Centralized vs. Decentralized Digital Currency (and Why it Matters)
The evolution of digital currency continues to play a critical role in our global economy. But there are numerous kinds of digital currencies — based on widely disparate technologies.
One of the most important distinctions is between decentralized currencies — as typified by cryptocurrencies like $BTC and $ETH — and centralized alternatives.
The Importance of Decentralization
Decentralized currency gains its value from the people who use it, and does not rely on any bank, authority or third party to function or exist.
The Bitcoin whitepaper published in October 2008, described Bitcoin as a “peer-to-peer electronic cash system to enable online payments directly from one party to another” with no bank or intermediary. Now 13 years later, blockchain technology is the basis of a fast-growing universe of financial services expanding beyond currencies to lending platforms, exchanges, and more. In October, 2021, the market capitalization of the decentralized finance space was over $93 billion; the total market capitalization of decentralized cryptocurrencies was more than $2.3 trillion.
Centralized Digital Currency
But as decentralized currencies have become more popular, the concept of centralized digital currencies has also begun to appear. Recognizing the potential benefits of digital money, central banks and governments have begun exploring the usage of a form of blockchain technology to create central bank digital currencies, also known as CBDCs.
Centralized digital currencies use the same kinds of underlying blockchain technology as their decentralized counterparts, but with a crucial difference: they are issued and controlled by centralized institutions. As such, centralized digital currencies do not derive their value from their users; instead, their value comes from the authority of their issuing body.
While Central Bank Digital Currencies, or CBDCs, are not widely used in most places in the world, they will play an essential role in the future of our global economy. As CBDCs begin to appear in our bank accounts and digital wallets, people will become more familiar with how they work and what their implications are for people and businesses around the world.
Shifting Institutional Attitudes Toward Digital Currencies
Financial institutions were initially skeptical of cryptocurrency, fearing it could serve as a tool for money laundering and other illicit activities. Nevertheless, they recognized digital money’s potential to be easily created, programmed, and issued. They also took note of the benefits that cryptocurrency networks provided their users, including fast transactions across borders, low settlement fees, and greater financial inclusion. Decentralized stablecoins also showed that digital currencies did not need to have volatile values– they could instead be tied, or “pegged,” to fiat currency and retain their value.
What Will CBDCs Look Like on a Practical Level?
CBDCs would be fully-backed by the fiat currencies of their issuing countries and classified as legal tender. They would be capable of instantaneously settling domestic and international transactions, eliminating the wait times associated with sending money through legacy financial systems. Their transaction fees are also likely to be lower than those of traditional financial channels.
People would likely be able to store their CBDC funds in digital wallet accounts held in authorized banks.
It’s unclear if, when, or where these currencies may be adopted. Currently, there is no large-scale implementation of a nationally-issued digital currency. Still, CBDC technology may one day drive a sea-change in the way global financial systems operate. Watch this space.
Centralized Bank Digital Currencies in China.
Chinese currency goes by two different names: the Yuan (CNY) and the people’s renminbi (RMB). The distinction is subtle — renminbi is the official currency of China and acts as a medium of exchange. The yuan is the unit of account of the country’s economic and financial system.
Both exist in digital form now. Digital renminbi (Digital RMB) is a central bank digital currency issued by China’s Central Bank— the People’s Bank of China (PBOC). It is the first digital currency to be issued by a major economy, and has been in public testing as of April 2021.
The e-CNY, or digital yuan, is also a centralized, cash-like digital currency that is expected to be primarily used for retail payments in China. The PBOC, the Central Bank, and e-CNY operating institutions have conducted large scale e-CNY pilot programs in multiple cities with fast food and retail establishments.
What is Offshore RMB
Offshore RMB is a decentralized version of the digital renminbi. This is intended for global trade use, and is currently being developed and tested by Conflux to facilitate international trade and cross border payments through a pilot program in the Shanghai Free Trade Zone.
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