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Central Bank Digital Currencies (CBDC)

BitForex Editor
Feb 07, 2021

While it might be true that the above-listed currencies can be rightly classified as digital currencies, other currencies are also known as digital currencies yet they are not cryptocurrencies. These currencies are known as Central Bank Digital Currencies (CBDC).

Over the past few years, a lot of discussions and analysis have been happening concerning CBDCs, if they should be implemented already, when they would be implemented, their impacts on our world and economy, how they will help to make finance and trading work in this age of cashless banking, and most importantly if they will do between than private cryptocurrencies.

Are you feeling confused already at all of these? It is quite normal for all these not to sink in yet, but as you follow this article, you will understand everything perfectly.

So, let’s start with what a Central Bank Digital Currency is.

What are Central Bank Digital Currencies?

Central Bank Digital Currencies are known as the digital and electronic formats of our everyday fiat currencies. Unlike cryptocurrencies, CBDC is digital versions of the different fiat currencies of the world and they are issued and backed up by the different Central Banks of the world.

Just like the fiat currencies of the world, CBDCs features a unique serial number to mitigate fraud and duplication, and CBDCs are hybrid currencies that share the features of both fiat currency and cryptocurrencies, as it takes in the regulated system of the fiat currencies and the seamless convenience cum safety of the cryptocurrency network.

At the moment, no Central Bank has issued their CBDC yet publicly as a result of technological obstacles, but several central banks have started researching how to design and implement suitable CBDCs for their fiat currencies.

The History of CBDC 

The idea of exploring digital fiat currencies didn’t just come out of the blues. The idea to explore the concept of CBDCs originated from the need to create digital versions of the everyday fiat currencies that will rival what is obtainable with cryptocurrencies.

In a bid for fiat currencies to be at Par with the existing cryptocurrencies regarding international usage, the surge of seamless digital transactions, and peer to peer network, is one of the reasons that birthed the drive for central banks to launch their digital currencies.

Asides that, the idea of Mark Zuckerberg unveiling and launching his private cryptocurrency known as “Diem”, is another reason why the central banks of the nations of the world are doing their best to ensure that fiat currencies don’t become useless and valueless when transactions go digital finally.

In summary, it can be deduced that the evolution and successes of the existing private digital currencies in everyday business transactions is what brought about the need for CBDCs.

The call for CBDCs was pioneered by the following central banks; Bank of England, People’s Bank of China, Central Bank of Uruguay, and the Bank of Canada.

Kindly note that before this recent interest of the central banks in digital currency, some banks have experiment internally with digital currency.

Starting with the Central Bank of Ecuador which launched an electronic currency in 2015. This digital currency aimed at improving mobile payments through a centralized banking system. The currency was disconnected in the year 2016 because of its low patronage.

In 2015 also, the Netherlands Bank experimented with a digital coin named Dukaton, and other central banks as mentioned above followed suit, and they all came up with the conclusion that the DLT Blockchain technology is not yet fit enough to be run for general use.

Benefits of CBDCs

First and foremost, one of the main advantages of CBDCs is that should paper fiat currencies phase out, these CBDCs will help to cushion the effect of the phasing out and also to boost a continuance of transactions, most especially, digitally.

Another major and obvious benefit of CBDC is that it will also help to reduce the cost of producing paper currencies. It is a truth that the cost of creating and supplying fiat currencies into the economy is high, hence digital currencies ensure less cost of producing cash.

One other benefit of CBDC is that it helps to keep money safe from bank burglars who attack banks and rob banks of paper currencies. But in a case where these fiat currencies are digitalized, there will be less physical handling and storage of fiat currencies.

In the same vein, the use of digital fiat currency will help to reduce loss and theft of money from individuals. If you have your money in digital form, it will mitigate the risks of you losing money either to robbers or carelessness.

Finally, CBDCs help to foster financial inclusion such that the people who have been unable to make use of traditional banking system for one reason or the other can finally be included through the use of digital currency.

Central Banks Digital Currencies versus Cryptocurrencies

1. Cryptocurrencies have a limited supply while CBDC doesn’t. Citing Bitcoin, for example, this cryptocurrency has a finite supply of 21 million in totality. What this means is that in all, the amount of Bitcoins that can be mined by miners is 21 million. And when this number has been reached, there won’t be any more Bitcoin to mine.

On the other hand, CBDC is not finite and their supplies are endless. Just like the paper currencies, the central banks can supply CBDC into the economy as they want.

2., Unlike Cryptocurrencies that have no central authority governing and managing them, CBDCs are governed and managed by a central body which is the Central Banks of the diverse nations.

3. Cryptocurrencies are powered by diverse networks and nodes, whereas CBDC is powered by a singular network.

Facts to Note About CBDC

1. They are not cryptocurrencies but they are digital currencies.

2. None has been implemented by any Central Bank to function as at the time of this article.

3. The design of CBDCs is not for them to serve as a replacement for fiat currencies, rather they would serve as supplementary currencies alongside bills, coins, bonds, and notes.

The evolution of private digital currencies have no doubt caused for traditional banking systems to think of ways through which they can stay relevant and valuable like the cryptocurrencies.

This craving to be like cryptocurrencies is the reason for the birth of the CBDCs. Clearly, the different central banks of the world have commenced the process of creating their digital currency to suit their nation’s financial systems, but they are yet to make positive headways.

The question now on the lips of everyone is if the central banks would really make it work with their digital currency projects, and peradventure they actually succeed, can CBDCs become as valuable and relevant as the existing private cryptocurrencies?

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