CBDCs Governments’ Attempt to Keep Reins.
Blockchain is one of the most talked about topics, and rightly with features that aim to empower individuality, it is here to stay. One such feature of blockchain is decentralization, i.e, demolishing the needs for centralized organizations by laying down infrastructure for peer-to-peer transfers. Cryptocurrency is one such structure of the blockchain, providing a platform for P2P transactions without the involvement of a 3rd party verifier. It technically dries the government of its right to control the economy and marks a concern for them. Thus coming up with a centralized digital currency is a smart move from the governments to take on cryptocurrency.
What is CBDC?
CBDC or Central Bank Digital currency is the digital form of a country’s fiat currency issued by monetary authorities or central banks. CBDC, in the simplest terms, is the digital currency of a nation backed by the central bank and is equivalent to the nation’s currency in circulation. For example, One Dollar Note/Bill is equivalent to 1 Dollar CBDC.
Origins of CBDC
To understand the idea and origin of digital currency, we need to understand the origin of currency in general. However, we won’t go too far back to the barter system, moreover, for now, the origin of fiat currency and understanding will do the trick. Fiat currency is basically the government-issued currency without any backing of collateral such as gold and silver (past forms of value derivation) but acts as the legal tender for exchanging value and services within the country.
Fiat initially was in the forms of notes and coins (physical) however, with the growth of technology, another currency shaped itself digitally, popularly called Cryptocurrency. With innovation and technology, decentralized crypto completely disrupted modern-day finance, inspiring authorities to launch government-backed digital fiat currency or CBDCs.
Benefits of CBDCs
CBDCs have multiple benefits that are offered by blockchain technology and cryptocurrencies as well, however, let’s look at some aspects that are lucrative for adopting CDBCs.
- Elimination of third-party risk: At present, fiat money is held by commercial banks which are regulated by Central Banks. This inclusion of a third party brings in the risk, however, a CBDC eliminates the risk of bank failures by directly interacting between the users and the central bank. Any risk that remains in the system rests with the central bank.
- Inclusion: The CBDC will be accessible to people who do not have access to banks in rural areas because of various reasons. Thus, it will bring in a feeling of inclusion among the people by including them in the country’s financial systems.
- Low cost of infrastructure: CBDC reduces the cost of implementing a financial structure within a country to bring financial access to the unbanked population.
CBDCs Vs Cryptocurrencies
Cryptocurrencies are unregulated and decentralized, leading them to be highly volatile. Its price is determined by different factors such as demand and supply, market sentiments, and many more, which makes it unfit for day-to-day usage. This volatility could cause severe financial stress in many households and affect the overall stability of an economy.
On the other hand, CBDCs would reduce the risks of using digital currencies in their current form as they are backed by a government and controlled by a central bank. CBDCs are designed to be similar to cryptocurrencies, but they may not require blockchain technology or consensus mechanisms making them a bit less transparent but surely more stable.
How Government benefits
It is the topic that should have motivated you to read this article. So, without making you wait for more, let’s jump onto it. CBDC is a centralized currency, therefore, making decentralization tedious to pursue. Decentralization is one of the key aspects that makes CBDC so popular. It carves the route for the people in a democracy to take power into their hands while no authority in power would be interested in losing its control, bringing CBDC to play.
The second key benefit to governments is the power to monitor people’s data, such as transaction details, wealth, social media accounts, and other private information. With the blockchain and WEB3, they might lose this as well. Thus, CBDC acts as a starting point for the governments to transition themselves digitally and hold firm onto their power.
So, now that you know what a CBDC is and how its different aspects might affect us. Let us know, what you think about it, and keep following us for more such content.
Ashmeet S. Kharbanda is the Marketing Executive at NonceBlox Pvt. Ltd. and the founder of the YouTube Channel – Litpreneur. He’s a keen reader and writer who loves talking about Blockchain, Web3, and Finance.