The tech space can change and blow your mind within the blink of an eye. The current disruption is in the Fintech world, which is owed to the introduction of CBDC.
CBDC, or Central Bank Digital Currency, is just what it reads: a digital currency issued by the central government of a country.
CBDC may be a centrally controlled digital currency, but it utilizes blockchain technology's architecture and partly resembles the working ecosystem of cryptocurrencies such as Bitcoin and Altcoin.
So, what is the entire bustle about digital fiat money, CBDC, and what should you look forward to? Let’s dive into the details.
While the introduction of CBDC may seem sudden to the world, it was, in fact, introduced back in 1993 by the Bank of Finland. The project included a smart card - Avant Smart Card containing legal electronic money. The project was dropped around the 2000s. But CBDC has taken up pace again with the advancement of technology and, most importantly, the rising trend of cashless economies. So, what does CBDC mean to the economies in 2023?
The Central Bank Digital Currency of CBDC is a digital form of the country’s fiat money. Simply put, it is the virtual version of the dollars or pounds you carry in your wallet. It is issued by the central bank or the country's primary monetary authority.
What makes CBDC innovative is that it runs on Distributed Ledger Technology or DLT. So, just like Bitcoin or Ether, the CBDC of a country’s currency will be digital, except it is a legal tender with a value fixed by the central authority. We’ll discuss the differences and similarities between CBDC and crypto later. But first, let’s understand the need for the emergence of CBDC and blockchain-powered finance.
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Central Bank Digital Currency was created and implemented with the motive to support the entire financial and commercial banking system of the country. The motive justifies the way CBDC works in any economy.
The CBDC system uses the ‘Pegging Method’ where each CBDC token is tied to a single fiat currency unit by 1:1, equating the values of the e-currency and paper money.
Additionally, electronic currency can use smart contracts too. It is one of the many ways in which digital blockchain CBDC works. China is one of the many countries using smart contract functionality for its digital Yuan. Creating smart contracts for e-currency can help secure transactions and reduce the need for paper contracts and checks.
Based on who gets to use CBDCs, it is divided into two types, each of which has varying features.
General purpose or retail CBDCs cater to the general public or individual businesses. These CBDCs deal with multiple small-scale transactions and are also accessible to underbanked or unbanked individuals.
Wholesale-only CBDCs are meant for use by financial institutions only. These are used for a few large-scale interbank settlements. Unlike retail CBDCs, wholesale CBDCs are only limited to authorized financial institutions.
So far, the concept of CBDC is still being researched and observed at different levels across different economies.
A basic model for using CBDC will look something as follows:
The CBDC ecosystem is designed based on a few core features and fundamental principles.
The CBDC runs as per the rules of DLT technology, which is why it is often equated to popular cryptocurrencies like Stablecoins. However, CBDC and cryptocurrencies have several major differences.
For starters, cryptocurrencies are built on public blockchains. As for CBDC, it is built on a private blockchain that only allows authorized participants. One of many blockchains approved for CBDC development is Corda.
Secondly, cryptocurrencies work on a permissionless ecosystem. CBDC is very explicitly a centrally issued and controlled currency. Therefore, while it uses the decentralized public ledger technology, it is controlled by the central bank or financial organization.
Lastly, cryptocurrencies are infamously known for their volatile nature. Its value can change very quickly, leading to loss or even gain. CBDC, on the other hand, has no liquidity or credit risk.
As many as 103 countries have embraced the CBDC system of finance. Many countries have already gone through a trial run for the sake of research to make the system error-free. Here are some of the most well-known CBDC projects around the world.
|e-HKD||Proof of Concept||Hong Kong|
With the global economy leaning towards a more efficient, transparent and immutable form of finance, CBDC does look like the modern future. It is a blockchain-based currency that is not decentralized. It’s a novel concept with use cases across different areas of business and sales. Central banks have joined the best blockchain development company to create what we are now referring to as e-currency. Only time will tell how this turns out for the financial institutions and the general public.
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