What is CBDC Crypto?
When we talk about Blockchain and crypto, the first thing that pops up in our minds is Bitcoin. But to be honest, the blockchain technology has evolved way beyond that! Today, blockchain technology is being used to create highly advanced products like Central Bank Digital Currencies or CBDC. But what exactly are CBDCs, and how do they differ from popular cryptocurrencies like Bitcoin and Ethereum? What is their importance in the future? Time to find out!
What Are CBDCs?
CBDCs are nothing but the digitized versions of a nation’s fiat currency. As the name suggests, the CBDCs are launched and backed by the central banks of the respective nations’ governments. But what makes it different from your standard cryptos is its control. These CBDCs are centrally controlled by a single entity, i.e., the Central Bank. Moreover, they are backed by the government and, hence, are very secure.
The best example is India’s digital rupee. This digital currency is India’s CBDC, and hence, it carries equal value as its fiat counterpart. It can be used for bank transfers and all other transactions, just like fiat currency.
CBDCs vs. Cryptocurrencies
One of the most common questions is how CBDCs differ from cryptocurrencies like Bitcoin and Ethereum. And that’s an obvious question, as both these currencies exist in digital form. So here is the difference between CBDC vs. Cryptocurrencies.
- Control:- CBDCs are centralized. This means they are fully regulated and controlled by a central authority. In most of the cases, it’s the central bank of that particular nation. However, cryptocurrencies like Ethereum and Bitcoin are decentralized. This means they do not have any controlling body above them. Instead, they operate on a distributed network of computers.
- Purpose:- The sole idea is to create cryptocurrency as an alternative to traditional currencies. The idea is to offer a currency that’s not controlled by any single entity. Cryptocurrencies offer a decentralized form of currency that is acceptable to all. On the contrary, CBDCs are designed to complement existing fiat currencies. The goal behind their creation is to make transactions more efficient and secure.
- Stability:- CBDCs are backed by the government. So, they are stable, just like their fiat counterparts. However, cryptocurrency can be volatile as its prices fluctuate based on market demand.
How CBDCs Work?
CBDCs use Blockchain and Distributed Ledger Technology (DLT). This fusion helps offer more security and transparency to the transactions. You might be aware that Blockchain is a type of DLT where transactions are recorded in a decentralized and immutable ledger. Here, each transaction is verified by a network of computers (nodes) before being added to the Blockchain.
Let’s say you are using a CBDC to make some transactions.
Here, the transaction will be broadcast to the blockchain network. This network then verifies it via multiple nodes. And once the transaction is recorded on a blockchain network, it’s impossible to alter or delete it. This entire process makes sure that all transactions made via this particular Blockchain are secure and transparent.
Issuance and Regulation
A central authority of the nation issues and manages the CBDC. In most cases, this central authority is the Central Bank. Central Banks regulate the CBDCs just like their fiat counterparts. This ensures that the CBDC is backed by the nation’s reserve and aligns with the nation’s monetary policies. The issuance of CBDCs is managed by the central bank, which plays a crucial role in maintaining the stability and trustworthiness of the currency. Central banks regulate CBDCs in much the same way they regulate physical money, ensuring that the digital currency is backed by the country’s reserves and is in line with monetary policy.
User Interaction
This is the most important part. If no one is using a CBDC, it makes no sense to launch it, right? Thankfully, CBDCs are designed in a way that they can be used just like other cryptocurrencies. Users can use them through digital wallets and mobile apps to make everyday transactions. In the future, there is a strong possibility that these CBDC wallets will be linked to your bank accounts or can be operated independently. This will give users much-needed flexibility.
Why Central Banks Are Interested in CBDCs?
Now, this is a very important question. There is a general perception that cryptocurrencies are Central Banks’ Kryptonite! So you’ll often see Central Banks across the world tugging a war with cryptocurrencies. But when it comes to CBDCs, these central banks have become too interested in them! Why? Here are the reasons:
Monetary Policy Implementation
If central banks issue CBDCs, it becomes super easy for them to manage their supply and interest rates. Central banks can manage inflation, stabilize the economy, and respond to financial crises better if they are using the CBDCs.
Financial Inclusion
Another reason why central banks are so interested in the CBDCs is financial inclusion. CBDCs can offer financial services to unbanked and underbanked populations. This is extremely helpful in the case of developing countries where traditional banking has a limited presence. Central Bank of Nigeria launched the eNaira for this specific purpose only.
