Central Bank Digital Currencies (CBDCs) continue to make headlines globally. These hybrid systems combine the efficiency and monitoring capabilities of blockchain technology, with the manageable and controllable nature of the centralized banking system. In essence, most CBDCs in the works today will function as virtual versions of their fiat counterparts.
The goal of CBDCs is to provide the world’s currency issuers with more efficiency, control, and security. CBDCs can accomplish this task because they act as blockchain-based financial instruments that bridge the gap between traditional cryptocurrencies and the current central bank-issued fiat currencies of the world.
The hype surrounding CBDCs is real. More banks than ever are now exploring the issuance and effects of these coins in the market. The great news is that as more banks enter the blockchain space, they lay the framework for the future infrastructure of cryptocurrencies. Soon, these systems may come to serve more than just CBDCs. These protocols could support the entire crypto space one day.
What Makes a Central Bank Digital Currency?
Central Bank Digital Currencies function as hybrid technology. For one, they utilize blockchain tech to facilitate speedy transactions and monitor market activity. Blockchain enables better transparency in the market. Additionally, since CBDCs are centralized, bankers gain far more control over the issuance, monitoring, and editing of transactions on their respective blockchains.
CBDCs are Not Decentralized
There are some distinct differences between CBDCs and cryptocurrencies that you should be aware of. For one, CBDCs are not decentralized. The entire network is run by the central bank issuing the token. Users have no say in the development, advancements, or protocols of these systems.
Banks gain the ability to cancel, remove, edit, or prevent certain transactions when utilizing a CBDC system. In essence, CBDCs take the user-control aspects from decentralized cryptos and alter them to support the bank’s control requirements.
Components of a CBDC
Every CBDC fits certain criteria. Primarily, all CBDCs feature issuance from a centralized organization. As mentioned, these digital coins are designed to supplement fiat currency instead of providing an alternative financial system like Bitcoin. CBDC network transactions can be deleted, altered, or refunded depending on the Central Bank’s requirements. These actions don’t require any consent from users of the network.
CBDCs are for the Banks
Bankers continue to express interest in these coins because they provide a new level of controllability. Bankers can effortlessly trace and track every transaction in real-time via consensus. In this way, bankers believe the technology could help to combat money laundering.
CBDCs are far more cost-efficient than their paper counterparts across the board. For one, printing money is expensive. In 2019 alone, the US treasury spent over $1 billion in printing costs. Interestingly, despite the continued rise of the rate at which fiat currency is printed, the use of paper currency transactions continues to decline globally. Because there is no printing required, governments can enjoy faster currency deployments via CBDCs.
Currency injections are a major point of concern at the moment given the current epidemic and the lack of many people to basic funding. The push for CBDCs has increased since the start of the COVID-19 pandemic as governments explore ways to inject cash efficiently
Banks Want to Know More
A 2018 study revealed that 70% of central banks have interests in CBDCs. Already, China began testing its own CBDC network labeled Digital Currency Electronic Payment (DCEP) this year. These tests are just the beginning of what is sure to be a long and profitable road for CBDCs moving forward.
By D. Hamilton, BIG Writer