What is Central Bank Digital Currency (CBDC)
This is going to be the biggest overhaul of the global financial system since Bretton Woods’. Raoul Pal, Founder/CEO - Global Macro Investor and Real Vision Group
A CBDC is a digital form of traditional currency offered by governments to its citizens and backed and controlled by the central bank. Many countries are experimenting with CBDCs in an aim to meet the digital currency demands and are basing these currencies on the same general principles and the blockchain technology underlying Bitcoin.
CBDCs are however different from virtual currencies and cryptocurrencies in general as they are issued and backed by a national government, making them centralized. CBDCs are still in the infancy stages, as most governments are still in the research and experimentation phase. CBDC increases the security of payments between banks, institutions, and individuals due to the used technology.
Many countries have expressed their interest in launching their own CBDC, with Venezuela being among the first to make this step with their own cryptocurrency called Petro. China is also in this league, and several steps ahead as the digital yuan has been released for trials in several cities. Other countries experimenting with a digital currency include the U.S., Sweden, England, and Uruguay.
Key features of CBDC
Distributed ledger technology
Central banks in order to keep track of all financial records, will need a ledger. A distributed ledger has several copies of a transaction details, each stored and managed by separate financial entities. These few entities have the right to access and alter the blockchain that supports the CBDC. The central entity controls who has access to the blockchain and the records, and what they can add or change.
Unlike Bitcoin, CBDC are centralized and controlled by one body. This body controls the supply of money in the ecosystem so they can stimulate the economy during hard times, set interest rates and control inflation. The controlling body will also choose to participate in managing the distributed ledger.
CBDC can be used to track all transactions that citizens perform as it is controlled. Since there are not any properly functioning CBDCs currently, different governments can make different decisions on this matter, with some leaning towards total tracking and control, well others might be focused on preserving the privacy of the users.
It is likely for CBDCs to lower transaction costs since financial entities are more connected hence it is easier to move money around. This can highly reduce the costs of transferring money from one entity to another, or withdrawing money.
Benefits of CBDC
There are many inefficiencies and vulnerabilities in the current central banking system. The implementation of CBDC can solve some of these challenges by simplifying the creation of a secure payment system that serves as a largescale asset register. The benefits of a CBDC include:
Improved interbank payment system
CBDCs allow for automation which facilitate instant payment settlements between counterparties on an individual basis.
CBDCs use a platform-based software model that lower barriers to entry for new firms in the payment sector. This fosters innovation and competition, pushing financial institutions towards innovative strategies.
CBDCs can be distributed on mobile devices increasing access and usability for citizens who are far from banks and cannot access physical cash.
Since CBDCs are digital, they do not require the costly and time consuming reconciliation that is currently required for cross border payments and e-commerce.
Without doubt CBDC debate is gaining momentum, the world is changing, our daily life is changing, therefore it is absolutely necessary that something happens to change the way we transact.
The details of how it will work are still unknown, but this will definitely make our payments cheaper, faster and more reliable. The drawback highlighted by a number of experts is that the governments will be having absolute power on us as they can keep track of the majority of transactions (excluding crypto transactions).