Payment System Efficiency
CBDCs can make payment systems more efficient. But how? Well, they reduce the transaction costs and settlement times. Traditional banking systems can take more time to process transactions. If the transactions are across borders, this issue becomes even more challenging. But with CBDCs, transactions have become super fast and super easy.
What are the Risks and Challenges of CBDCs
CBDCs offer a great benefit, but they are not immune to the risks. There are certain challenges that might prevent the CBDCs from getting popular quickly. Here are a few of those reasons:
Privacy Concerns
This is one of the biggest challenges. The core foundation of cryptocurrencies is privacy! However, as the CBDCs are issued and managed via a central authority, there might be severe privacy concerns. With more surveillance and increased data collection, each CBDC transaction can be tracked, putting individual privacy at risk.
Cybersecurity Risks
As with any digital technology, CBDCs are vulnerable to cybersecurity threats. There is always the risk of hacking, data breaches, and other cyberattacks on the CBDCs. If the issuing central bank fails to deploy hard-core security measures, people might lose a significant amount of their money in the form of CBDCs.
Impact on the Banking Sector
The biggest threat from CBDCs is to the traditional banking sector. Commercial banks rely on deposits to fund loans, but if people shift their funds to CBDCs, banks could see a decline in deposits. This will impact their money-lending ability and, ultimately, their business.
Overall, these are some serious risks that have to be mitigated if the central banks want to move towards CBDCs. Until these issues are fixed, CBDCs might not become mainstream.
Which CBDC Projects are Functional as of now?
A lot of nations are already exploring or implementing CBDC projects. Their goal might be different, but the concept and underlying technology are similar. Let’s check out some of these examples:
India’s Digital Rupee
India is the world leader in digital payments, with almost half of the global instant transactions happening in India. So, it’s no surprise that the country made quick moves to adopt the CBDC. The Reserve Bank of India (RBI) came up with the idea of a Digital Rupee. This CBDC will be designed to operate on online as well as offline modes!
Key Milestones:
- In December 2022, the RBI launched a pilot for the wholesale digital rupee.
- The pilot for the retail digital rupee followed in 2023, focusing on small-value transactions.
China’s Digital Yuan (e-CNY)
China is also one of the leading countries in the CBDC race. Its plan to launch the digital yuan (e-CNY) is already in the advanced stages of development. The digital yuan has been tested in several pilot programs across major cities. Gradually, China has integrated it into everyday transactions.
Current Status:
- As of 2024, millions of people use the digital yuan for daily transactions.
- The Chinese government is expanding its use to include more sectors, such as transportation and utilities.
Nigeria’s naira
Nigeria’s eNaira is one of the first to have successfully launched CBDCs. It was introduced in 2021 and has been gradually gaining traction in the local economy.
Impact:
- The idea behind eNaira is to boost financial inclusion and make it easier for Nigerians to access digital financial services.
- It has also helped reduce the reliance on cash transactions, promoting a more digital economy.
What does the future hold for CBDCs?
The future of CBDCs seems positive as a lot of countries are looking to utilize its potential. However, there are certain challenges that remain to be tackled. However, as CBDCs become more widespread, they might bring some fresh changes to the current financial system. They will offer a more efficient and inclusive form of money.
Given the fact that India is leading digital payments, India’s move towards the adoption of the rupee might be fast and effective. As RBI is leading the initiative, there might be plenty of opportunities for traders and investors here.
As the project has moved beyond the pilot, it’s expected to go live soon. Once the feasibility tests for the retail and wholesale sectors are over, the rupee will be ready as an excellent investment and trading asset.
Financial institutions are likely to develop products specifically tailored to the e-Rupee. This might include something like e-Rupee-based investment alternatives. Additionally, the e-Rupee could impact how you approach asset allocation.
Wrapping up
RBI is continually expanding the e-Rupee project. And this will surely shape the future of finances in India and abroad. If you are a retail investor or trader, the implications will be widespread. So stay tuned, stay informed, and make the right decisions. Always choose a reliable platform when trading or investing in any form of digital asset, including CBDCs. Let’s see what the future brings up for the CBDCs. Till then, follow us on LinkedIn, Twitter, and Facebook to get the latest updates on all Crypto- related news.
