Central Bank Digital Currency

Understanding Central Bank Digital Currencies

Central Bank Digital Currencies (CBDCs) are digital versions of fiat currencies issued by central banks. Unlike cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH), CBDCs are fiat currencies backed by trust in the issuing central bank and the sovereign government or political authority. They exist in a digital form, similar to traditional fiat currencies such as the U.S. dollar, euro, or Japanese yen.

Currently, publicly available CBDC implementations do not exist. They only exist as proof-of-concept projects, such as the Digital Currency/Electronic Payments project of the People’s Bank of China and the digital Uruguayan peso of the central bank of Uruguay.

CBDCs may or may not use a distributed database like blockchain, but they cannot be considered true cryptocurrencies. They are not decentralized because their issuing central banks maintain complete control over CBDC production and distribution, similar to traditional fiat currencies. The value of CBDCs is solely based on the public’s trust in the issuer.

Despite not being true cryptocurrencies, CBDCs offer several advantages over other forms of fiat money. They enable direct peer-to-peer transactions without the need for third-party payment processors. Additionally, CBDCs provide the government with more immediate control over its currency, allowing for more efficient implementation of monetary policy.

A central bank digital currency (CBDC) is a digital currency issued as legal tender by a country’s central monetary authority. It is regulated and governed by the government’s regulations and laws. CBDCs are represented by digital tokens or electronic records and are controlled by the central bank of the respective country.

CBDCs should not be confused with cryptocurrencies. They operate differently from cryptocurrencies, such as stablecoins, which represent specific fiat currencies and operate on public, permissionless blockchain ledgers. CBDCs, on the other hand, are controlled by their issuers and exist on permissioned, closed blockchain networks.

The responsibility for the operation of CBDCs lies with the country’s monetary authority or central bank. CBDCs combine the traditional banking system with a backed circulating money supply and the convenience and security of digital form.

In simple terms, CBDCs are government-backed currencies that differ from most cryptocurrency projects. While cryptocurrencies like Bitcoin are decentralized, CBDCs are centralized and regulated. They represent the official currency of a country through the use of technology. Currently, no countries have officially launched CBDCs, but several governments, including China with its DCEP network, are in the final stages of creating and issuing CBDCs.