Central Bank Digital Currency (CBDC) is the third and final topic in this Digital Currency series. CDBC is a digital currency issued by a country’s central bank and regulated by their monetary policy. More than 65 governments around the world are experimenting with the creation of their own digital national currency, which will be built on a blockchain similar to Bitcoin and other cryptocurrencies.
Venezuela was the first to launch their own CBDC, Petro, in 2018. The Venezuelan government claimed the Petro was partially backed by their oil reserves and a way around economic sanctions. Users did not flock to it and the Petro has since failed. China is conducting large-scale testing of the digital Yuan and expect to make it fully available this year. In the U.S., the Federal Reserve Bank of Boston and Massachusetts Institute of Technology are experimenting with developing a digital U.S. dollar.
One of the larger differences between Bitcoin and CBDC is the permission level. Bitcoin and other cryptocurrencies are permissionless, meaning anyone can participate in and view the distributed ledger. Rules governing Bitcoin are fixed and cannot be arbitrarily changed.
CBDCs, on the other hand, are permission-based. This means a government-approved group of individuals or entities have access to and can control the digital currency. Benefits of CBDC may include expanding financial inclusion to under or unbanked communities and the ability to access funds if paper cash is not available. Concerns about CBDC include it becoming the only legal tender, forcing citizens to use it rather than the current form of fiat currency. In this case, it may allow a government to track all transactions, or it may allow the confiscation of money from individuals to be used for government-identified purposes.
The impact of CBDC on traditional banking is yet to be determined. Will banks be participants or have permissions within the CBDC? Will a government offering compete with traditional banks? Is it possible deposits may move from banks to a government-sponsored wallet, reducing the amount of funds available for traditional bank lending? Financial transactions are becoming more digital and time will tell which countries will adopt a fully digital fiat currency. The impact of such adoption on traditional banking is yet to be determined.
Thank you for reading my blog series, and please contact me at bhudgins@epayresources.org if you have questions or want to chat Digital Currency!
Other series topics:
Part 1: Cryptocurrencies
Part 2: Stablecoins