What Is a Central Bank Digital Currency (CBDC)?
If you have been anywhere near the crypto industry, you must have heard of central bank digital currencies (CBDCs). They are digital currencies because they are built on blockchain technology, but they are not decentralized digital currencies.
Unlinke Bitcoin for example which is decentralized and nobody has superior control over, a central bank digital currency is issued by the central bank of a country, and the bank has absolute control over its use.
In this guide, we discuss what central bank digital currencies are, how they work, their advantages and concerns around them.
What are CBDCs?
Governments around the world are mostly against the use of cryptocurrencies, except for a few countries that have publicly embraced crypto. However, they cannot deny the efficiency and speed of cryptocurrencies that make them excellent for both local and cross-border payments.
This is the opposite of fiat currencies which are limited by geography, are slow to use, among other issues. Seeing that cryptocurrencies may replace their fiat currencies and they cannot ban or stop their use, the governments have resorted to the use of CBDCs as alternatives to cryptocurrencies for their citizens.
They therefore invented cryptocurrencies that are centralized and controlled by the government, even though they keep permanent transaction records as well. Since they are programmable, the government can decide on what you can or cannot use a CBDC for.
For example, there was a recent discovery about the proposed Brazilian CBDC. A blockchain developer reviewing the codes used to build the CBDC said it has built into it the ability for the government to seize funds and reduce users’ account balances.
This has led to speculations that CBDCs are instruments of control that the government is using on the people.
How CBDCs work
CBDCs are issued directly by the central bank, and can be monitored directly by the central bank. In the legacy banking system, transactions from individuals are not seen by the central banks, but rather as transactions between one commercial bank and another.
However with a CBDC, the central bank can directly determine what you’re buying with your money. Remember it is programmable money? That means the government can decide that you can’t buy certain things with your money and they can seize your funds if you disobey.
Advantages of CBDCs
CBDCs aren’t completely a good idea, but they are also not entirely bad. The following are some of the advantages of CBDCs.
- Financial inclusion
This is the main reason governments are using it to back their proposals for CBDCs even though there may be other motives. With a CBDC, anyone can create a wallet and join the banking system even without a smartphone. This is particularly useful in third world countries where most citizens have no access to banking services.
2. Effective crime fighting
CBDCs are as transparent as regular cryptocurrencies, and on top of that can identify the user. This means you cannot use it for criminal activities without being found out. Because of this, it is an effective way to combat crime and have a saner society.
3. Faster transactions
Since they are built on blockchain technology, they facilitate faster transactions, reducing transaction time.
4. Easy cross-border transactions
With CBDCs, it could be easier to carry out international transactions compared to the current system. This also reduces the cost of transactions effectively.
Concerns around CBDCs
As much as CBDCs have some positive sides, there have been serious concerns surrounding them. For example, some experts have argued that it could become an instrument of control as is the case with the proposed Brazilian CBDC.
While they are also built on blockchain technology, crypto supporters have emphasized that CBDCs are nothing like crypto, since they offer centralized and absolute financial control to the government, which can be used to stop any public revolt against the government. This can take away freedom of speech which is a fundamental human right
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