Tone

CBDC – the future of money?

April 27th, 2023

Central Bank Digital Currency is a digital currency that is issued and backed by a central bank of a country, with its value corresponding to the country’s legal tender. Nations around the world are taking steps to upgrade their financial systems with CBDCs.
The central bank regulates and control it.

The history of CBDC.

The idea was born from the progress of crypto such as Bitcoin and Ethereum.
They became well known for their capacity to give safe and independent exchanges without depending on customary banks.

In 2014-2018, Ecuador had one of the first retail CBDCs, which was available to many people and worked through mobile phones (not blockchain). Low adoption caused the program to close.

Making the same choice that Ecuador, the Central Bank of Tunisia, acted in 2015.
Since then, several countries have either begun or are creating their own Central Bank Digital Currency.
Some countries already conducting pilot programs and engaging with stakeholders. The People’s Bank of China, European Central Bank, Federal Reserve, Bank of Japan, Bank of England and many more, are all researching and developing their own CBDCs.

The fundamentals of CBDC.

CBDCs are digital currencies that are created and supported by central banks, while cryptocurrencies are independent and not backed by a controlling group. Central Bank Digital Currencies offer a regulated and secure option compared to traditional currency, while cryptocurrencies offer an autonomous approach to money.
The fundamentals are: backed by a Central Bank, a legal tender, regulations and a new technology.
They can be designed for specific, allowing central banks to target specific areas of the economy and improve efficiency.
Banks issue and trade CBDCs in a digital format, making them more efficient and cost-effective than physical cash.

The two key kinds of CBDCs are Retail and Wholesale.
Retail is designed for public use, allowing people to replace physical cash with digital currency.
Financial institutions use wholesale in order to facilitate interbank transactions.
There are hybrid CBDCs and synthetic CBDCs, which offer unique features and benefits.

How CBDC and crypto differ.

A distributed network or blockchain uses cryptographic methods to make cryptos like Bitcoin.
The blockchain of, e.g. Bitcoin, is permissionless blockchains which can be seen in public. CBDC uses a permissioned blockchain, which is private.
Public blockchains possess the capability to self-govern themselves with no external influence or control.
CBDCs allow central banks to see ownership information, while cryptocurrencies offer anonymity.

Crypto can be used for transactions and speculation, but CBDCs are only for payments.
Benefits of CBDCs include better oversight of the monetary system and more accessibility financially, but users have less data security since transactions are required to be shared with tax and regulatory bodies.
Crypto users can choose how many data to disclose.

Pros & Cons.

Central Bank Digital Currencies can automate transactions, eliminating any risks associated with third party interference, protecting user privacy, deterring illegal activities, promoting financial inclusion, and providing customers with a direct link to central banks.

Although CBDCs may appear to solve centralized financial systems, they are not always the answer.
People have raised concerns about the privacy of the central bank’s control of transactions and data.
Making payments from one country to another can present certain challenges.
The impact of legal and regulatory barriers on global foreign exchange markets could be significant.
The digital yuan could take over as the primary payment method in China, shrinking the dollar’s influence and potentially prompting global companies to use it for their operations.

Check out my Twitter thread on the subject:

 

Find more and additional information in this great article and video.

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