Today’s topic is on Central Bank Digital Currency (CBDCs).
Wondering what Central Banks have to do with digital currency? A whole lot!
Central Bank Digital Currencies (CBDCs) are the digital form of a country’s fiat currency.
They are solely owned and managed by the Central Bank of that country.
As you read on in the post, you will find out more about CBDCs and why the Central Banks want to create them.
Let’s get started.
The following are the subheadings to be discussed in this post.
- What Are CBDCs?
- Why Central Banks Want To Create CBDCs
- List Of Countries Experimenting With CBDCs And Their Progress So Far
- CBDCs Future: Great Or Gloomy?
- Frequently Asked Questions (FAQs) About CBDCs
- Closing Thoughts
For easy navigation, the links to the complete details of each subheading are added to it.
You can just click and read up.
Let’s get to discussing the very first subheading at once.
What Are Central Bank Digital Currencies (CBDCs)?
As stated above, CBDCs are the digital form of a country’s fiat currency.
Unlike cryptocurrencies that have no central authority, CBDCs are controlled by the Central Bank of that country.
So, instead of printing money physically, the Central Bank issues electronic coins.
These coins are backed by the full faith of the government of that country.
The Central Banks, not your private bank, hold the liability to these coins since they are the issuers.
Simply put, CBDCs are the digital fiat currencies. Just like having digital Naira.
The CBDCs are proposed to come in 2 categories – Whole sale and Retail
This category of CBDCs are ones that will be exchanged and traded between private banks and Central Banks.
Exchanges of this sort help to streamline payments between these institutions.
It is considered the better project as it makes cross border settlement faster, cheaper, and safer.
This category contains CBDCs that are meant for the average people. They will use it for daily transactions.
It will be based on a distributed ledger technology and thus will include the features of anonymity, availability, and traceability.
Retail CBDCs help to reduce the costs of cash printing and management.
But we have fiat currencies for the Central Banks to control. Why go ahead to try something digital?
Read about their reasons for that below.
Why Central Banks Want To Create CBDCs
Reason 1 – Threat of Cryptocurrencies
The emergence of cryptocurrencies posed a great threat to the present day traditional banking system (which of course, is overseen by the Central Bank).
They are frustrated because they are not calling the shots any longer. They are also a bit concerned about the possibility of scams, theft, and hacks.
And because this is way beyond their control, Central Banks started contemplating the idea of digital currencies.
This will be their own version of cryptocurrencies; one that they can regulate.
It will serve as the country’s digital fiat that will be backed by a suitable amount of monetary reserve.
Each CBDC unit will serve as a secure digital instrument equivalent to a paper note.
It will also be distinguishable to avoid imitation (just like paper note have their serial numbers).
Since it is still the Central Bank that is issuing it, it will work alongside other forms of regulated money like coins, notes, and bonds.
Reason 2 – Digital Services For The Unbanked
Some Central Banks see it as a way of providing digital services for the unbanked.
This is because their will be no need to own a bank account or have a minimum amount to maintain your account.
Reason 3 – For Economic Surveillance
Central Banks seek to create CBDCs partly because it is a digital currency that is controlled by them.
And as such, the movement of money can be tracked. With this data, the Central Banks will learn how funds are allocated.
This will further allow for better tax collection and policy making.
Below, you will find a list of countries that are experimenting with CBDCs.
List Of Countries Experimenting With CBDCs And Their Progress So Far
|S/N.||Country||Started||Progress So far|
For a more comprehensive list and their progress thus far, check out this post.
Moving on, we will look at what the future holds for CBDCs.
CBDCs Future: Great Or Gloomy?
I will say the future of CBDCs is great and I will state the reasons for my assertion.
For starters, let me pedal back a bit to remind you of the new normal – the post COVID 19 era.
The pandemic got everyone doing things differently and mostly, virtually.
Most transactions are now done online and this is a sign that the world is going cashless.
This means that CBDCs will have a very great role to play in the financial ecosystem in years to come.
Not just that, we know people are always concerned when it comes to security.
With the Central Banks backing CBDCs, there is a level of security that comes with it.
Fraud will be checkmated as there will be a higher level of control and accountability.
This is against what we have in cryptocurrencies where not even a single authority is in charge.
Again, this will help greatly with cross-border remittance such that workers abroad can easily send funds home.
It will also broaden financial inclusion so that individuals need not a bank account but an internet connection to access funds.
I know there are questions bordering around:
- the regulation of CBDCs
- its interoperability with existing currencies, and
But these are things that I believe will be sorted out when CBDCs go mainstream.
Definitely, things will be put in place to surmount the challenges posed.
Finally, with more and more countries venturing into CBDCs, I am optimistic that it will go live in many countries in the nearest future.
I answered some of the questions you might have about CBDCs in the section below.
Frequently Asked Questions (FAQs) About CBDCs
I will say this depends on the country.
For some countries that are already on the cashless path, it will become a replacement for its fiat currency.
But for the ones that still have cash flowing around, it will become a supplementary form of money.
I am not certain of this.
This is because many countries see blockchain as a harbinger of solutions while others view it as something that threatens their control over things.
So for countries that view it as a good thing, they can use it. Countries that think otherwise will go ahead and work with another technology.
Cryptocurrencies: These are digital assets that are decentralized and are backed by cryptography.
Stablecoins: These are cryptocurrencies whose values are pegged to an external asset e.g USDT which has its price pegged to the USD.
CBDCs: This is the digital money that is issued by Central Banks.
The main thing here is control. While CBDCs have the Central Banks calling the shots, the others are decentralized.
Follow me now to the concluding part to wrap up this post.
CBDCs are the Central Banks’ version of cryptocurrencies.
Whether or not a country will have to go ahead and create one is up to the authorities.
They will have to weigh the benefits and challenges involved depending on its peculiar circumstances.
With that, we end the discussion of today on CBDCs. Hope you enjoyed reading through?
It’s time for you to let me in on your thoughts concerning CBDCs.
From the progress report so far, which of the countries do you think will launch their CBDCs first?
With the Feb. 2021 CBN Crypto ban still on, do you see the Central Bank in Nigeria looking the CBDCs way?
Do you still have questions asides from the ones I answered above?
Let’s have your replies in the comment box below.
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