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Digital Dollar Domination: Discover the Global Surge in CBDCs

Daniel Urbánek
Daniel Urbánek
July 25, 2023
News, Education

Witness the financial future unfold as Central Bank Digital Currencies (CBDCs) take center stage. Discover why nations worldwide are turning to digital money.

In the last few years, the financial realm is experiencing an unprecedented shift. The movement away from traditional paper currencies toward a digital future is accelerating, driven by technology's relentless advance and the changing needs of the global economy. This article uncovers the global rise of Central Bank Digital Currencies (CBDCs), their relationship with cryptocurrencies, and the potential advantages and challenges they bring. Delve into this fascinating topic and understand why your financial future could very well be digital.

TL;DR:

  • CBDCs are digital currencies issued by central banks, rapidly gaining global popularity due to factors like declining cash use and the rise of crypto.
  • While CBDCs and cryptocurrencies share the digital aspect, they differ significantly. CBDCs are state-issued, while cryptocurrencies are usually decentralized.
  • The implementation of CBDCs varies globally, from direct accounts with the central bank to reliance on private-sector banks for distribution and maintenance.
  • CBDCs offer potential benefits, such as reduced costs and heightened security, but also bring challenges like technological instability and traceability, impacting privacy and taxation.

What are Central Bank Digital Currencies (CBDCs)?

Central Bank Digital Currencies (CBDCs) are the digital version of a nation's fiat currency, issued and regulated by its central bank. Unlike traditional cash, CBDCs operate on a digital platform, representing a stable value directly linked to the underlying fiat currency. 

Essentially, CBDCs offer the same functionalities as cash, like storing value and facilitating transactions but in a digital form. Examples of central banks exploring or implementing CBDCs include the US Federal Reserve System, the Bank of Japan, the People’s Bank of China, and Germany’s Deutsche Bundesbank.

The Rapid increase in popularity

In 2023 alone, a whopping 65 countries have been busy cooking up their own versions of CBDCs. Some states are still in the research phase, while others are already deploying the first versions of their CBDCs. That's most of the globe's economy getting on board the digital currency train.

A map of CBDCs development by country.

Leading the pack is China with its digital yuan, known as e-CNY. They started testing it in 2019 and it quickly took off. By 2022, people were using this digital money to buy stuff at the Beijing Olympic Games! But it's not just about buying your favorite team's jersey - hundreds of millions of transactions have already been carried out using e-CNY.

Jamaica deserves a shout-out, too. In June 2022, they launched the JAM-DEX, marking the first time a CBDC was officially recognized as legal money. It's still pretty basic, but hey, it's a start!

Africa is on the CBDC map as well, with Nigeria launching its own digital currency, the eNaira. Considering how popular mobile money services are in Africa, we can expect to see some exciting CBDC developments there.

Relationship between CBDCs and Crypto

Cryptocurrencies, similarly to CBDCs, are also digital currencies but they're not issued by a central authority. They're decentralized and encrypted for security. Now, you might be wondering, are CBDCs just another type of crypto? Well, not exactly. Let's delve into this a bit further.

CBDCs and cryptocurrencies share some similarities. They're both digital and they both aim to make transactions faster and more efficient. But that's where the similarities end. The key difference lies in who calls the shots. With cryptocurrencies, there's no one in charge. 

Cryptocurrencies operate on a blockchain, which is like a digital ledger spread across multiple computers. On the other hand, CBDCs can also operate on a blockchain, but they are issued and controlled by a country's central bank. That means they're a digital form of the country's official currency and they're regulated by financial laws. From an ideological point of view, CBDCs stand directly against cryptocurrencies.

Aspect CBDCs Cryptocurrencies
Issuance Issued by central banks Generated by mining or staking in a decentralized network
Privacy Central banks control, track, and can influence any transaction Can be completely anonymous with no third-party permission
Supply Infinite, new resources are issued regularly Finite or infinite depends on the type of currency
Store of value Depreciating value over time May act as a deflationary asset
Ease of use Beginner-friendly, should be straightforward

Often require some level of technical knowledge

Security

Multiple levels of security measures, heavily regulated

Each user responsible for their own security

Censorship and freedom

Transactions can be potentially censored and controlled

No central authority is able to censor or ban transactions

Benefits and Drawbacks of CBDCs

In some cases, the implementation of CBDCs into the financial policy of a state can be quite controversial. On one hand, they provide practical benefits in faster payments and direct regulation, but on the other, they remove a big degree of privacy and security.

What Problems do CBDCs solve?

CBDCs can reduce the cost of maintaining physical cash, making financial transactions more efficient and cheaper. They could significantly improve the speed of money transfers, both locally and internationally. 

Plus, with the increase in digital transactions, CBDCs could provide a legal and secure means of transacting for people without access to traditional banking. Moreover, CBDCs could offer heightened security as a regulated digital currency, reducing the risk of fraud and enhancing trust in the financial system.

Concerns and Shortcomings

Cyber Security - As with any digital system, CBDCs are vulnerable to cyberattacks. If not properly secured, this could lead to significant financial losses and potentially undermine trust in the nation's financial system. It is crucial for central banks to invest in high-end security measures to protect against such risks.

Privacy - Traditional financial system is already regulated and heavily traced. That means all your transactions done online are transparent for financial companies and the government. The implementation of CBDCs would mean an even bigger invasion of privacy and destruction of financial autonomy. 

Centralization - CBDCs move the balance of power in the favor of governments, creating powerful centralized entities, which have complete control over our finances. Of course, this will depend very much on the specific government, but there definitely is an opportunity for abuse. 

Fiat currencies - Another problem of CBDCs is that they, unfortunately, inherit the bad qualities of fiat currencies, such as infinite supply and lack of inherent value. These will continue to cause further problems, only transferred to a digital form.

The Bottom Line

CBDCs have taken the world by storm, as of this time over 98 % of all the countries have announced that they are tapping into CBDCs in one way or another. The practical implementation of CBDCs has its strong sides, as well as a lot of drawbacks - overall the trend is set towards centralization. That is why we have decentralized cryptocurrencies like Bitcoin, which we may use freely. 

The anonymity and decentralization of cryptocurrencies will most probably play a huge role in counteracting the centralization tendency of CBDCs. However, with a carefully set financial environment, there is the possibility that these two fundamentally different systems may peacefully coexist with each other.

As the world gradually moves towards the implementation of CBDCs, we stand on the cusp of a financial revolution. The opportunities and challenges presented by CBDCs will play a critical role in shaping the future of finance, and it's a journey worth keeping an eye on.

Disclaimer: The content of this piece reflects the writer's opinion. This article is not intended to provide financial advice and is meant solely for entertainment and educational purposes. Investing in cryptocurrency involves significant risk. Capital is at risk, and returns are not guaranteed. Always conduct your own research.

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