WHAT ARE CENTRAL BANK DIGITAL CURRENCIES (CBDCs)

21, February, 2022
By: Ikenna Uwakwe

Bitcoin is changing the world financial system. Government financial institutions are beginning to change their stand with the world acceptance of cryptocurrencies. People are now starting to wake up and realize the value and use of cryptocurrencies as a new form of payment. One such change by the governmental financial institutions is CBDC crypto.

WHAT IS CBDC CRYPTO?

The fear of missing out on the current innovation going on in the financial world and the quest for digital currencies has forced many government financial institutions to follow the trend and create their own form of cryptocurrencies. CBDC crypto stands for central bank digital currency. Central bank digital currencies are simply digital currencies that are similar to what we know as cryptocurrencies.

They are issued by the central bank of a country and their values are pegged at the value of the country's fiat currency. Central bank digital currency can be said to be stable and risk-free due to its backing by central banks of different countries.

THE IDEA BEHIND CBDC DIGITAL CURRENCY

Since the inception of time, man has always sought ways to improve his life, this need and curiosity for improvement has brought innovation in every area of man’s life. Examples of such innovations include the financial sector of his life. Man started off by trading one thing for another in other for him to survive, this is known as trade by barter. Then he developed and moved on to other sophisticated selling and buying methods.

The latest of man innovation in the financial sector can be said to be cryptocurrencies. While this innovation currently faces a lot of backlash from different governments from all across the world, people are beginning to imbibe and accept this new way of life. Governments are left with no choice but to create their own form of cryptocurrency which is known as central bank digital currency.

Technology has given us a lot of new ways to do something. One of such new ways includes the digitalization of buying and selling. Some countries around the world are beginning to experience a decrease in the use of physical currencies known as Fiat money. This new phenomenon serves as a wake-up call to the government all over the world that digital tokens and cryptocurrencies are not a phase that will pass but an innovation and a way of life that is here to stay.

TYPES OF CBDC

Two types of central bank digital currencies exist. We have the retail central bank digital currencies and wholesale central bank digital currencies.

1: RETAIL CENTRAL BANK DIGITAL CURRENCIES

Under this model of central bank digital currencies, consumers are eligible to have a wallet that will contain the CBDC crypto. This type of crypto is issued to the general public. This type of CBDC crypto is most especially helpful to individuals who cannot access conventional banking services. Anyone is eligible to use the retail central bank digital currencies. Consumers have no reason to worry when using this type of central bank digital currency because it is backed and supported by the country. Examples of countries that use the retail central bank digital currencies include the United States, the Bahamas, etc.

2: WHOLESALE CENTRAL BANK DIGITAL CURRENCIES

Wholesale central bank digital currencies are the exact opposite and improved version of retail central bank digital currency. The whole CBDC is used by financial institutions. Large funds could be transferred by banks and big financial institutions using wholesale central bank digital currencies. 

This type of CBDC is helpful in cross-border payments and improves efficiency for domestic payments. Unlike the retail CBDC, wholesale CBDC has improved security and the digital ledger used by the digital currencies could be used to prevent and avoid bank fraud. Examples of countries working on wholesale digital currencies include Saudi Arabia, Malaysia, and Singapore.

ADVANTAGES OF CENTRAL BANK DIGITAL CURRENCIES.

DISADVANTAGES OF CENTRAL BANK DIGITAL CURRENCIES.

1: change and disruption of the country financial structure.

2: the intrusion of protection and privacy of users.

3: central bank digital currencies will influence the monetary policy of the country.

4: increased cyber-attacks.

SIMILARITIES AND DIFFERENCES BETWEEN CBDC AND CRYPTOCURRENCY.

While the idea for central bank digital currencies originates from cryptocurrency, that doesn’t mean they are the same, in fact, they are two opposite sides of a coin. Cryptocurrency's main theme is decentralization while CBDC's main theme is centralization. In cryptocurrency, there is no central party, no one controlling how it is run, transactions are recorded and processed on what is known as a blockchain while in central bank digital cryptocurrency, the central bank of the country controls the digital tokens. The privacy cryptocurrency offers cannot be found in CBDC, the central bank records, and keep every transaction. The key aspect of a country's economy is stability, cryptocurrencies are not stable and are very volatile, and are mostly controlled by sentiments. Prices can go up and down without warning which is why governments find it hard to trust and accept cryptocurrencies.

EXAMPLES OF COUNTRIES WITH CENTRAL BANK DIGITAL CRYPTOCURRENCIES.

Most countries are in the research and development phase of their digital cryptocurrencies. As of February 2022, only nine countries have launched their digital tokens. Examples include Nigeria, Grenada, St Vincent, the Grenadines, Saint Lucia, Dominica, Monserrat, St. Kitts, and Nevis, Antigua, Barbuda, and The Bahamas.

CONCLUSION 

The world is moving away from paper notes and coins to a much more seamless method of buying and selling. No matter how any government tries they cannot ban the use and adoption of cryptocurrencies. Central banks are faced with the choice of either innovating and keying into the new dispensation or fading off into extinction and being replaced by blockchain technology.