July 7
DeFi 101

CBDCs: What You Need to Know About Them

Basics of CBDCs

3 min read

Last year, a study showed that 80% of 66 central banks surveyed around the world had some plans surrounding CBDCs. Amongst those, 10% said they were close to issuing a new digital currency in the nearest future. It’s 2021 and the numbers keep growing with more central banks showing keen interest in issuing their own distributed ledger technology (DLT) based currency.

You’re probably wondering now, what the heck are CBDCs? Let’s dive into an overview.

<text-h2> What are CBDCs? <text-h2>

CBDC is an acronym for “Central Bank Digital Currency”. This is the newest form of digital currency being developed by central banks to be used along with fiat currencies. They are a digital representation of the fiat currency (depending on the country or region) on the blockchain, or other forms of DLT. Just like fiat money, holders of CBDC will be able to make digital payments and transfers.

In contrast to typical cryptocurrencies, CBDCs are backed by a substantial amount of foreing currency reserves or assets depending on the country’s monetary policies. Invariably the risks of volatility with CBDCs will be far less than decentralized cryptocurrencies. CBDCs will serve equally as legal tenders and a stable store of value. They serve similar functions as stablecoins, whose face value is equal to the fiat counterparts.

However, unlike decentralized cryptocurrencies or stablecoins, the distribution and management of CBDCs are primarily controlled by the central banks and other relevant monetary authorities. This means CBDCs are regulated and controlled by select governing bodies. This definitely isn’t a decentralized or non-custodial form of digital money.

<text-h2> What’s the adoption rate? <text-h2>

The idea of creating CBDCs has been one explored by various central banks over the past year. Last year, the central banks of Japan, UK, Sweden, Canada, Switzerland and the European Central Bank formed a group with the Bank of International Settlements (BIS) to explore the potential use cases of CBDCs.

In April this year, the Bank of England announced in an official statement, the joint creation of a CBDC Taskforce to explore the creation of a potential UK CBDC. China, also announced, as a trial, it will be rolling out 40 million renminbi i.e. US$6.2 million in digital currency via a lottery to residents in Beijing. The Bank of France following in the same trail, announced its completion of a CBDC experiment and continues in its aim to develop a European CBDC. Several other countries like Sweden, Russia, Canada and a host of others, have also continued to work at the possibility of developing their own CBDCs.

The reason behind growth in the exploration of CBDCs by central banks and government authorities isn’t far-fetched. Generally, crypto is defined to be decentralized and not controlled by monetary authorities. This is majorly what has spurred the central banks to create their own versions that can be controlled and managed by them.

Although no country has officially launched its own CBDC yet, it is interesting to see how blockchain technology continues to demonstrate its relevance in transforming the financial sector across the globe. While some may express doubts at the use of blockchain in creating these CBDCs for fear of decentralization, the impact of DLT-based solutions cannot be overemphasized.

How this would exactly affect the use of crypto and more interestingly stablecoins, is highly debatable. Decentralization is the foundation for cryptocurrencies, a feature that is completely opposite to CBDCs. Crypto has come a long way in showing the world the importance and remarkable impact of a decentralized form of finance i.e. ease of transactions and global accessibility. CBDCs certainly can’t top that, their centralized features already defeat the entire blockchain philosophy. However, CBDCs carry on the innovation of blockchain at its heart for a far more efficient transaction system that can improve transfer speeds, cost and overall reliability.

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