To the uninitiated, the technologies behind CBDC – central bank digital currencies – and cryptocurrency might sound similar. They are both digital currencies, after all. But to conflate the two is vastly misleading. Even if CBDCs adopt distributed ledger and blockchain aspects at the design level, they will in no way provide utility in the decentralised finance (DeFi) or Web 3.0 spaces.
Because so many countries are researching ways to transition to digital currencies, it’s important to understand what they are and what they mean for society.
A CBDC is simply digital fiat
- A central bank digital currency is the digital form of a country’s fiat currency.
- A CBDC is issued and regulated by a nation’s monetary authority or central bank.
- As a centralized form of currency, they may not anonymize transactions as some cryptocurrencies do.
The introduction and evolution of cryptocurrency and blockchain technology have created interest in cashless societies and digital currencies. Thus, governments and central banks worldwide are exploring the possibility of using government-backed digital currencies. When, and if, they are implemented, these currencies would have the full faith and backing of the government that issued them, just like fiat money.
CBDCs could decrease the maintenance a complex financial system requires, reduce cross-border transaction costs, and provide those who currently use alternative money transfer methods with lower-cost options.
Important! A CBDC also provides a country’s central bank with the means to implement monetary policies to provide stability, control growth, and influence inflation.
CBDCs might appear to be the gateway to digital currencies when in reality “they’re just a different flavour of fiat. CBDCs do not solve any of the fundamental problems of traditional fiat and only serve to further entrench the interests of central banks.
A working CBDC would share none of the trustless, permissionless or decentralised principles that crypto is founded on. Some fear the exact opposite. They lack the ideals that cryptocurrencies were founded on and are nothing more than a government tool to extend power and control over the currency. CBDCs strip away privacy, personal sovereignty, and decentralisation.
Types of CBDCs
There are two types of CBDCs, wholesale and retail. Wholesale CBDCs are primarily used by financial institutions. Retail CBDCs are used by consumers and businesses, much like physical forms of currency.
Is CBDC a Cryptocurrency?
Though the idea for central bank digital currencies stems from cryptocurrencies and blockchain technology, CBDCs are not cryptocurrencies. CBDCs are controlled by a central bank, whereas cryptocurrencies are almost always decentralized, meaning they cannot be regulated by a single authority.
Is CBDC Based on Blockchain?
CBDCs can be based on blockchain, but they do not need to be. The Federal Reserve Bank of Boston and Michigan Institute of Technology’s Digital Currency Initiative found in their research that distributed ledgers could hinder the efficiency and scalability of a CBDC.
Will CBDC replace Cryptocurrency?
Unlikely, since they serve different purposes, although CBDCs will undoubtedly have an impact on the cryptocurrency sector.
