So-called CBDCs are a type of cryptocurrency increasingly discussed by governments around the world. Its acronym stands for “central bank digital currency”. See below what is a CBDC, understand the technology behind it, its main functions, differences from cryptocurrencies better known as bitcoin (BTC), and how it can reshape the global financial system.
What is a CBDC?
A CBDC is a form of digital money that governments around the world are experimenting with and studying. It is an alternative to traditional fiat money that can provide a number of unique advantages for domestic transactions in a given country and for international transactions, all with high speed, security and low costs.
However, a further definition is yet to emerge, as none of these cryptocurrencies have actually been implemented on a large scale. Thus, we restrict ourselves to defining a CBDC as a state digital currency, created by a country’s central bank and administered by the government. Its functions and features may vary from currency to currency.
Is CBDC the same as cryptocurrency?
While there is a huge diversity of cryptocurrencies on the market, with different names, purposes, prices and operations, most have something in common: they are private and decentralized.
In other words, traditionally, a digital currency, whether for enrichment or for payments, is created by a company or a collective of developers, and managed openly by its community, with automated pricing systems, mining difficulties and others essential functions.
With a CBDC the dynamic is different. A country’s central bank is responsible for everything: developing, issuing and managing the cryptocurrency and its system. The blockchain of a state digital currency also tends not to be open, meaning that transaction data, typically public to the entire world, is more restricted and accessible by government agencies.
Furthermore, no central bank in any country in the world intends to create a CBDC to function as a digital asset, as is the case with bitcoin, for example. Therefore, state digital currencies are designed for everyday use, payments, transactions and possibly stores of value.
What makes a CBDC different from traditional currency?
In the end, a CBDC operates in a similar way to trust money. What differentiates one of these digital currencies from traditional currencies is essentially simple: one exists physically, while the other exists only virtually on a blockchain network.
In other words, the biggest difference is in the application of technology and cryptography to overhaul the financial system. Instead of physical money, you would use a digital version, and instead of banks, you would use digital wallets issued by central banks. All this in order to reduce the administrative costs of maintaining the current payment system and to bring greater agility and ease of transactions.
This new type of currency is still at the beginning of its development. Most countries are just beginning to explore the idea, like the United States, which is still discussing the possibility of creating a digital form of the dollar.
However, some more ambitious countries, including China with its digital yuan, have already completed a hands-on demonstration and are testing the technology. However, no CBDC has been implemented on a large scale yet.
What changes with a Central Bank Digital Currency?
Using as an example the digital yuan, the first and most developed CBDC, this cryptocurrency is completely transaction oriented. More than 20 million Chinese already have their digital wallets issued by the People’s Bank of China. Accessible through apps and convertibles in ATMs, a user can make digital payments just like internet banking.
In other words, it is possible to receive and send coins only with the address of the digital wallet and make instant payments, from physical stores through QR codes and other technologies, to bank slips, subscriptions and online purchases. Essentially, it doesn’t change much for those who are already used to digital finance.
However, the potential for large-scale implementation of this technology is enormous, especially for international transactions. By concentrating the management of a currency in a blockchain network, numerous ports are opened.
Once global agreements and regulations on CBDCs are established, international payments and transfers could be carried out without going through numerous intermediary institutions. So, it would be like being able to make a Pix from Brazil to Japan instantly and at a very low cost
With information: CoinDesk