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Everything You Need to Know About CBDCs ⁠ — Part 1

A new issue is taking root in the crypto and financial world, gathering support from such crypto leaders as Ethereum founder Vitalik Buterin, as well as from the leaders of the world’s central banks. At the same time, there is a debate as to whether this is good news for the decentralised cryptocurrencies – or if it actually constitutes a danger. At the heart of this discussion are CBDCs – central banks’ digital currencies.

What are CDBCs? What do they mean for users, countries and the crypto arena? Do the plans for and discussions regarding a digital currency that would be managed by governments, mean the crypto revolution is entering the mainstream, or is this a clear sign of the importance of decentralised and censorship-resistant cryptocurrencies? Read on to find out more.

What are CBDCs?

CBDCs (central banks’ digital currencies) are digital tokens, similar to any cryptocurrency — yet with one important difference: they are issued by a government as a complementary variation of its fiat money. Usually, they are considered a digital replacement for today’s physical cash.

Theoretically, CBDC can be held in digital wallets, transferred globally with a single click, traded on crypto exchanges, use blockchain technology, enable the creation of smart contracts, and even keep its users anonymous. It all depends on the chosen specific structure.

There are many possible formats for CBDCs that are being considered by various governments across the globe. One main dilemma is the level of control that the authorities will maintain — or relinquish — in comparison to the current status of money. Physical cash is very anonymous, and it seems as though certain governments are trying to put an end to its usage exactly for that reason. If CBDCs are to replace cash, it is reasonable to assume that they will offer less anonymity.

It is therefore a plausible scenario that one or more governments could choose to launch CBDCs that will allow them to track each and every penny: who spent it, where and for what. However, other options are also being promoted by the crypto community, and it is these which we will discuss here.

Cryptographically Provable?

In early February, Vitalik Buterin suggested that CBDCs could become interesting for the crypto world, if they would include the option to use them over blockchain.

Tweeted Buterin. “Will transactions be cryptographically provable?… If yes, then this opens the door to interesting possibilities.”

As Buterin explained in his tweet, he was curious as to whether this would enable CBDC owners to confirm their ownership through cryptographic proof, which would enable the crypto world and the fiat money to mingle in a fascinating way, with potentially far-reaching consequences.

Yet, it seems a bit far-fetched to expect governments to allow such usage of their coins. While this might be grounds for free trading on a scale hitherto unseen, it would also reduce countries’ financial control.

What led one of crypto’s global leaders to support a government-controlled centralised currency? It could be reasonable to assume that in an era that includes great efforts towards institutional recognition of the crypto world, there could be a significant value for cryptocurrencies if CBDCs were adopted ⁠— even if they were not as crypto-friendly as they could potentially be.

Davos Believes in Digital Money

CBDCs were also on the agenda at the World Economic Forum’s annual meeting in Davos, Switzerland, that took place in January. Consensys CEO and Ethereum co-founder Joseph Lubin described the attitude among governments towards CBDCs in a post he wrote after the Davos conference.

“Many nation states have recognised the potential benefits of these technologies: …from cross-border cost saving, to fighting corruption and money laundering –– and a powerful Fear of Being Left Behind,” wrote Lubin.

He was not alone in this impression. Benoit Coeure, Head of the Innovation Hub at BIS (Bank of International Settlements) said in an interview with Bloomberg, “The next step is how this is going to change the very face of money…”

Earlier this year, BIS launched a group to examine various use cases for CBDCs and their functional and technical design, including cross-border interoperability; and the sharing of knowledge on emerging technologies. The group is led by the BIS and a combination of the central banks of Canada, the European Union, Japan, Sweden, Switzerland, and the United Kingdom.

According to a survey by the BIS, 80% of the world’s central banks are working on launching their own digital currency. Ten percent of central banks are expected to adopt CBDC within the next three years and a further 10% will adopt it within six years.

The Libra Effect

One of the most important influences on the growing interest in CBDCs is not a government: it’s Facebook. The largest social network in the world announced last June that it was launching Libra, a cryptocurrency project, which provoked anticipation and suspense all over the world. A few weeks after the Libra announcement, China announced that it was advancing the digital yuan. Various other governments around the world also felt the need to reconsider their steps in light of the possibility of competition for their fiat currencies.

In the meantime, regulators have confronted Facebook with tough obstacles that have startled other partners in the Libra project and posed questions regarding its feasibility. However, it is notable is that as soon as the opportunity arose for a commercial digital currency to be launched globally, it was clear to everyone that it was just a matter of time until it became an integral part of the monetary markets. Confronted with this possibility, many governments are rushing to develop their own alternatives.

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