Central bank digital currencies (CBDCs) are becoming increasingly popular. But what are they, and why do you need to know about them? CBDCs are digital versions of national currencies that central banks issue. The idea is to provide benefits for both consumers and businesses and have the potential to revolutionize the global financial system.
In layman’s terms, “CBDCs are just a digital fiat currency, while cryptocurrencies are digital assets stored on a decentralized network.” In this blog post, we’ll explore the differences between CBDCs and cryptocurrencies and their potential implications for the future of global finance.
What Is A Central Bank Digital Currency (CBDC)?
A CBDC is a digital currency issued by a central bank. It is essentially the same as a traditional government-issued fiat currency, but it exists only in electronic form and can be used for digital payments.
One key difference between these two digital assets is that CBDCs are issued and regulated by a central bank or government authority, whereas cryptocurrencies are not. This means that a country’s central bank has much more control over the value and circulation of a CBDC than over a cryptocurrency.
However, to believe that both are the same is terribly inaccurate. Even if central banks adopt distributed ledger and blockchain technologies in their design, they will not be able to create functions in decentralized finance (DeFi) or Web3 spaces.
What are experts saying about CBDCs?
According to Kent Barton, tokenomics lead at ShapeShiftDAO, “CBDCs are simply another type of fiat currency that doesn’t address any of the issues associated with traditional fiat. Instead, CBDCs only serve to solidify central banks’ power.”
Some have doubted if central banks are trying to copy cryptocurrencies instead of finding their originality, which would present two entirely different technologies. This opinion is expressed by Mark Basa, director at HOKK Finance. Basa said, “The next generation may grow up entirely on the blockchain. That means the first account they’ll ever open may be a crypto wallet with a decentralized currency. I think the banks know that, and this is their way to stop the currencies from falling into the blockchain.”
“A CBDC is just digital fiat. Most fiat transactions are already done digitally, so it’s tough to see how these would be any different than the money we have today,” Barton said.
Advantages of CBDC
There are several claimed advantages to countries implementing their own CBDCs, such as:
- CBDC could lead to quicker, more affordable, and safer transactions;
- CBDCs make it easier for the government to implement monetary policy and other functions;
- A CBDC would eliminate risks for events such as bank failures or runs, and any excess risk in the system would then fall on the central bank.
Drawbacks of CBDCs
While there are several potential advantages to using a CBDC, there are also some risks and disadvantages, including:
- A country’s central bank would control its CBDC. The central bank could then choose to limit the types of transactions allowed;
- If the central bank has data on every transaction and information about CBDC users, there is a hazard of privacy problems;
- Crypto users value privacy over stability and are unlikely to switch to CBDCs. However, there is a chance that newcomers may be more open to using CBDCs;
- If people can use Central Bank Digital Currencies to buy things, Commercial Banks might lose many customers and hurt the banking industry.
Users Privacy
CBDCs:
- Only government-authorized financial institutions can view and interact with the blockchain network of a centralized digital currency that central banks manage.
- The only way CBDCs (central bank digital currencies) can be used is to make payments — any hoarding or investing activity related to them is not allowed.
Cryptocurrency:
- The main advantage that cryptocurrency users have is anonymity. However, with CBDCs, customers’ identities will be linked to an existing bank account and a similar quantity of personal information.
- CBDCs are solely for payments and other financial transactions, while cryptocurrencies can be used for payment and trading/investments.
Why are CBDCs growing faster across countries?
According to the Atlantic Council, 105 countries (representing more than 95% of global GDP) considered forming a CBDC. Only 35 countries were exploring a CBDC in May 2020. A record-breaking number of 50 countries are currently exploring (developing, piloting, or launching) the program.
The central banks could take the Terra Labs disaster and wider cryptocurrency market volatility as an opportunity to advance their CBDC agenda. Investors who have been hurt by the recent market crash may be more willing to switch to a government-backed digital currency if they don’t fully understand the difference between cryptocurrencies and CBDCs.
Although crypto pessimism ranges from country to country — for instance, China has an outright ban on transactions while El Salvador made Bitcoin legal tender — almost every government is enacting some form of regulation.
“However, many people who are familiar with cryptocurrencies will not listen to the benefits of CBDCs,” Basa stated. “They won’t buy into it and will probably dive deep, further away from CBDCs.” DeFi and decentralized exchanges can still allow people to avoid government control despite increasing regulation.
Is a CBDC better than cryptocurrency?
CBDCs are more stable than cryptocurrency since they rely on government backing. However, cryptocurrency has the advantages of being decentralized and private. Ultimately, the decision of which one to use should be based on individual needs and preferences. Also, the CBDC vs. crypto debate will likely become louder in the upcoming years.
Conclusion
Public opinion seems considerably more positive for cryptocurrency at this stage than CBDCs. Some of the benefits that crypto has is anonymity and longevity, as it has been around longer than CBDCs. This may be why people are more familiar with it too.
While CBDCs may have some benefits, there is no clear reason to support them over cryptocurrencies. In fact, they could pave the way for more stringent regulations on crypto.
Dion Guillaume, global head of PR and communication at Gate.io, believes that the crypto economy and CBDCs can coexist depending on central banks’ policies. He asks, “Are they OK with running CBDCs side-by-side with crypto, or will they squash crypto to boost CBDC utility?” Only time will tell what major role central bank digital currencies will play in the years ahead.
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Restoring trust in web3 security. Lossless incorporates a new layer of blockchain transaction security, protecting projects and their communities from malicious exploits and associated financial loss.
Lossless protocol implements an additional layer of blockchain transaction security for ERC-20 standard tokens, mitigating the financial impact of smart contract exploits and private key theft. Lossless protocol utilizes community-driven threat identification tools and a unique stake-based reporting system to identify suspicious transactions, providing real-time protection.
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