Cryptocurrency

Central Bank Digital Currency

Exploring the good and the bad of CBDC’s

0x_idkCrypto

Published in

Coinmonks

6 min readAug 24, 2021

We know things about Bitcoin and Ethereum, but do we know what Central Bank Digital Currencies are?

Central Bank Digital Currencies (CBDC) are a form of digital currency pegged to a country’s currency — issued by the central bank. They’re similar to stablecoins like USDC, USDT, and TUSD — all pegged to the US dollar. The key differentiator between stablecoins and CBDC’s is that the former are issued by private companies and listed on digital asset exchanges.

CBDC’s are different from the digital fiat currency you currently use to top up your virtual cards and do person-to-person transfers to your friends and families. CBDC’s differ from the cash you use to buy chips and peanuts at petrol stations. They are a new class of digital currencies that are regulated and controlled by the central bank of a nation. Blockchain has made this possible. CBDC’s will be on the blockchain and this means that all transactions will be recorded from one block to another. Records of where, when, and who will all be seen in the block (anonymously to people like you and me, of course).

Before CBDC’s become a part of our everyday lives, we should explore the opportunities and challenges of this new asset class. Let’s take a look at what this will mean for the users and issuers of central bank digital currencies.

Benefits of a CBDC

CBDC or central bank digital currency has been the topic of discussion these days within central banks. CBDC’s are seen as the number one choice to be a competitor to digital money; and here are some noteworthy benefits of a central bank digital currency.

Efficiency and reliability

One of the most notable benefits that come to mind with CBDC’s are similar to what we are able to see happening with cryptocurrencies. CBDC’s will be able to significantly reduce and faster transactional speeds for institutional payments and retail users.

How is this different than the digital e-money I have?

This is a simple yet intimidating question people who are for CBDC’s always get asked. A good note to take is that CBDC’s will be issued electronically without printing any banknotes. This completely cuts off the step for a user having to deposit physical banknotes into an ATM and depositing those funds into their e-wallet.

Cost-efficient alternative

CBDC’s can be a driving factor to cost-saving. We live in an era where things move faster than ever, and this means money that we use as a medium of exchange will need to be exchanged at a quicker rate while at the same time reducing costs for production. CBDC’s will significantly lower cost factors for the production and printing of physical banknotes, renting or use of storage spaces; and costs for transportation.

Distributing physical banknotes can present a daunting task for distributors and CBDC’s can be a safer way to distribute funds by reducing concerns of fraud that may happen within the ecosystem. Of course, there may be cybersecurity concerns; central banks should have a plan in place and prioritize security from the get-go.

Encourages innovation

When CBDC’s take their place in the future, this can encourage innovation within the financial systems in a country. The perception of the payments ecosystem in terms of competition will be different in its entirety, where. There will be an increase in innovative ideas coming out of private entities such as neo banks to help with the distribution of CBDC’s to retail users.

Additionally, CBDC’s can be a solution to banking the unbanked and providing virtual bank accounts to undocumented individuals in a country. Sure, Know-Your-Customer (KYC) will be a barrier to entry for the undocumented communities, but starting out with banking the unbanked is a great place to kickstart these efforts.

The downside of a CBDC

While CBDC’s can be a good initiative to take on from central banks, there are many downsides’ to the citizens of a nation with the new technology money.

Geographical restrictions

When we think of CBDC’s we think about the possibilities of sending funds from one country to another. This would be possible with the technology that CBDC’s will be built on. However, transferring a RMB CBDC from China to someone in the United States won’t have much use for the person there unless of course, infrastructures like a CBDC exchange have already been built to execute CBDC conversions. For the time being, CBDC’s still have geographical restrictions because they can only be used in their native country.

Banks will become irrelevant

In today’s financial ecosystem, banks are the dominant forces that play the middleman role for any transaction. If you want to send money abroad, you will still use banks; when you want to buy a car or a house, banks are there to provide you loans.

So, will banks be needed when CBDC’s roll-out?

The heading to this point may be sort of a clickbait but, compared to the size of banks are today and how they will be in the coming 10 to 20 years will significantly reduce. This means, banks will be automated with a handful of employees working for a bank branch, and if you didn’t get this hint — this contributes to unemployment. Banks will not be redundant entirely however, with CBDC’s in the cards there will be a lesser need for employees to be physically in bank branches.

User Privacy

User privacy in CBDC’s has been contended in many discussions. Experts are concerned about whether or not CBDC’s are truly private. When central banks print and issue cash to different parties; the banknotes themselves only have serial numbers (#123456) to identify them. When banknotes are exchanged, there is no evidence of the paper trail of where the banknote (#123456) came from before the current holder.

CBDC’s have made this possible. Now, this may not be as good as it sounds, sure — knowing where the money goes is an amazing feat to finally curb money laundering and terrorist financing activities. However, for regular citizens like you and me; do we really want the central bank and government to know what we spend our money for?: Probably not. CBDC’s will be able to track transactions, the flow of money, and individual user behavior through purchases on-chain. Now, it is not clear how CBDC’s design functionalities will look like. However, most will have activities shown on-chain.

Closing thoughts

Central bank digital currency’s (CBDC) are different from stablecoins, there is a strong misconception as to the two being very similar. CBDC’s are a new form of digital asset issued by governments and central banks to limit production and other miscellaneous costs. In addition, curb illegal activities that can be tracked on-chain. CBDC’s are a new technological hurdle that if done right, central banks and governments will be praised for their work and will be able to build trust in their country’s.

Disclaimer: Thanks for tuning in, Any expression of opinion (which may be subject to change without notice) is personal to me (the author) and I (the author) make no guarantee of any sort regarding accuracy or completeness of any information or analysis supplied.

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