Central Bank Digital Currency (CBDC)
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These are electronic currencies that are issued by the central bank of a country. Also, its design can be token-based or account based.
The token-based design of a CBDC bears a resemblance to cryptocurrency, as the user will have to confirm the ownership of digital assets via a private key. Meanwhile, the account-based design requires that intermediaries recognize the identities of the parties involved in transactions, and keep a balanced record.
When it comes to CBDC distribution, the central bank can do so by asking individuals to open an account with them. Also, they can assign the distribution to commercial banks.
Central Bank Digital Currency isn’t cryptocurrency
Stablecoins are digital assets that appear somewhat related to CBDC nevertheless differ in a number of ways. This is because stablecoins are provided by profit-making private companies. Unlike CBDC cryptocurrencies are not backed by any government and are very volatile.
Central Bank Digital Currency (CBDC) Versus Mobile Money
Mobile money is a liability for the private financial institution, while the central bank’s digital currency is a liability for the central bank. Before the arrival of CBDC, cash remained the only way for people to use money, which was a liability to the Central Bank.
Additionally, mobile money needs intermediaries, such as banks or financial organizations, to facilitate transfer and payment. On the other hand, the Central Bank Digital Currency is developed to function peer to peer, and this almost eliminates the need for intermediaries.
Crypto Versus Central Bank Digital Currencies
Cryptocurrency was created to be non-centralized, which implies that it doesn’t need a particular authority. Contrary to this, the CBDCs are completely centralized, as the central bank is the authority that governs and facilitates transactions.
Additionally, cryptocurrencies are an extremely volatile set of digital assets, and investors’ sentiments are what determine their worth. Meanwhile, the CBDC carries the same value as its fiat equivalent and is stable in value.
Finally, cryptos’ issuance and production are governed by an algorithm and network participants, while the central bank is responsible for the issuance and control of CBDC.
Nations Using CBDCs
United States of America (U.S.A.)
In comparison with big economies around the globe, the growth of CBDC has been slow in the United States in recent years. In 2022, the United States Reserve declared that they are designing a wholesale prototype, which will be used to test the blockchain technology to know if it could provide quick and safe payments. The United States Reserve then discovered that blockchain-enabled international payments can truly be quicker and safer.
United Kingdom (U.K)
The United Kingdom is still ruminating on whether it should or should not issue CBDCs as of 2022. However, the BoE (Bank of England) later said that they have yet to make a decision about the issuance of CBDC. This year, the BoE disclosed that they will progress their research on CBDCs.
Europe (EU)
It was in June 2021 that the European Central Bank started the electronic euro and has continued to investigate CBDC retailing. Halfway into 2022, Christine Lagarde, ECB president, and Fabio Panetta, an executive board member, said in a blog post that deciding on both designs of the digital euro is still too early and that they are looking forward to completing their investigations about the digital euro by the fall of this year (2023).
After two months, Fabio Panetta hinted that the ECB might issue a CBDC in four years’ time.
China
China has made more significant progress concerning CBDC. The digital yuan has been in testing for a bit more than 2 years. The central bank of China disclosed through a financial statistics statement that as of December last year, there were 13.61 billion digital yuan in circulation. After some months, the People’s Bank of China revealed that transactions made using the electronic Yuan have exceeded the 100 billion threshold.
It is clear that China is ahead of some of the world’s largest economies when it comes to launching CBDCs.
Possible Investment Opportunities in CBDC
As many countries move toward the creation of CBDCs, there are blockchains that may benefit from collaboration with financial institutions such as banks. Blockchain projects like Chainlink may be useful in linking centralized organizations with the blockchain network. Subsequently, this will enable the transfer of central bank digital currency between private and public networks.
Likewise, projects like the Hyperledger now have some technologies that are being put to use in central bank digital currency projects. Also, projects like Algorand are bent on standing as an authority to provide retail and wholesale Central Bank digital currencies.
Traditional Companies
Traditional companies like IBM are testing CBDCs and are confident of their position in the sector. Furthermore, other companies like Microsoft will be pivotal in the design and deployment of central bank digital currencies. Tech companies have in the past collaborated with other organizations to help central banks safely test CBDCs.
Investors Take
In the coming years, the CDBC sector will be a profitable one to monitor, as many nations are laboring not to be left behind. Nevertheless, the Central Bank Digital Currency still has to overcome the challenges posed by technology, and adoption challenges. Nevertheless, nations that are able to do the best work at introducing the central bank digital currency will stand to record a lot of financial development in the coming years.
