What is central bank digital currency and how does it differ to crypto?


rypto all started with a niche community of visionary technologists and like-minded investors. Since then, it has been a whirlwind of volatile capital growth and simultaneous spectacular market decline.

It has been the birthplace of a host of young billionaires, accompanied by a generation who have felt the true force of the market’s turbulent swings.

In this article we will look at digital currencies, specifically central bank digital currency (CBDC), and the role it could play in the future.

What is digital currency?

The term digital currency is a collective term that refers to cryptocurrency and central bank digital currency.

CBDC is an electronic type of currency — a digital form of the physical currency we use today. It is less volatile and more secure than cryptocurrency but does not have the added decentralised benefits that crypto has.

Why the need for digital currency?

In 2018, QuadrigaCX, a Canadian crypto exchange, filed for bankruptcy, and effectively stole $250m worth of crypto belonging to the customers using the exchange. Chainanalysis, a blockchain tracking firm, was unable to verify what happened to the stolen money or what the money was used for.

This was a famous example of fraud and malicious behaviour, and such examples demonstrate that sometimes it is ironically the decentralised characteristic of DeFi (decentralised finance), that provides opportunities for said cases of cyber-crime.

But what does this all have to do with digital currency?

While crypto like Bitcoin and Ethereum have grown in value and favour, (despite recent decline), so has the market for criminal activity.

Digital currencies offer the potential to revolutionise the way in which payments and transactions take place. However, although crypto is being adopted by big banks and funds, it still does not meet the required safety profile to become mainstream and approved by central banks. This is where CBDC comes into play.

The potential benefits of CBDC

The core value-adds for CBDC are:

  • Reduced cost – little cost to the end user
  • Security – CBDC adheres to higher levels of security, greater fraud protection, and in turn is more secure for end-users
  • Stricter rules around education and marketing
  • Privacy – protecting individual’s privacy from governments because governments would have less need to monetise data

While all this sounds rather idyllic, it is important to note that some of the above is open for discussion.

For example, CBDC is marketed as protecting users’ data privacy, however, true crypto believers are sceptical of this. Crypto loyalists have created this anti-establishment financial ecosystem to counter government control. Some crypto fans feel that central bank digital currencies could also provide governments with too much data, which might contribute to the overall sentiment of increased data surveillance experienced and witnessed during lockdown.

Which countries have adopted central bank digital currency so far?

So far, 10 countries have officially launched CBDC, while China’s pilot is set to roll out in 2023. Meanwhile, 105 countries representing over 95 per cent of developed global GDP are currently exploring CBDC.

In the last six months South Korea, India, Russia and Japan have made significant progress in their pilots – though the latter has reportedly recently shelved plans due to a lack of interest.

Among G7 economies, the UK and US lag as the slowest adopters of CBDC.

So, what happens next?

It is safe to say that there are several pros and cons when weighing up the benefits of CBDC. The positives are that it could be safer, more secure, and more regulated – meaning less hacking, illegal activity and less advertisements enticing uninformed investors to buy risky assets like crypto and tokens.

CBDC, as a concept, however, struggles since it is controlled and issued by central banks, raising the red flag of data privacy concerns and the general notion of the currency being controlled by a large government system.

It will be interesting to see how this space evolves and which digital currencies will fare the test of time.

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