As the name suggests, a Central Bank Digital Currency (CBDC) is a digital version of a country’s fiat currency. This article aims to discuss all the important aspects of CBDCs. Also, you will learn why many governments are looking to launch them.
What are CBDCs?
CBDCs operate like stablecoins as both are pegged to a certain fiat currency. The difference comes in terms of issuance: CBDCs are issued solely by central banks, while stablecoins are distributed by private entities.
How Do CBDCs Work?
Although some nations have adopted blockchain technology in creating CBDCs, they still control the ledgers. By comparison, crypto assets are decentralized and operate without a central authority.
Governments issue CBDCs in various ways. One of the common methods is through mobile wallets. Two years ago, when the Bahamas released its CBDC called Sand Dollars, it partnered with a private mobile wallet provider to help distribute the tokens. Sand Dollars allow holders to make online payments without the need for intermediaries like banks.
Why Do Governments Want CBDCs?
The BIS (Bank for International Settlements) released a report in 2021 stating that governments are focused on launching CBDCs due to the growing adoption of digital currencies like Bitcoin and Ethereum. The report also warned that countries overlooking CBDCs could put their financial systems in danger because big tech companies are likely going to offer citizens virtual currencies soon, decreasing their reliance on fiat currencies in the process.
There are other reasons necessitating CBDC adoption. According to the Institute and Faculty of Actuaries 2019 report, CBDCs facilitate quick money disbursals, especially during a crisis. In addition, they help bank the unbanked, as per International Monetary Fund’s research. The institution recently said that CBDCs play a huge role in promoting financial inclusion since people do not need to open bank accounts to make payments using CBDCs.
International Monetary Fund stated that CBDCs would benefit a country such as Indonesia, where most of its citizens cannot access traditional finance but have a good internet connection.
Meanwhile, the deputy governor of the central bank of China, Fan Yifei, said at the start of the year that CBDCs would prove helpful in reducing the illegal use of money. He argued that fiat currencies are anonymous and also easy to counterfeit.
Payment processor Mastercard says countries adopting CBDCs will save a lot of money. The company reports that it costs a country 1.5% of its GDP to manage physical money.
Countries Working to Develop a CBDC
As of June 2023, more than sixty countries have announced exploring the idea of a CBDC. About twenty nations already have a CBDC in circulation. Some of them include Grenada, Nevis, Saint Kitts, China, and the Bahamas. Meanwhile, thirteen territories are currently piloting their CBDCs. What that means is they are testing the real-world use cases of their Central Bank Digital currencies. Some of those countries include Ukraine and Sweden.
Ukraine is testing its CBDC called e-hryvnia. The country’s central bank signed a deal with blockchain firm Stellar Development Foundation in 2021 to research and develop e-hryvnia. It is, however, unclear if the CBDC is built on Stellar’s network.
Further, Sweden is currently testing its blockchain-based CBDC called e-krona. However, Riksbank has yet to disclose when the digital currency will be issued to the public.
Does the United States Have a CBDC?
The US Federal Reserve has hinted at plans for a digital dollar in recent months. But the central bank can only begin working on it after receiving approval from Congress. However, not all Congress members support the idea. The Republicans have been against a US CBDC, claiming that Joe Biden’s administration wants to use it to control Americans.
A bill seeking to block the Federal Reserve from issuing a CBDC has already been tabled in the House.
Conclusion
Although there are concerns over users’ privacy, it is clear that CBDCs can help people transact faster than traditional systems. Whether these digital currencies can replace physical money remains to be seen.
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