It all about CBDC

Cryptocurrencies such as Bitcoin and Ethereum have consolidated their relevance in the cryptoverse throughout the last decade, making them household names. Financial markets have given digital currency such positive reviews that central banks such as the US Federal Reserve, the European Central Bank, the Bank of England, and the People's Bank of China are experimenting with their own versions.

Central Bank Digital Currency

A CBDC, or Central Bank Digital Currency, is a digital currency that originates from a central bank, as the name implies. Simply put, a CBDC is a digital representation or type of fiat currency that functions similarly to a cryptocurrency but is issued by a central bank. To be fair, this is a broad statement, as cryptocurrencies and decentralisation usually go hand in hand. This is not the case for CBDCs, which are by definition centralised.

The monetary concept of a CBDC, on the other hand, is not dissimilar to that of existing fiat currencies such as the Euro or the Dollar. They're often marketed as a digitalized version of fiat currency. To comprehend CBDCs, one must first comprehend what constitutes a currency. A currency, in broad terms, is an economic unit of value that serves as a generally accepted medium of exchange. The value of fiat currencies varies a lot.

As you might be aware, a CBDC in no way resembles Bitcoin in terms of fundamental existence because it is distributed by a central authority, in this case a central bank. CBDCs, as opposed to stablecoins like USDT or USDC, are best understood in this regard.

What distinguishes a currency from others?

The following characteristics must be present in a currency:

Fungibility

Fungibility refers to the uniformity of the medium of exchange's units, with the smallest unit interchangeable with any other of the same currency's units. Despite the fact that each note can be uniquely marked, paper cash has a specific serial number that never gets in the way of a transaction. This can be replicated in a digital world thanks to blockchain variations.

Recognizable

A currency must be generally recognised in order for parties to settle and compromise on terms of exchange. Transaction costs will rise if a currency is not recognised by one party due to uncertainty and perceived danger. The US dollar is now known as the "reserve currency" of the world. As a result, it has gained widespread acceptance. A CBDC, like the USDC, can keep this feature and maintain a 1:1 ratio to traditional monetary value.

Flexible

A currency needs to be adaptable and mobile. CBDCs would almost certainly boost cross-border payments significantly, eliminating conventional "swap lines" and other time-consuming procedures associated with legacy financial structures (which work with disparate databases).

Durable

Durability refers to the notion that a currency can hold its value over time and can be reused. This is more of a concern with paper money than with digital currencies. Since CBDCs are a digital representation of paper money, the issue of longevity is entirely solved. The cost of improved productivity and automation is that no transactions can be carried out without being observed by prying eyes on the open blockchain.

Stable

In every conventional fiat currency, stability is essential. For different factors stemming from the centralised issuance of currency, currencies such as the Turkish Lira have depreciated by hundreds of percent. In comparison, the Euro-Dollar norm has allowed prices to remain relatively constant over time. Although inflation reduces a currency's buying power, inflationary pressures are expected to be countered by wage rises, giving Euros, Dollars, and the Great British Pound currency a sense of stability. The implementation of a CBDC will have little impact on this.

CBDC versus Cryptocurrency

It remains to be seen if the implementation of central bank digital currencies would have a tangible impact on cryptocurrencies. Given that such central-bank-issued stablecoins would have the same properties as fiat currency, there's no reason to believe that these digitised types of money will have any significant impact on precious assets like Bitcoin and gold.

The Future of CBDC

Slowly but steadily, central banks have realised that digital ledger technology provides a significant opportunity for them to gain greater control over fiscal policy, among other items. Since CBDCs do not fundamentally alter an underlying fiat currency, Bitcoin supporters have turned their critical gaze on this growth.

Although politics and currencies fight it out in public, central bank digital currencies are shaping up to be the next big thing in the stablecoin industry, if nothing else.