The popularity of cryptocurrency is driving a worldwide move toward a government-regulated digital currency. Many countries are exploring a central bank digital currency, or CBDC, including the US, and some have already implemented some form of a virtual dollar with government oversight.
- CBDCs are the government’s answer to cryptocurrency.
- They would be digital forms of standard currencies.
- Dozens of nations are implementing or exploring CBDCs.
What is a Central Bank Digital Currency?
A central bank digital currency (CBDC) is a digital form of money we commonly use. It would have the same value as a government-issued fiat currency like the dollar.
A CBDC differs from standard currency because it is all digital. No paper scrip or coin is involved. It is accessed and transacted online. It may sound a lot like cryptocurrency, but there are key differences that we’ll get into later.
Goals of a Central Bank Digital Currency
The goals of a CBDC are the following:
Provide a Stable Option to Cryptocurrency
One of the flaws of Bitcoin and other cryptos is the massive volatility in value. A CBDC would be valued the same as the dollar or whatever the host government’s currency.
Cut the Red Tape of International Banking
Moving currency between countries gets bogged down. A universal digital method of cross-border transactions would theoretically be smoother.
Government Oversight for Transactions
There would be no pure peer-to-peer digital transactions without government oversight in a CBDC system. There would be no need for massive computing systems required for mining.
Access for People with No Bank Accounts
Millions of people don’t use banks and resort to payment methods like money orders. A CBDC would allow them to pay using any online device such as a smartphone.
Types of CBDCs | How Do They Work?
Most people who use a CBDC would have an assigned access number or key, as with cryptocurrency. That number code would provide access to a central bank for deposits and payments. It could also allow the use of a conventional bank like we do today, but the funds would not be insured.
There will be various types of CBDCs. The central bank digital currencies would come under the two main categories below:
Wholesale CBDCs are primarily for banks and big financial institutions. This system would be like a reserve holding bank that grants accounts to banks for deposits or interbank transfers.
The central bank would use monetary policy tools to help keep the economy and money flow stable.
Retail CBDCs are for most of us – businesses and consumers. They are token- or unit-based and accessible with private/public keys like cryptocurrencies use.
These CBDCs are pure e-money but can complement regular cash. You could use them without a bank account.
What Countries Currently Offer CBDCs?
Nine countries and territories have launched CBDCs. Another 80 nations have projects underway, including India, Sweden, the UK, and Canada. The US is exploring such a project. Here are the countries that have CBDCs:
- The Bahamas
- Antigua and Barbuda
- St. Kitts and Nevis
- Saint Lucia
- St. Vincent and the Grenadines
Is the US Considering a CBDC?
While many other nations are actively exploring CBDCs, the US is on the verge of a study. President Biden, in March, directed federal agencies to evaluate the infrastructure needed to employ a national CBDC.
That’s a start, and other politicians have expressed interest in a CBDC. But Congress tends to work in slow motion, so a national CBDC is still a long way off.
CBDCs vs. Cryptocurrencies | What is the Difference Between Them?
CBDCs and cryptocurrencies are both digital or electronic with no physical token, but they differ in many important ways. Regulation is the main big difference.
Cryptocurrencies use a peer-to-peer transaction system using a blockchain and are open to viewing by the public. No regulatory authority currently oversees cryptos.
A Central Bank Digital Currency would be regulated and overseen by its central bank, such as the US Federal Reserve. They may use blockchain technology. The regulation provides for a more stable value. Cryptocurrencies are subject to huge swings in value, whereas a CBDC has the same value as the host country’s currency.
What Are Experts Saying About CBDCs?
While there is a lot to be sorted out, experts see some advantages of CBDCs. Kristalina Georgieva of the International Monetary Fund said:
The CBDC model can potentially offer more resilience, more safety, greater availability, and lower costs than private forms of digital money.Kristalina Georgieva
CBDCs and The Future of Financial Systems
Central bank digital currencies result from the soaring popularity of cryptocurrencies worldwide, and it will be interesting to see how CBDCs function and grow in popularity. But until more nations implement CBDCs, we won’t look for them to become a payment option for online casinos anytime soon.
The 4 Things You Need to Know About CBDCs
Below are some of the most frequently asked questions about central bank digital currencies.
What is a CBDC?
A central bank digital currency (CBDC) is a digital form of money that has the same value as a government-issued fiat currency like the dollar.
What is Fiat currency?
A Fiat currency is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.
Is CBDC a cryptocurrency?
No, CBDC is not a cryptocurrency. CBDCs and cryptocurrencies are both digital or electronic forms of money with no physical token, but Cryptocurrencies use a peer-to-peer transaction system while CBDCs are regulated and overseen by a central bank.
Is CBDC a Fiat?
Yes, CBDC is a digital form of Fiat money. CBDCs are established by government regulation and have the same value as a government-issued fiat currency like the dollar.