Future Of Online Payments With Blockchain: Digital Blockchain CBDC

CBDC On Blockchain - Moving A Step Further in Fintech

By Suffescom Solutions

August 30, 2023

CBDC On Blockchain - Moving A Step Further in Fintech

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.

The Rise Of Central Bank Digital Currency

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?

What is Blockchain CBDC?

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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Major Factors Contributing To The Rise Of CBDC

Here are a few that make the top of the list:

  • The increasing inclination toward cashless economies, especially after the pandemic.
  • To improve financial inclusion and reduce the number of civilians with little access to financial services. The structure of CBDC is designed to remove financial barriers such as transaction costs and minimum balance accounts that forced the unbanked population out of the records.
  • Reduce maintenance costs of complex transactional systems, money printing costs and cross-border transaction costs.
  • Improve privacy and financial security of consumers and businesses.
  • To help improve the economy's stability, control growth and influence inflation.
  • Better implement fiscal and monetary policies.

The Blockchain CBDC Trend (2023 Stats)

  • As of June 2023, 11 countries have adopted CBDC, 53 are in advanced planning stages, and 46 are in the research phase.
  • The value of transactions processed via CBDC is expected to grow by 260k% between 2023 and 2030.
  • Over 130 countries, which constitute 98% of the global economy, are exploring central bank digital currencies.

Why Digital Blockchain CBDC?

Blockchain technology serves as the fundamental architecture for CBDC, offering unparalleled security, transparency, and decentralization. This subsection explores the unique attributes of blockchain that make it an ideal choice for CBDC implementation. It delves into the distributed ledger system, immutability, and smart contract capabilities, emphasizing how these features contribute to the reliability and efficiency of CBDC transactions. Understanding why blockchain is the chosen technology underscores the foundation of CBDC's innovation in the financial sector.

CBDC And Blockchain Use Cases

The blend of CBDC with blockchain technology opens up many use cases that redefine traditional financial processes. There are many specific applications and scenarios where CBDC leverages blockchain to bring positive change. Examples may include cross-border payments, real-time settlement, and programmable money through smart contracts.
By examining these use cases, stakeholders gain insight into the versatility and potential of CBDC powered by blockchain, reinforcing the notion that this innovative combination goes beyond the simple digitization of currency.

Why Is CBDC On Blockchain Beneficial?

  1. Creates a Trusted System: The central bank maintains control over the digital currency while ensuring the security and privacy of authorized users.
  2. Underpins Compliance: With a permissioned and scalable system, the CBDC system can be programmed to comply with the central regulations and policies.
  3. Data Availability: With a distributed ledger, the central system has easy and transparent access to all the transactions on the permissioned network.
  4. Easy Authentication: CBDC on blockchain creates a more secure way of digital verifications, which can further be integrated with other systems, allowing for better interoperability.

How Does CBDC Work?

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.

Let’s understand how it works in detail.

Types of CBDC

Based on who gets to use CBDCs, it is divided into two types, each of which has varying features.

General Purpose or Retail CBDCs On Blockchain

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.

These are further of two types:

  • Token-based retail CBDCs are accessible via private or public keys.
  • Account-based retail CBDCs that are accessible via digital verification.

Wholesale CBDCs On Blockchain

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.

How To Use Blockchain CBDC?

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 e-currency can be accessed via the app or web portal of the bank.
  • The user can upload the total amount they need to the app.
  • The app will feature digital verification features to ensure the end user is verified.
  • Choose the denomination of the e-currency in the app.
  • Use QR codes or private addresses to make transactions in CBDC.

CBDC For Financial Industry

Central Bank Digital Currency (CBDC) stands at the forefront of financial innovation, presenting a transformative opportunity for the financial industry. Unlike traditional currencies, CBDC is a digital form of a country's fiat currency issued by its central bank. CBDC profoundly impacts the financial landscape, from enhancing transaction efficiency to influencing monetary policy.

As governments globally consider or implement CBDCs, the financial industry faces a paradigm shift that could redefine how we perceive and engage in monetary transactions.

CBDC For A Secure Future Of Payments

CBDC's introduction aligns with pursuing a more secure and inclusive payment ecosystem. Digital blockchain CBDC addresses concerns related to security and inclusivity. With blockchain technology as its backbone, CBDC transactions can be executed securely, minimizing fraud risks.

CBDC promotes financial inclusion by providing a digital alternative accessible to a broader population, including those without access to traditional banking services.

Alluring Features Of CBDC

The CBDC ecosystem is designed based on a few core features and fundamental principles.

Fundamental Principles of Digital Blockchain CBDC

  • Not harm the fundamental and monetary stability of financial policies and continue to support its objectives.
  • Coexist with the different types of central bank money in the innovative financial ecosystem.
  • Promote innovation and efficient models within the financial ecosystem.

Core Features of Blockchain-Based CBDC

Instrument Features

  1. It should be as convenient as using cash.
  2. Low-cost transactions.
  3. Availability across multiple points of sale and offers online and offline transactions.
  4. It is convertible while maintaining the singleness of currency.

System Features

  1. Must have highly secure features offering resistance to cyber-attacks.
  2. Offer end users instant access to final settlement.
  3. Should offer high throughput and scalability with the ability to handle many transactions.
  4. Interoperable with easy flow of funds between different systems.

Institutional Features

  1. Strong legal framework underpinning the authority of the central system to issue CBDC.
  2. Must be compliant with the necessary regulatory standards.

CBDC vs Cryptocurrency: Essential Differences

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.

CBDC Projects Around the World in 2023

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.

Project Name
KhokaWholesaleSouth Africa
Proof of ConceptHong Kong

Is CBDC The Future?

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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