CBDC stands for “central bank digital currency,” it is a novel type of money that some powerful governments are trying to develop and incorporate into their financial systems. CBDC utilises blockchain to revolutionize how governments treat the concept of currency and potentially improving the current financial system resulting in one that is more efficient, even broader and lower costs.
To name a few countries, Venezuela was the pioneer amongst governments and central banks with Petro in 2018. Despite its moderate success, it was the key to inspire other competent and innovative countries to experiment with CBDC such as China, South Korea and the United States. However, perhaps the biggest motivator for central banks and government to push for the CBDC development was when Facebook came out and announced the development of Libra – a Facebook backed cryptocurrency to be used worldwide, pending regulatory instructions from various authorities and governments around the world.
Although much of its developments are still ongoing and it is impossible to precisely point out how CBDCs are going to be used or even accurately describe what features will be included, we can still pinpoint a few features that won’t be missing.
Distributed Ledger Technology (DLT)
A distributed ledger (DLT) is a consensus of replicated, shared, and synchronized digital data geographically spread across multiple sites, countries, or institutions. Unlike with a distributed database, there is no central administrator. The distributed ledger database is spread across several nodes (devices) on a peer-to-peer network, where each replicates and saves an identical copy of the ledger and updates itself independently. The primary advantage is the lack of central authority. When a ledger update happens, each node constructs the new transaction, and then the nodes vote by consensus algorithm on which copy is correct. Once a consensus has been determined, all the other nodes update themselves with the new, correct copy of the ledger. Security is accomplished through cryptographic keys and signatures.
This allows the central banks and governments to track the monetary flows and keep financial records securely and safely. Whereas without DLT, the records will have to be stored somewhere less safe which is not helpful for anybody. Unlike blockchains such as Bitcoin and Ethereum where there is a lack of a central entity (represented by the central bank and the government in the case of CBDC), CBDCs actually aid governments and authorities to trace money and keep an intact record of all transactions. Therefore, we can treat CBDC as a good middle ground between staying anonymous and getting governments to endorse the use of cryptocurrencies.
Is it the end of Fiat?
Hardly, as we see it the world will treat CBDCs as a form of currency that is connected with the fiat money that the world is familiar with. Further, according to a survey conducted by the Bank for International Settlements in 2020, out of 66 central banks, 80% of them were exploring the idea and merely 10% were close to developing and launching a CBDC for the public.
CBDCs are important in a sense that it will being a real movement in the society in general to the direction of adopting cryptocurrencies. Without the endorsements of governments, central banks and other big players in the financial system, it is not easy for the private sector to further innovate as the authorities will also be an obstacle in innovative development.
We remain absolutely positive in the future of cryptocurrencies with or without central bank digital currencies. Start trading now.
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