What are CBDCs?

by | Jul 27, 2021

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If you’re following the world of cryptocurrencies, you must have stumbled upon this term called CBDC. So what does this term stands for and what it means for us? Well, CBDCs stand for central bank digital currencies, and governments around the globe are trying to experiment with these currencies considering the exponential growth of cryptocurrencies. Let’s understand the concept of CBDCs and their implications.

What are CBDCs?

CBDCs or Central Bank Digital Currencies can be said to be the centralized versions of currencies built using blockchain technology. By the definition, the central bank digital currency is a tokenized version of a fiat currency such as Dollar, Rupee, or Euro. 

It’s worth noting that, unlike other cryptocurrencies, CBDCs are issued and regulated by a monetary authority such as a central bank or other government entity. Furthermore, even though CBDCs are using the same underlying distributed ledger technology, the governments are able to retain complete control over the given currency’s supply, set national interests, censor, or even seize the account of an individual using the CBDCs.

Apart from the usual benefits of control over a currency, the governments are also looking at additional benefits with CBDCs to justify the need.

Need for CBDCs

Well, it’s an established fact that a range of cryptocurrencies such as Bitcoin, Ethereum, and many more have been gaining massive popularity among the people. With the growing interest over the last few years, the crypto ecosystem is drawing a large amount of capital (in trillions of dollars) from all sorts of sectors such as the bond market, real estate, etc.

On the other hand, the governments and old money players have been utterly unsuccessful in controlling the influence of the crypto ecosystem. From the remote towns of Venezuela to African nations and all the way to the Himalayan towns of India and Nepal, the world is waking up to the emerging market of cryptocurrencies and decentralized finance.

Therefore, a handful of governments are now showing interest in playing the same game they were earlier unable to ban. From China to the US, India and European Union and even countries like Nigeria, Japan, France, and Tunisia are working on their own CBDCs. So far, it seems like China is leading the race with the launch of its digital Yuan trial last year in October.

Furthermore, CBDCs are also touted to offer lower costs and higher efficiency. Managing a physical currency involves a lot of overhead and additional costs. With CBDCs, the governments can avoid the additional costs of printing and strengthen their economy by moving towards a truly cashless economy.

Conclusion

From a normal user perspective, the CBDCs will look similar to that of electronic money or the internet banking account. You’ll be able to buy physical goods or make any transactions in an almost similar way. However, under the hood, the CBDCs work in a completely different way using the distributed ledger technology.

Will CBDCs actually pan out or just fizzle out over time? Will the majority of governments around the world will opting for Bitcoin as a legal tender or will be issuing their own CBDCs? Only time will tell.

Head of Content Marketing @ HyperLinq. His love for Chai and mountains precedes everything. Often wonders about things like, "why $1 earned through leverage feels 100x better than $1 earned selling your time?"
Head of Content Marketing @ HyperLinq. His love for Chai and mountains precedes everything. Often wonders about things like, "why $1 earned through leverage feels 100x better than $1 earned selling your time?"

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