What Are Central Bank Digital Currencies (CBDC)?

Hundreds of years ago, value and money were measured with tangible objects like gold, silver, cowries, etc. Fast forward to today, our fast-moving world has uncovered a new form of money – Digital money.

In advanced countries, most citizens prefer digital cash to paper cash. And what’s more, the digital finance revolution seems to improve daily. More recently, we have had Central Bank Digital Currencies (CBDC), which seem to be the future of money in several nations already. But what exactly is a Central Bank Digital Currency? Why do we need them? And what countries are already using them? The answer to these questions will be discussed in this article.

What Is a Central Bank Digital Currency?

A Central Bank Digital Currency is an electronic form of money issued by the Central Bank of the State and has a monetary value that matches a country’s currency. Notably, Central Bank Digital Currencies are managed on digital ledgers and are available to all citizens. Does this mean they are any form of Digital money equal to a country’s currency? No.

Admittedly, digital money isn’t an entirely new concept. In fact, according to data from [source], only x% of Americans prefer to make payments with cash. US Citizens make most of their payments digitally or via a credit or debit card. But Central Bank Digital Currencies (CBDCs) are not just digital money held as liabilities to Commercial banks or other Payment Providers; they are liabilities of the Central Bank itself.

Benefits of Central Bank Digital Currencies

• CBDCs can improve interoperability for payment providers and services. With CBDCs, retail and wholesale outlets can operate in conjunction with each other without third parties.
• Central Bank Digital Currencies support offline functionality. Although CBDCs can’t function perfectly in an ecosystem without connectivity, users can still make payments with a preset value when the network is interrupted. Transactions can then be finalized once connectivity has been restored.
• CBDCs offer Near-instant Transaction processing and validation. In some nations, financial transactions and settlements could take forever. Removing an intermediary in transaction processing always makes payments almost instant.
• Central Bank Digital Currencies will make it easier for nations to curb fraud. Since CBDCs operate on a distributed ledger, tracking financial transactions will be seamless. At the same time, users will still be offered a level of privacy.
• With CBDCs, government agencies and private entities can allocate funds to specific needs. CBDCs can be programmed to be precisely utilized in precise industries like the sports industry, food industry, or transportation industry. Thus, when funds are disbursed to specific industries, the purpose will be met as the restrictions prevent funds from being siphoned.

Differences Between Central Bank Digital Currencies and Cryptocurrencies

CBDCs and cryptocurrencies are digital currencies, and both could exist on the blockchain. However, they have striking differences.

1. Decentralization: Most cryptocurrencies are decentralized. Interestingly, decentralization is one of the sole reasons for creating Bitcoin and other cryptocurrencies. The possibility of having peer-to-peer electronic cash that would not be controlled by the Fed or Central Bank of any nation is what die-hard crypto fans desire.

   Contrary to that, CBDCs are not decentralized in any way. They are a more centralized form of digital cash. CBDCs can be controlled, tracked, and monitored by a single entity, the Central Bank.

2. One Country, One CBDC: Each nation can only have one CBDC. Although, countries with plans of releasing a CBDC in the future are working towards making this digital form of money interoperable. Settling international payments seamlessly using Central Bank Digital Currencies would be possible. However, only one official digital currency can be issued by the Central Bank or Fed in one nation.

   Unlike CBDCs, multiple cryptocurrencies can be used in one nation. Whether it is Bitcoin, Ether, or Gate token, cryptocurrencies can be used freely.

3. Cryptocurrencies are Open-Source: The source code of cryptocurrencies is freely available and can be redistributed or modified. When Bitcoin was created, developers created forks of the digital currency. These forks include Bitcoin Cash, BTC Gold, and Bitcoin Classic.

   Central Bank Digital Currencies are not open-source and cannot be forked like cryptocurrencies.

4. Anonymity: Although cryptocurrencies run on the blockchain, which is a transparent digital ledger, they guarantee a level of anonymity to users. Wallet addresses do not reveal the personal name, house address, contact, and tax information of users. The identity of a wallet owner may be concealed forever.

