CBDC – Central Bank Digital Currency
What is CBDC?
A central bank digital currency (CBDC) uses a blockchain-based token to represent the digital form of a fiat currency of a particular nation or region. A CBDC is typically decentralized, but it is issued and regulated by a central bank of the nation or region. CBDCs mainly use technologies inspired from cryptocurrencies, such as distributed ledger technology (DLT). A digital currency can also be programmable, which for example allows transfers to be automated or interest payments being connected to a certain amount of digital currency.
What are the benefits?
Because of the technology used and the way CBDCs are structured, the cost of transferring money will decrease substantially. This leads to financial entities being more connected and smoother money transfers. CBDCs promise a new legal tender with no interoperability issues and offer direct peer-to-peer transactions. Two parties could easily transfer money between each other at low cost, instantly across the globe, without an intermediary.
DLTs give a full record of all the transactions, this will prevent money laundering, fraud and tax evasion. A blockchain is more secure than existing systems and will prevent hacker attacks.
What are the risks?
Total transparency is one benefit and risk, the privacy rights of Citizens could be violated. Governments could block citizens and companies from participating in the financial sector if they do not comply with the regulation. On the other hand, when transactions are completely anonymous, money laundering and terrorist financing becomes easier.
Another important risk is, that the financial stability of the current financial system could be threatened, when a CBDC is established and the majority would convert their “old” money into new digital money. Banks and financial institutions could become obsolete and a lot of jobs could be lost.
Where is it tested?
The Bahamas already introduced the first CBDC in 2020. This project in a smaller country can function as a proof of concept for larger countries. China is piloting its own CBDC called DC/EP (Digital Currency Electronic Payment), which has been tested since 2014. China’s CBDC is planned to officially launch in 2022/23. The European Union has started to research CBDCs and will develop a strategy for the implementation in mid-2021.
CBDCs will become very important in the future as central banks from all over the world start to research the potential and start to develop their own digital currencies. In a digital and globalized world, a new form of digital money, which is controlled by public entities and not private companies, is inevitable for the success and efficiency of global trade.
Sander, Philipp; Gross, Jonas (2020): The Digital Euro and the Role of DLT for Central Bank Digital Currencies.
Written by Ferdinand Klinke, Blocksize Capital GmbH
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