What is CBDC and How It Will Change the World
30th March 2021
Cryptoanarchists believed that Bitcoin would become the single world currency of a new era. The predictions came true not entirely: BTC has become a valuable asset for investment, but we still cannot pay in bitcoin in a cafe or supermarket.
However, a new type of money based on cryptographic protocols has appeared. We are talking about government digital currencies or digital central bank currencies (CBDC) which are currently being developed and tested in several countries.
The difference between CBDC and fiat currency
CBDC (Central Bank Digital Currency) is the digital form of a fiat currency of a particular nation (or region): means of payment, measures, and conservation of value.
CBDCs are quite early-stage, so we are still not sure what features they will actually have. It is possible that most of them may be blockchain-based. But some fin-tech experts doubt it because of challenges regarding privacy protection, interoperability, and the ability to move value consistently.
Players and the moderator
Several countries around the world, from Uruguay to China and Switzerland, are currently developing or testing central bank digital currencies. An important participant in the process is the Bank for International Settlements (BIS). It promotes cooperation between central banks of different countries, mediates and also conducts research and collects statistics about CBDC.
The Bank for International Settlements (BIS, or "bank of central banks") was established in 1930. BIS is headquartered in Basel (Switzerland) and the Board meets at least ten times a year.
In early October 2020, the BIS published a detailed report about government digital currencies. The 26-page document describes the required qualities for a CBDC, the specifications, and the reasons why central banks are interested in a new type of currency. The report is based on the BIS's cooperation with seven state-owned banks, including British, Canadian, and Japanese. In different countries, considerable experience has already been accumulated in the theoretical substantiation, development, and testing of digital currencies, because the idea first appeared six years ago.
Well begun is half done
Since 2014, China has been working on a project codenamed “DC / EP”: Digital Currency / Electronic Payments. But only in 2019, after five years of development, the authorities made an official statement. The development was carried out by The Digital Currency Research Institute of the People's Bank of China; the system is based on similar technology with Libra stablecoin (Facebook’s).
Now the "digital yuan" is being tested in four major cities in China, and the tests are going well: the system has already processed 3.13 million transactions.
Such rates and successes in the development of the state digital currency are associated with the peculiarities of the Chinese economy: the country is investing a lot in technology. And also, as the authors of the study highlighted, "blockchain is an object of special interest for the governing party in China."
Briefly about the countries that also working on government digital currencies:
- The representative of the Bank of England stated that a blockchain-based central bank currency could be used to implement negative interest rates (2015)
- The central bank of Sweden started testing blockchain-based “e-krona” (2020)
- The central bank of Uruguay announced the start of testing digital pesos (2017)
- The Eastern Caribbean Central Bank announced and Bitt company announced a joint CBDC project (2019)
- The European Central Bank (ECB) published a report about the digital euro. It will be possibly issued toward mid-2021
- According to the press release from the Central Bank of the Bahamas, the development of their digital currency “Sand Dollar” (2020)
- The Central Bank of South Korea received its first application for testing its own digital currency. According to the roadmap, at the final stage “digital won” will be released (2020).
Differences between CBDC and cryptocurrencies
The term “CBDC” is often used in the context of blockchain technologies, cryptocurrencies, tokens. But these are things from different economic spheres.
Here are the main differences:
- All cryptocurrencies are decentralized and do not have a control center. CBDCs are centralized and controlled by central banks, other government agencies, and international financial institutions.
- Cryptocurrencies are based on blockchain technology and inseparable from it. CBDCs could use other engineering (there is such a possibility).
- Cryptocurrencies are widespread and have millions of users. But not a single coin has yet become a means of payment. CDBCs definitely will be means of payment, but all of them are still in development or test mode.
- Cryptocurrencies are not directly linked to the financial system of any country. While CBDC is the digital form of a fiat currency of a particular nation.
In the future, these differences may fade, especially if the cryptocurrencies and digital currencies of countries will be easy to exchange.
Image by Coingeek
How CBDC could change the future
The main goal of CBDC developers is to speed up and reduce the fees of international transactions. This will be done through new technologies.
Also, the widespread introduction of CBDC may have other consequences that are important for the cryptocurrency community:
The digital yuan (China's CBDC) could replace the US dollar as a dominant international settlement.
Buying cryptocurrency can get easier. According to Ethereum developer Vitalik Buterin, “There will be a lot of opportunities to fairly exchange between different kinds of assets and move from one ecosystem to another.”
This is the reason why all blockchain companies monitor the news about CBDC closely.