Misunderstanding of Central Bank Digital Currencies
A term that has begun to grow very common within the crypto space are CBDC’s, Central Bank Digital Currencies, so what is the purpose of CBDCs? CBDCs are similar to stablecoins issued by central banks.
What Are They?
So are banks issuing their own cryptocurrencies? Well, technically not. While CBDCs are still in quite early development with only China beginning testing, they will be similar to cryptocurrencies in the sense they will run on a blockchain. But that’s likely where the similarities end. The chain will likely be a private centralized chain with no privacy, that allows central banks to completely track transactions, hence why China seems to have been so excited to start this project.
Cryptocurrencies have a public ledger that is available for anyone to see all transactions that take place on the network. While still just speculation, this same rule could very likely be applied to CBDC’s. This would allow for improved monitoring of acts such as, how taxes paid by citizens are utilized to benefit the economy or wealthy individuals and institutions that participate in acts such as money laundering and illicit transactions.
The End For Crypto?
There are some critics who believe a CBDC will be the “Bitcoin killer” along with being the end of the entire crypto space. Though the argument points for these can easily be countered from a little research. Firstly, there’s the belief a CBDC will replace all cryptocurrencies as a form of payment, taking away the entire ethos of why this space began. This statement is ignorant of the fact that CBDC’s will be no different from dollars in our bank account in terms of utilization. The reason for cryptocurrencies wasn’t to simply improve transactions, it was to democratize the power to control a currency and give users true ownership of their assets.
While it is uncertain whether we will have true ownership over our CBDC’s, it’s likely we won’t. As central banks will need to use their clients’ funds in order to generate revenue. CBDCs will also still be controlled and manipulated by the Fed and governments to their own benefit, thus CBDC’s do not satisfy the needs to entirely replace cryptocurrencies. The only remote possibility of governments attempting to ban cryptocurrencies, would be to disable CBDC’s to flow from user wallets into exchanges, though this could easily be solved with peer to peer transactions and doesn’t seem likely due to the adoption for this space happening.
While most cryptocurrencies do not have to worry about a CBDC taking their place. Stablecoins potentially face risk as both are essentially digital dollars, with the difference being stablecoins being far less regulated than digital currencies offered by central banks would be. This could be a large potential risk to stablecoins, as with CBDC’s there would likely be no longer be a need for stablecoins in regulators' eyes.
What’s The Point?
Governments know they won’t be able to replace the cryptocurrency space, as that is not their plan with CBDC’s. The role of CBDC’s will be to allow for tighter monitoring of funds from citizens, while also allowing for the simplicity of transactions, allow for convenient cross border payments and financial inclusion.
By having money that is programmed virtually, it will be entirely possible to program currency to automate payments after meeting certain requirements. Thanks to smart contracts, CBDC users won’t have to make monthly payments for their credit cards, but rather can program and set smart contracts to automate these payments once there is a satisfying amount held in their wallets.
As many around the world are unbanked, the utilization of CBDC’s will allow those unable to open a bank account access to CBDC through a mobile wallet app. While the lack of privacy is quite concerning, it does allow for compliance to tax laws to be much easier to regulate, as these taxes could be programmed to be automated.
Conclusion
With the effects of the pandemic, it seems pretty clear our current monetary system has flaws that need to be addressed. From participants of economies unable to receive stimulus, to some citizens unable to purchase essential items from stores only accepting card, both issues caused by the inability of access to a bank account.
The effects of CBDC’s could potentially increase transparency in were money to both retail and institutions alike. Governments and central banks could make sure their clients aren’t making illegal purchases, while regular citizens can make sure their tax money is being used to better their economy. The global barrier of cross border payments will also be removed with the use of smart money, a common issue of one sending funds back home overseas, only for the portion received to be a fraction of the amount sent due to middlemen fees.
Aside from stablecoins, the utility of a CBDC and almost every other cryptocurrency on the market is quite vastly different. So while CBDCs can and will likely benefit the everyday lives of people in the economy, they won’t be replacing cryptocurrencies like some skeptics believe. As CBDC’s throw out the initial purpose of cryptocurrencies out the window, from a decentralization and pseudo anonymity perspective.
About Me
Hey, thanks for taking the time to read my work. I’m your average 20 year old, currently in school for Economics and Finance. Some of my hobbies consist of sports, working out and staring at price charts.
I initially began interested in the crypto space after frustrations with legacy markets. From the second I read about the Ethereum ecosystem, I fell in love. An entire ecosystem built on one platform that anybody can access? Unheard of, until now.
With how fast this space is developing, I try and find projects within this industry that show promise and potential to disrupt our modern world. All this fundamental analysis not only helps me better understand these projects better but hopefully gives you guys some newfound information!
If there are any projects you’d wish to suggest I take a look into, I’m always available on Twitter
