards in some countries. This shows how the adoption of digital money is a slow and gradual process.

CBDC adoption

As previously mentioned, the world is gradually studying and experimenting with the idea of CBDCs. In the following paragraphs, we will talk about the leading three economies in the world on this matter.

United States

One of the Federal Reserve Board of Governors, Lael Brainard, said that the growing popularity of cryptocurrencies is raising important questions for the monetary policy of the future.

The market is well aware that the Federal Reserve is concretely studying the effects of a digital dollar’s creation on the US economy. The main idea behind the study would be to launch a fast and efficient CBDC with fewer end-user transaction costs. 

Since the U.S. Dollar is a virtual currency even outside the US borders, this study is essential for the world economy.

As we know, MIT experts are studying the feasibility of a U.S. CBDC at the very request of the Federal Reserve. It will be interesting to see if the next few quarters will hold important news in this regard.

Europe

Christine Lagarde, President of the European Central Bank (ECB), has recently highlighted the importance of the “digital euro” project for the Euro Area. We understand from the official website of the ECB that the central bank aims to introduce the digital euro in an experimental transitional phase.

The project would not aim to eliminate banknotes and coins in Europe quickly. However, it would constitute a test before the mass adoption of the CBDC. Lagarde is convinced that an increasingly digital economy requires a new payment method, and we will see if the market will prove it right.

China

The United States and Europe are still studying the technical feasibility of CBDCs. Meanwhile, the digital yuan is already a reality in China. So even though China’s CBDC is still in an experimental stage, economists are looking closely at this all-important monetary test.

During the upcoming Beijing Winter Olympics, the Chinese Central Bank will have the first major test for the virtual currency. Also, anyone who participates in the Olympics will use the digital yuan as a payment equivalent to the traditional yuan.

Integrating payment apps such as Alipay and WeChat Pay with this new payment system is a significant step in this initiative.

Final thoughts

This article has shed some light on the concept of CBDC. Also, it cited the main pros and cons related to centralized digital money. These new currencies originated from the blockchain world. However, there are very few points that CBDCs have in common with cryptocurrencies.

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The elimination of encrypted information and a decentralized network make CBDCs look like traditional currencies in digital format. Nevertheless, central banks still expect to have great relevance in the world’s economic future. Only time will prove them right or wrong.

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