Central Bank Digital Currency (CBDCs) is a form of digital currency that replicates fiat currencies using blockchain technology. Central banks back them and they are seen as legal tender.
Ever since the inception of cryptocurrencies, central banks in countries are at the risk of losing monetary and fiscal power. Since cryptocurrencies have brought decentralization, central powers face risk. This is made possible with blockchain technology (Distributed Ledger Technology). Using the same technology, countries are looking for utilizing the fundamentals of the technology without losing out on their powers. This is how Central Bank Digital Currency was born. Let’s dive right into it!
What is Central Bank Digital Currency?
Central Bank Digital Currencies are the digital form of traditional fiat currencies. They exist in the form of an electronic record or a digital token of a country’s official currency. The central bank of a county is the monetary authority in a country. Central banks can issue and regulate it. Therefore, they are no different from fiat currencies and are backed by the state. This form of currency uses blockchain technology to handle and track its usage.
How do CBDCs work?
CBDCs use the blockchain’s distributed ledger technology to achieve their goals. Despite using a technology that brought about decentralization, it continues to be a centralized entity. They function as a unit of account, store of value, and medium of exchange for daily transactions. Moreover, they provide security of transactions by employing cryptographic techniques used in cryptocurrencies (like Bitcoin).
The current imagination of CBDCs is around two types. First, as “Wholesale CBDCs” that can be used to facilitate efficient transactions between the central bank and other member banks. Second, as “Retail CBDCs” that can be utilized as currency by the general public in a country.
Benefits of CBDCs
CBDCs can help governments regulate monetary and fiscal policies in countries rather easily. Thus reducing the burden of the government. At the same time, they can promote financial inclusion in a country where there are a lot of unbanked people out of the financial system. Moreover, using CBDCs governments will be able to provide a real-time picture of economic activity in a country. This will help in more accurate and timely GDP estimates and projections. For citizens, the transactions will become more efficient and instantaneous as compared to cash. Not just that, CBDCs can help countries to fight corruption and black money.
Concerns with CBDCs
CBDCs are the central form of currencies so it becomes easier to invade the privacy of citizens. Not just that, there are concerns about credential theft and losses to individuals. Additionally, the rise of quantum computers will eventually reach CBDCs and can compromise the cryptography used to maintain secure transactions. Despite, all these concerns 80+ countries are in the race to develop a CBDC. Use this digital tracker to read more on the rise of CBDCs across the world.