CBDC is the word on everyone’s lips. But what are CBDCs & why are governments looking at issuing CBDCs? Find out. 🏦💰
CBDC stands for Central Bank Digital Currency. A CBDC is a digital currency issued by a central bank, rather than a commercial one.
But knowing what CBDC stands for doesn’t actually help in deciphering what a CBDC is and what CBDCs can be used for, so let’s break down the jargon.
Understanding the difference between a central bank and a commercial bank is key to understanding CBDCs.
A central bank is a public financial institution. It manages a given country's (or countries’) currency by creating and managing monetary policy. For example, the Federal Reserve is the central bank of the USA.
Meanwhile, commercial banks provide financial services to the public, including individuals and businesses. For example, JPMorgan Chase is a large commercial bank in the USA.
With that terminology out of the way, let’s take a look at what CBDCs are.
CBDCs are tokenized versions of existing fiat currencies, potentially built using blockchain technologies. Unlike cryptocurrencies like USDT, CBDCs are issued by a central bank
This means CBDCs are (or will be) regulated by a centralized authority and the liability of a given central bank.
No. CBDCs are not cryptocurrencies. While CBDCs share some similarities with cryptocurrencies, they are not the same thing.
Cryptocurrencies may be centralized by being issued by a given company like USDC or decentralized like Bitcoin by being distributed via a decentralized ledger. Either way, cryptocurrencies are not issued or controlled by a central authority - like a central bank.
While CBDCs may share some technical features - for example, they may utilize some aspects of blockchain technology - CBDCs are issued by a central bank and effectively backed and managed by the government.
The centralized nature of CBDCs comes with both its advantages and disadvantages.
There are many potential benefits to CBDCs, for both investors and the government. The benefits for investors include:
The benefits for governments and institutions include:
As you might have noticed, many of the benefits of CBDCs for institutions are inherent risks for investors.
CBDCs have many potential risks too, for both investors and institutions:
Much of the hype around CBDCs you see in the news today comes as a direct result of the impact cryptocurrencies have had on the global financial market - both good and bad.
Cryptocurrencies have improved financial inclusivity worldwide, as well as innovating new borderless financial opportunities thanks to the DeFi market and stablecoins in particular.
But they're not without their risks - even for stablecoins. Most investors remember all too well the fallout when the TerraUSD algorithmic stablecoin de-pegged permanently, leaving billions in losses, despite promising investors that their assets were pegged to a particular value.
The rise (and sometimes fall) of crypto, as well as covid speeding up our growth towards effectively cashless societies, has shifted government focus towards CBDCs - both to potentially offer regulated digital currencies for investors and to continue moving towards a cashless world.
Use cases for CBDCs are plentiful. Take the example of exchanging currencies to travel. Although some apps exist to aid cashless currency exchange and travel, with CBDCs this process could potentially be much cheaper and with better exchange rates, allowing for easy, cashless currency exchange.
This though is an example of a retail CBDC - and there are actually two kinds, with two distinct purposes.
We mentioned a retail CBDC above. This is a CBDC primarily used by individuals for retail payments - like cash or like many investors currently use stablecoins. Unlike stablecoins, retail CBDC's are backed by a central bank.
Wholesale CBDCs would be utilized by financial institutions, commercial banks and central banks. Wholesale CBDCs could potentially solve a wealth of problems within traditional financial systems, for example, by improving payment speed and streamlining cross-border transactions.
While there are two distinct kinds of CBDCs that central banks are looking at implementing now, there’s no reason with the right infrastructure and development that a CBDC couldn’t serve as both a retail and wholesale CBDC.
According to research from the Atlantic Council, there are 11 CBDCs launched as of 2023:
As well as this, 18 countries now have CBDCs in pilot stages, including:
These are by no means the only countries launching developing CBDCs though. Overall, there are 119 countries with a CBDC either launched, being trialed, in some form of development, or researching a CBDC.
Let’s take a quick look at some of the biggest financial players and where they sit in the race to launch a CBDC.
The Biden administration has shown a lot of interest in a digital dollar. As part of the so-called crypto executive order, Biden directed the Federal Reserve and other authorities to research and pursue prototypes for a US CBDC for wholesale and retail applications.
The Bank of England and HMRC released a consultation paper in February 2023 outlining the case for a Britcoin. As well as this the government has been advertising CBDC-related roles and the Bank of England has announced its soliciting vendors for a CBDC wallet, suggesting a launch of a digital pound may be imminent.
Australia's CBDC is in the pilot stages now. The Reserve Bank of Australia, alongside the Digital Finance Research Cooperative Research Centre, has outlined the technical requirements for Australia's CBDC - eAUD - and invited public comments. eAUD is currently planned to be utilized as both a wholesale and retail CBDC.
The Bank of Canada has been conducting research and development work into CBDCs since 2017 and more recently launched a consultation process in 2022. Though its early days, the Bank of Canada has focused on offering a digital currency with an eco-friendly footprint that could serve as both a retail and wholesale CBDC.
More questions on CBDCs? We got you.
Two main reasons - crypto and covid. Crypto - and stablecoins in particular - have grown rapidly, offering new investment opportunities, all without regulation from a central authority. At the same time, covid pushed us closer to being a cashless society than ever before. As such, the two events have created a perfect storm to compel governments and central banks into researching and developing CBDCs faster than they were previously.
No, not all CBDCs will use blockchain technology. While they may use a digital ledger, it’s unlikely that many of them will implement the key feature of a distributed public ledger like existing cryptocurrency blockchains have.
Most central banks currently developing CBDCs have stated that the CBDCs they're developing are not cash replacements. But who knows what the future may one day hold!
119 countries according to research from the Atlantic Council, although a few of these projects are stagnant or have been canceled.
Although stablecoins are pegged to the value of a particular fiat currency, they’re not regulated by the issuer of that currency. Instead, they’re generally backed by reserves (either cash or cash equivalents). This means you need to trust whatever entity issues that stablecoin. USDT in particular has come under fire for not being transparent about whether it maintains full reserves. Meanwhile, a CBDC would be issued and backed with the assurance of the central bank, theoretically meaning it can’t fail as a stablecoin could.
Not yet, but the Federal Reserve is looking at developing a USD CDBC - so watch this space!
Bitcoin and other cryptocurrencies don't share many similarities with the CBDCs being developed or launched by central banks today. The main appeal of cryptocurrencies remains as an investment asset, as well as remaining out of reach of government regulation and control.
It looks unlikely currently, but maybe one day. The European Central Bank has announced its intention to develop and test a CBDC, which could mean a CBDC for 20 countries using the euro.
Mainly due to privacy concerns. With cash, the government can’t trace our every transaction as easily. Similarly, with crypto, in many instances, while transactions are recorded on a public ledger, wallet addresses are not linked to our personal data. With a CBDC, the central authority would be able to trace every transaction and theoretically link every transaction to a given identity, giving governments unprecedented insight into our financial lives.