What are CBDCs?

What are bank-issued crypto coins?

A Central bank digital currency (CBDCs) is a digital currency issued by central banks as a currency for countries or regions to perform as a medium of exchange for goods and services. They are supported by blockchain technology which aids the record and validation of transactions. In other words, CBDCs are real-world money that has transformed into digital.



CBDCs are akin to stablecoins as they are recognized to not fluctuate due to the status of being pegged to a stable-valued asset, which differentiates from general cryptocurrencies which are not.





What drew the government’s eyes to CBDCs?



In the past few years, cryptocurrency has inarguably gained traction as the distributed ledger technology, or blockchain has served as a modern solution for transparency and security.



More on the premise, many believe cryptocurrency can be a threat to the traditionally centralized financial system, present in banks and financial institutions, which require governmental supervision and arbitration.



It is believed that the inability to control the growth and influence of cryptocurrency has rendered financial institutions to adapt towards the notion of establishing digital currencies, rather than from it. The fruits of these efforts are CBDCs, which, as an individual unit, functions like a banknote with varying numbers of identification to prevent infringement.



The implementation of CBDC launch plans can be explained as follows.



1. To reduce monopolization and heavy reliance on private financial services: which can render the state to be unable to maintain national fiscal stability.



2. To reduce banknote capital expenditure and increase the public’s reach to financial services



3. Traceability: many transactions conducted throughout the world are illegal. For countries like China, where banks record any individual’s transaction history, traceability may not be desirable as it is already performed by a central institution. However, in many countries, like in the United States, it can be perceived that such policies invade personal financial privacy





Difference between CBDCs and bank applications



The main difference between the two is the supporting technology. The blockchain technology presented in CBDCs enables the decentralization of transactions, however, in this particular case, the blockchain back-end would be managed by the central banks.



CBDCs are supported by Permissioned blockchains, which differ from those of Bitcoin which are Permissionless. For that reason, the users allowed to function within this blockchain are entirely managed by central institutions, along with what level of access they have. To illustrate, while, Mr. A is allowed to only access and read the data present on the blockchain, Ms. B, who has the higher level of access, is able to both read and change the sets of data.



This contrasts with the Bitcoin blockchain system wherein users are not required to be granted access before managing or validating transactions.



Nonetheless, it is worth mentioning that though cryptocurrency has been recognized as a medium of exchange in some nations, there has still yet to be a formal law to regulate its official use.





CBDCs v.s. Stablecoins



In simplification, both two attain the properties of price stability and low fluctuation but different in terms of the issuer and regulation. Stablecoins are initiated by private entities and their stable values derive from the pegged fiat currency, like the yuan or dollar currencies. Despite the similarity of value to the fiat currency, stablecoins cannot legitimately execute as payments. On the other hand, CBDCs issued by central banks certainly are capable of paying liabilities

Are all CBDCs supported by blockchain technology?



The answer is not every country chooses to use blockchain technology. Though blockchain is viewed as purposeful and highly efficient in the eyes of many countries across the world, nations like Canada, Ukraine or the Netherlands still define blockchain as unsuitable for managing transactions regarding digital currencies.





Conclusion



All in all, CBDCs are digital currencies issued by central banks. Its value and utility are similar to fiat currencies, but it is supported by blockchain technology. Various government organizations around the world have been reported to have started planning to put the technology to use to further enhance their financial system. However, the matters of blockchain and CBDCs are still relatively new to the world and many nations are still researching its usage.

Reference:



Coindesk, Public, Private, Permissioned blockchain