Central bank digital currencies, or CBDCs, are exactly what the name suggests: they’re digital versions of a state’s fiat currency. But how does that differ from money sitting in a digital bank account, being used to make cashless transactions with debit cards?
Why do governments even want to have CBDCs? And which countries have launched CBDC projects?
What’s a CBDC?
CBDCs are digital versions of a state’s fiat currency.
They’re just like stablecoins, which are pegged at a 1:1 ratio with a selected fiat currency. However, stablecoins like Tether (USDT) are run by private entities that maintain central bank-issued cash or cash equivalents. They maintain these belongings in order that their stablecoins can reflect the precise value of fiat currencies.
The International Monetary Fund (IMF) considers CBDCs to be a new type of money which are:
- 🤖 In a digital kind
- 🏦 Issued by a country’s central bank
- 💵 Intended to serve as legal tender
Central banks actually print US dollars or British pounds, so the physical banknotes in your wallet don’t meet the criterion of “digital form.”
And the money you move digitally by your financial institution is in fact a series of electronic deposits backed by the belongings of business banks—97% of the money held by common folks and companies within the UK are actually commercial bank deposits.
Bitcoin, the world’s largest cryptocurrency, meets two of the above standards: it’s digital and now serves as authorized tender in El Salvador. However, Bitcoin has nothing to do with the “CB” in CBDC. It’s not issued by the Central Reserve Bank of El Salvador—even when the bank mined Bitcoin en masse, that wouldn’t count as “money issuance,” as a former IRS counsel told Decrypt in June 2021.
How does a CBDC work?
Sometimes the states developing central bank digital currencies tout blockchain as the underlying expertise for CBDCs, but the central bank finally maintains authority over the ledgers. In contrast, cryptocurrencies are decentralized with no central authority.
There are many different ways that CBDCs could also be virtually deployed by the states. But when early initiatives are something to go by, CBDCs tend to work on mobile wallets similar to Apple Pay or Google Wallet.
Within the Bahamas, which absolutely launched a CBDC in October 2020, the central bank issues Sand Dollars simply because it points to the Bahamian dollar. It additionally maintains a ledger of all Sand Dollars in circulation.
In partnership with private providers, the central bank maintains a KYC infrastructure that citizens must comply with to open a mobile wallet. Sand Dollars facilitate peer-to-peer digital funds without an intermediary like a bank account, which is the principle concept behind CBDC projects: scan the barcode in your cellphone to make an in-store fee or send money to another cell wallet.
Why do governments want a CBDC?
The Bank for International Settlements cites three causes for the current rise of CBDCs in its annual report (June 2021): the eye around Bitcoin and different cryptocurrencies, the debate on stablecoins, and the entry of Big Tech into finance.
Issues over the encroachment of big tech firms in finance, such as the Facebook-backed stablecoin Diem, are also echoed by the European Central Bank (ECB). In a June 2021 report, ECB stated that governments that shy away from introducing CBDCs could face threats to their monetary programs and financial autonomy from “international tech giants probably providing artificial currencies in the future.”