Central Bank Digital Currencies (CBDCs) leverage the security, monitoring capabilities, and efficiency of blockchain technology. However, unlike cryptocurrencies such as Bitcoin, CBDCs are centralized. These unique digital assets usually compliment their fiat counterparts rather than seek to replace them. In this way, CBDCs bridge the gap between traditional cryptocurrencies and fiat currencies.
A recent survey of central banks conducted by the Bank for International Settlements revealed that 86% of central banks were exploring CBDC issuance. The same study showed 60% were already conducting proof of concepts. Notably, this number will increase as more banks explore the benefits obtained through these coins.
So what makes a crypto a CBDC and why are all the largest financial institutions in the world researching this technology? Are they really worth the hype? And what do they mean for the average user? First, let’s take a look at what makes a CBDC.
What is a CBDC
The first component of a CBDC is that it’s issued from a centralized organization. Central banks need to retain control over their transactions. Blockchain technology provides near real-time monitoring capabilities via network consensus. Regulators and bank officials can delete, alter, or refund transactions depending on the central bank’s requirements. In this way, CBDCs are designed to supplement fiat currency.
Why Central Banks are Pushing Central Bank Digital Currency?
CBDCs provide currency issuers with a host of new capabilities. These blockchain-based financial instruments improve on many of the shortcomings of fiat currency. Here are some of the top benefits gained by banks and users
CBDCs would greatly reduce the time it takes to complete transactions globally. Actions that were once handled by third parties can be streamlined into smart contracts. In this way, CBDCs facilitate speedy transactions and improve monitor market activity.
Sharing all data on a distributed ledger will help to streamline banking practices and security. CBDCs would provide central banks with the capability to trace and track every transaction in real-time. This feature has many in the central banks promoting the technology as a means to reduce money laundering.
Another huge benefit that central banks can’t ignore is the cost savings. Most people are not aware that printing money is expensive. In 2019, the US treasury spent over $1 billion in printing costs. These costs are set to continue to rise as more currency is injected into the economy. On top of these costs, there is a steady decline in the use of paper currency in the market.
Faster Cash Deployments
Issuing large cash injections would be much easier for governments if they used CBDCs. Multiple nations turned to currency deployments during the pandemic. Sadly, these cash injections were costly and took weeks to reach their intended recipients. A CBDC could issue in near real-time and deposit in users’ wallets securely. This strategy saves on printing, security, mailing costs, and more.
Institute Financial Changes
Perhaps one of the biggest reasons why banks want to issue CBDCs is to better manage and track their financial policies. The added control CBDCs provide would allow these institutions to conduct strategies such as quantitative easing more effectively.
CBDCs Under Development
Today, CBDCs are under development across multiple nations. Some of these projects have already begun to see issuance. Here are some of the top CBDCs and pilot programs currently underway.
Uruguay raised eyebrows across the blockchain sector when officials started the e-peso testing program in 2017. The IMF praised the strategy as forward-thinking in an interview following the announcement. Today, Uruguay remains at the forefront of CBDC research.
The biggest news to hit the market was China’s Digital Yuan. Early this year, China began testing a CBDC network labeled Digital Currency Electronic Payment (DCEP) across select regions of the country. These areas included Shenzhen, Suzhou, Xiongan New Area, Chengdu, and portions of Beijing according to Chengdu Commercial Daily.
The pilot program just went into overdrive with the latest testing phase including 200,000 people and a 40 million digital Yuan ($6.2 million) giveaway. This latest test represented the largest so far. The test included the six largest state-backed banks and residents of Chengdu.
Residents entered into a lottery with the chance to win digital Yuan. The winners randomly received prizes ranging from 178 Yuan ($27) to 238 Yuan ($37). These funds could then be spent online at JD.com and at more than 10,000 brick-and-mortar outlets. Users could also pool funding and invest in co-working spaces and accelerators.
Recognizing the importance of remaining dominant in the digital economy, the US has recently announced the launch of 5 CBDC pilots. These projects are spearheaded by the Digital Dollar Foundation. This non-profit seeks to promote the digital dollar and mass adoption. Notably, the group was co-founded by former chairman of the U.S. Commodity Futures Trading Commission, Christopher Giancarlo.
Discussing the Digital Dollar Project, Giancarlo explained that it was vital that the USA remained in a position to set standards for the digital future of money. He then praised the testing collaboration with Accenture and other partners before discussing some of the other motivations behind the project. Specifically, he listed identifying technical and functional requirements, assessing benefits and challenges, and exploring potential use cases.
How to Counteract CBDCs and Restore Your Freedom
For the average user, CBDCs present a unique mix of benefits and drawbacks. The added efficiency and lower operating costs are sure to help save users money. However, the added monitoring and censorship capabilities of these digital assets could be used to track populations. For these reasons, it’s vital to stay up to date on the latest CBDCs developments and ways to operate outside of their reach.
Projects like META 1 Coin provide a decentralized antidote to the centralized wave of CBDCs entering service. The network combats the volatility argument via a multi-asset-backed stablecoin. Additionally, there are no gatekeepers or centralized authority to block or deny your transactions.
These platforms also do away with intrusive KYC and AML requirements. You can operate in the META 1 sphere freely and securely. This strategy fulfills the original mission of cryptocurrencies like Bitcoin – to restore wealth back to the masses.
The CBDCs are Coming
Given the recent surge in CBDC pilot programs, it is hard to imagine this technology not hitting the market in the coming years. China has already taken the important first steps to put the infrastructure in place. For those seeking to avoid more freedom, its best to stick to decentralized projects such as META 1.