   For Central Bank Digital Currencies, every user’s biodata is available and accessible by the Central Bank. You’ll also need to reveal personal details when using CBDCs to settle payments.

Countries Leading the CBDC Innovation

According to the Atlantic Council Geoeconomics Center, 112 nations representing 95% of the global GDP are already exploring CBDCs. Almost all the G20 nations are already exploring or have developed a Central Bank Digital Currency. So far, 11 countries have already successfully launched a CBDC. Some countries with an operating CBDC include the Bahamas, Cambodia, China, and Jamaica.

Source: Atlantic Council Geoeconomics Center

The Bahamas CBDC (Sand Dollar)

The Bahamas leads the charts in CBDC adoption. In October 2020, the Bahamas launched the Sand Dollar, the nation’s CBDC making it the first country to have a government-backed DLT currency. Since the launch of the Sand dollar, though, the Bahamas has struggled to stir massive utilization of its digital currency.

Earlier this year, the IMF encouraged the Bahamas government to accelerate its education campaigns on the Sand dollar. Notably, the Sand dollar has the potential to improve the financial inclusion of Bahamas citizens and achieve interoperability among payment channels.

China’s Digital Yuan

China kicked off its CBDC trial in Q2 2020. Although e-CNY is widely known, the nation’s digital currency is yet to be utilized in all states. China is utilizing the digital yuan on a small scale, intending to expand to more states in 2023.

In October 2022, 4.6 million Chinese merchants adopted the new form of currency, and over 261 million e-Yuan wallets were created to smooth the path of use of the Chinese digital currency. China reached another significant feat during the Beijing 2022 Winter Olympics when the country rolled out digital currency to athletes from visiting countries. The digital Yuan was accepted at several payment terminals and utilized by foreigners.

Nigeria’s e-Naira

Late in 2021, Nigeria launched its digital currency, the e-Naira. However, several citizens have turned down the opportunity of adopting digital currency. To promote the adoption of e-Naira, the Central Bank of Nigeria recently proposed some stringent laws for using cash and ATMs. Slim withdrawal limits are set to be imposed on cash transactions within banking facilities and across ATMs. Perhaps, the new cash restrictions will prove to be a turning point for the adoption of Nigeria’s CBDC.

Jamaica’s Jam-Dex

Jamaica joined the CBDC train in June 2022. The nation’s CBDC was named Jam-Dex, coined from “Jamaican Digital Exchange.” Jam-Dex has been in its pilot testing phase since 2021. According to Jonathan Dharmapalan, the CEO of eCurrency, Jam-Dex will serve as a medium of exchange, a tool for debt settlement, and a medium of accounting for Jamaicans.

Why Central Bank Digital Currencies Are Not a Threat to Cryptocurrencies

Financial experts have proposed several assumptions regarding the CBDC adoption and its impact on the cryptocurrency market in the last few years. Notably, Central Bank Digital Currencies are not a roadblock to crypto adoption. Both cryptocurrencies and CBDCs can exist in the financial ecosystem.

While cryptocurrencies are purchased mostly as investments to earn higher returns, digital currencies owned by countries are expected to remain stable or depreciate slightly due to inflation.

From another perspective, the massive adoption of Central Bank Digital Currencies will amplify the blockchain utility, leading to concept validation. Cryptocurrencies remain deflationary by nature, while fiat and digital monies owned by nations remain inflationary.

Conclusion

The development of Central Bank Digital Currencies is still in its infancy stage. Although many nations have indicated an interest in developing and piloting this new form of money, only a few have been met with success.

With the extra benefits that come with Central Bank Digital Currencies, the innovation has proven too hard to ignore. Even nations that frown against blockchain-based cryptocurrencies are investing huge sums in experimenting with CBDCs. If CBDCs live up to the expectations, we can expect a world with lesser physical cash, broader demographic inclusion, and lesser financial obstacles in the next decade.