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Wednesday, July 6, 2022

What is a CBDC?

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In simple terms, a CBDC is a government-backed, owned, and operated currency that is legal tender, and as the landscape of digital finance evolves, governments are beginning to take the concept of digital currency very seriously, and it’s about time.The Bank for International Settlements (BIS) recently published their annual economic report which somewhat dismissed cryptocurrencies and stablecoins due to their volatile, energy inefficient, and speculative qualities, also concluding that Bitcoin has “few redeeming public interest attributes when also considering its wasteful energy footprint.”The BIS report also described stablecoins as more of an “appendage” to legacy financial systems, and not necessarily the bank-killing revolutionary game changer they are often touted to be. Whilst that sounds like a bit of an insult, appendages tend to generally be good things to have, especially if they can coexist.

Which Countries are Experimenting with CBDCs?

There are efforts underway to create CBDCs, some are using blockchain, some are not, so let’s take a quick look at a few examples of what’s happening around the world right now, starting with China, who seem to be pioneering the non-blockchain CBDC.

China

The nation has held a pretty harsh stance on Bitcoin and cryptocurrencies since the beginning, despite being responsible for the majority of Bitcoin mining activity to this date.They have banned the trade of cryptocurrency, and very recently began cracking down on mining operations. However, the digital yuan (e-yuan) is currently being tested across various districts of China, which is now supposedly making its way to Beijing.

Europe

With the so-far successful rollout of the e-yuan, every other major trading block is beginning to consider it a threat, and in Europe there is a small sense of panic amongst some officials. Recently the head of France’s central bank described Europe’s sovereign control over its money to be “at risk” if it falls behind in the CBDC race.

Israel

Reportedly, the Bank of Israel is using Ethereum technology to trial their own digital shekel, which was originally supposed to be built on a private version of Ripple’s XRP ledger.

Brazil

Recently the nation’s central bank, Banco Central do Brazil (BCB) announced plans for a CBDC after a meeting with Ripple Labs.So, there you have it, “digital first” has finally made its way to our wallets, over the next five years or so, expect to see CBDCs introduced, as well as the proliferation of stablecoins.

CBDC FAQ

Why have so many countries been exploring CBDCs recently?

Bitcoin has grown rapidly since it launched in 2009, inspiring a slew of offspring currencies and financial products using a similar underlying technology. But it wasn’t until 2019, when Libra, the Facebook-backed digital currency project based on blockchain technology, was unveiled that governments around the world began to more seriously explore whether they should be adopting similar technology. 

They began to wonder if a currency created by a company as widespread and powerful as Facebook could challenge government control of money. In response, governments accelerated exploration of whether they can incorporate similar technologies into their national payment systems.

Will CBDCs replace the money we use today?

Most countries see a CBDC as a supplementary form of money, not necessarily a currency that will replace the existing infrastructure.

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