"The future of money is digital currency". - Bill Gates
October 22, 2020
Good evening everyone!
@BCH.Serg here.
Lets us explore today about one of the hottest topic right now in the world, the Central Bank Digital Currency or CBDC.
Almost 70 percent of the central banks of the world right now is conducting research on CBDCs and even the FED is reaserching for hypothetical CBDCs. This project is just around the corner. And i think it is coming. One of the proof is when China releases its CBDC, "Digital Yuan", last monday for the 50,000 people who won the lottery for its first mass trial.
Now here is the big question. Will it kill the decentralized cryptocurrency or will it guide for a wave of crypto adoption?
Before we start, let me remind you that this is all based on my own research and my own opinion.
We'll start by answering the question, "What are Central Bank Digital Currency?"
A Central Bank Digital Currency or CBDC is a digital token that uses blockchain technology to represent a fiat currency of a particular nation. It is centralized and it is issued and regulated by the central bank of the country.
Why the interest of Central Bank of the world to CBDC?
Increase in efficiency of the payment system for the society - with the use of the blockchain technology, we can have a fast, real time transactions and it will be much cheaper
Financial inclusions - with CBDCs, access to cash could be made accessible through a phone
The need for creating and protecting monetary sovereignty
Why Central Banks are looking to use blockchains for CBDCs?
What Bitcoin and the financial crash in 2008 made us think about is the nature of money and its various elements. That's things like is being used as a medium of exchange, a unit of measurement and a store of value.
Blockchains is super appealing to use for any digital currency because it represents a good balance between the privacy characteristic of the cash and the security characteristics of the deposits. This is something banks are valuing right now.
Implications of a Successful CBDC
When talking about success of CBDCs, we need to distinguish the benefits for a central bank and the benefits for the public. These benefits varies depending on what country we are talking about.
In developed countries, cash are easy to handle and easily accessible. However, in many emerging country, cash can be difficult to hold off and to get access to it, some may travel long disctances. Cash can be also dangerous to have too because it is prone for robbery.
All those problems are a thing of the past if CBDCs are successfully deployed. All cash now would be digital and will only require a phone to use. This means that CBDCs actually have convenience and security benefits for the users
Another thing holding back digital currency specifically is adoption. One way to overcome this adoption problem is for government to say we officially endorse this new payment method.
There are a lot of things you can do with digital currency that are simply impossible to do with cash because of its blockchain technology. Blockchain technology could play an important role when it comes to CBDCs.
A CBDC like cash, notes and electronic legal tender is on the liability of the central bank. These are not the assets of the central bank, it means that this assets are a claim that someone has on that central bank. Think about this, when someone operates a central database which is the ledger for an entire nations transactions, then the owner of that database actually becomes the owner of national currency. The reason why they have the ability to change all the database entries. What this means is that CBDCs are asset and not a liability.
Most people would agree that to actually operates a successful CBDCs in a way that is consistent with our accounting practices and legal frameworks, you are forcefully to use blockchain. When you set up a system like that, you get a lot of benefits for the core mandates of the central bank. So what are the mandates that central banks core about?
Price stability
Financial stability
Employement
How can CBDC help a country price stability?
Digital currency include a large part of the economy when it comes to measure of economic activity. Currently we have a large part of the economy growing and entirely digital. The problem is the value of creation in the digital space is not easy to account using traditional measures. That means a lot of prices we see in the traditional economy does not reflect the prices seen in the digital economy.
However, if we have a currency, a payment system, a medium of exchange that underpins this new digital economy, you can much better target that part of the economy. This is CBDCs intend to help with
Financial Stability
In 2008, the biggest issue is the lack of trust on financial intermediaries, so why did that happen? We have assets that are opaque and couldn't publicly audited.
The blockchain can help with all that by acting as a commitment device for transparent finance. This in turn could make financial system more stable.
CBDCs might be the best hope for digital currency to be widely adopted.
There are many crypto projects out there with great techs and great idea, however none of this are mass adopted yet. One of the key reason why is probably cryptocurrencies do not yet interface with the exisiting financial system. After all, majority if the people are not into crypto, that is why many people claim that for a digital currency to be widely adopted it needs to be accepted by the current financial system.
The easiest way to do that is actually by issuing CBDC from an official actor. If this finacial actors accepts your digital currency then its a whole lot easier to get adoption.
CDBCs challenges
Usability - the major problem in emerging market context is when one perosn want to transact doesn't have a smartphone. Not all people have snartphone especially on the third world countries
Privacy - CBDCs is centralized. The central bank can track down all transactions
Potential impact of CBDCs on Crypto
Let me remind you again that this is my own opinion based on what i researched.
CBDCs would greatly impact crypto. Whether or what the nation what cryptocurrency will they adopt. Or will they make one of their own.
If Central banks create their own crypto. What will the mass be adopting? Majority of people will certainly use what will the government tell them to use.
What we need is to educate more or disseminate more informatiin about digital currency. Its uses and how its technology works.
So what do you think of CBDCs? Please leave a comment down below for any suggestions or reaction. And it will be appreciated much if you hit the subscribe in my profile!
Have a good day ahead everyone.
Sources: https://cointelegraph.com/news/chinas-digital-yuan-cbdc-is-close-but-many-details-remain-unknown
https://www.bankingdive.com/news/fed-central-bank-digital-currency-Lael-Brainard/583631/
https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp
Lead image source: https://unsplash.com/photos/dDvrIJbSCkg
Very good article dear. Don't forget to back my post.