Central Bank Digital Currency (CBDC)
A central bank digital currency (CBDC) uses a blockchain-based token to represent the digital form of a fiat currency of a particular nation (or region). A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country.
Understanding Central Bank Digital Currencies
Over the years, traditional banking regulatory authorities across the globe have struggled to control the growing clout of popular cryptocurrencies like bitcoin and ethereum which work on a blockchain network. Such virtual currencies have gained immense popularity, owing to their decentralized and regulation-free nature, and have become a threat to the present-day traditional banking system that operates under the purview and control of a country’s regulatory authority, such as a central bank.
There is no clarity about any suitable reserve maintenance to back up the valuations of cryptocurrencies. Additionally, the continued launch of new cryptocurrencies has also raised concerns about the possibility of scams, thefts, and hacks.
Unable to control the growth and influence of such cryptocurrencies, many leading central banks across the globe are working on or contemplating launching their own versions of cryptocurrencies. These regulated cryptocurrencies are called central bank digital currencies and will be operated by the respective monetary authorities or central banks of a particular country.
Also called digital fiat currencies or digital base money, CBDC will act as a digital representation of a country’s fiat currency, and will be backed by a suitable amount of monetary reserves like gold or foreign currency reserves.
Each CBDC unit will act as a secure digital instrument equivalent to a paper bill and can be used as a mode of payment, a store of value, and an official unit of account. Like a paper-based currency note that carries a unique serial number, each CBDC unit will also be distinguishable to prevent imitation. Since it will be a part of the money supply controlled by the central bank, it will work alongside other forms of regulated money, like coins, bills, notes, and bonds. CBDC aims to bring in the best of both worlds—the convenience and security of digital form like cryptocurrencies, and the regulated, reserved-backed money circulation of the traditional banking system. The particular central bank or other competent monetary authority of the country will be solely liable for its operations.
Examples of CBDCs
To date, no country has officially launched a central bank-backed digital currency. Many central banks, however, have launched pilot programs and research projects aimed at determining a CBDC's viability and usability.
The Bank of England (BOE) was the pioneer to initiate the CBDC proposal. Following that, central banks of other nations, like China’s People’s Bank of China (PBoC), Bank of Canada (BoC), and central banks of Uruguay, Thailand, Venezuela, Sweden, and Singapore, among others, are looking into the possibility of introducing a central bank-issued digital currency.
Russia has been moving forward with its creation of the "crypto-ruble," announced by Vladimir Putin in 2017. It is speculated that one of the main reasons for Putin's interest in blockchain is that transactions are encrypted, and thus easier to discreetly send money without worrying about sanctions placed on the country by the international community. This theory gained traction after the Financial Times reported in Jan. 2018 that one of Putin's economic advisors, Sergei Glazyev, said during a government meeting that "This instrument (i.e., the CryptoRuble) suits us very well for sensitive activity on behalf of the state. We can settle accounts with our counterparties all over the world with no regard for sanctions."
Glazyev himself was placed under sanctions by President Obama that prevented him from trading in or traveling to America in 2014.
Venezuela has been purported to be working on a CBDC called the "petro" since 2017, which would be backed by physical stocks of crude oil. The Venezuelan government also announced "petro gold" in 2018, allegedly pegged to the value of oil, gold, and other precious metal.
Why have so many countries been exploring CBDCs recently?
Bitcoin has grown rapidly since it launched in 2009, inspiring a slew of offspring currencies and financial products using a similar underlying technology. But it wasn’t until 2019, when libra, the Facebook-backed digital currency project based on blockchain technology, was unveiled that governments around the world began to more seriously explore whether they should be adopting similar technology.
They began to wonder if a currency created by a company as widespread and powerful as Facebook could challenge government control of money. In response, governments accelerated exploration of whether they can incorporate similar technologies into their national payment systems.
Will CBDCs replace the money we use today?
Most countries see a CBDC as a supplementary form of money, not necessarily a currency that will replace the existing infrastructure.
How many countries are experimenting with CBDCs?
No one knows exactly how many. In a survey released in January 2020, the Bank for International Settlements (BIS), the international central bank coordinator, asked 66 central banks whether they are working on a CBDC; 80% of the central banks said they are exploring the idea, while 10% are “imminently close” to launching a CBDC for the general public.
Will all CBDCs use blockchains?
No. While many central banks see blockchains as bringing benefits such as efficiency gains, several central banks have expressed skepticism, arguing a blockchain-inspired CBDC does not bring enough benefits to justify creating and maintaining one.
