What are CBDCs, and Why do They Matter?
CBDC is a digital currency that is based on traditional fiat currencies. It tries to replicate and get the benefits of cryptocurrencies by making transactions smoother. More and more countries are considering officially announcing their own as they take the good parts of cryptocurrencies and build on fiat currencies. One of the main differences between CBDCs and Cryptos is that they are heavily regulated.
I have also taken the liberty to use digital currency interchangeably with CBDC. For anyone who is confused, they both mean the same thing.
Some Things that you Should Know About CBDCs!
The recent rise in Cryptos has displayed what a decentralized virtual currency can do for the economy. Inflation and other things that stem from it need to be addressed while making sure that new problems don’t sprout up. CBDCs are created on the premise that if fiat currencies can be converted into a more accessible form, a majority of the population will be banked, in addition to similar opportunities that you find with Cryptos.
Something that needs to be considered is unlike traditional cryptocurrencies, CBDCs have not entered the “rollercoaster ride” that is being a digital currency. There are so many Cryptos, and the decentralized nature of them gives us a lot of insights and informs us about the things that should be avoided and looked into. It has taken a lot of time for transactions to become secure with new cutting-edge technology. The analogy I would use is wanting a nice car and instead of purchasing it, you try to build your own car knowing you don’t have any prior experience. Taking the power away from financial authorities is also one of the reasons cryptocurrencies have been successful. CBDCs are also not looking to replace physical currency but looking to be an addition to existing assets.
Countries that are trying to create their own CBDC!
China has been at the forefront in terms of experimenting with a digital currency. It has also doubled down on maintaining control and getting information from its citizens without any regard to their privacy. The digital yuan does possess a threat to the US dollar, which has maintained its dominance while having underlying problems. China has released 4 types of wallets to store this digital currency while only one of them has some degree of anonymity, but when it comes to the rest, not so much.
The US is looking into CBDCs after taking note of the volatility of Bitcoin. Huge fees on transacting with fiat currencies seem pretty irrational even to financial authorities. The hunger for power (competing against China) has also been a motivating factor to create a new digital currency.
The Bank of England has also formally announced their creation of a CBDC. The governor of the Bank of England, Andrew Bailey, used to be vocal about his disregard for cryptocurrencies saying that most Crypto investors should be ready to lose all of their money. He has changed his opinions quite a bit after speaking at the Bank for International Settlements, where he said that CBDCs could lead to a fundamental change in finance and describing it as “the most fundamental innovations in the history of central banking”.
DWAYNE D’CUNHA, Writer on Medium.
Originally published at https://www.linkedin.com.