Central bank digital currency is a virtual Fiat money of any country. Central bank digital currency is centralized and issued and regulated by each country's monetary institutions.
In the traditional financial system, the technology behind circulating money has not kept pace with the pace of change in the world. Although sending money from one place to another is just sending a few bits, the process is more expensive and time-consuming than it seems.
Many governments are creating new types of digital money. The biggest benefit of this is increasing the efficiency of payment systems and reducing costs for everyone involved. Central bank digital currency can be considered as fiat money which is created by digital tokens and takes advantage of blockchain developments.
Central bank digital currency
Each country is researching and developing its own CBDC and has its own method and approach. Many of these central bank-based cryptocurrencies are built on the same general principles and blockchain technology that form the foundation and infrastructure of the Bitcoin cryptocurrency. Blockchain technology allows many different entities to have a copy of the history of transactions and transactions so that the history of transactions is distributed instead of being controlled by a centralized unit.
Characteristics of central bank digital currency
Contrary to popular belief, the features of the central bank 's digital currency are not yet fully known and may face many changes in the future. Even countries that have developed CBDC are likely to change its features in the future because these cryptocurrencies are currently in the experimental stages and should be developed according to the challenges they will face.
Most of the governments are looking for the use of blockchain-based technologies to develop the central bank's cryptocurrency, which can be used to intercept transactions in the best possible way, so one of the main features of the central bank's cryptocurrency will be its high transparency. The high transparency of transactions will make it possible for governing bodies to prevent financial corruption in the best possible way.
Compared to common digital currencies such as Bitcoin, it is possible to add new coins to the network in the central bank 's cryptocurrency. In fact, central banks can use this possibility to create new money and provide their needed liquidity in this way, while some people think that inflation will disappear with the emergence of CBDC.
General features of central bank digital currency
It is not known what characteristics central bank digital currencies will have in the future; Of course, if they are ever published. The digital currency of the central bank represents the official currency of a country in digital form.
- Unlike decentralized projects like Bitcoin, Central bank digital currency is centralized and regulated by national financial authorities.
- Although several countries are considering the possibility of creating and issuing CBDCs, no country has yet officially issued one.
- In many cases, CBDC will be a combination of Bitcoin and the official currency of a country, which will make the final hybrid product use the features of both categories. However, how will CBDC use technology to its advantage? One of the answers may be the use of a distributed ledger.
Advantages of Central bank digital currency
Currently, governments and central banks are researching and experimenting with digital fiat currency to explore the many positive aspects of central bank digital currency in terms of finance, economic growth, technological innovation and increased transaction efficiency. Next, we list a number of potential benefits of national digital currencies:
Technological efficiency
Instead of relying on intermediaries such as banks and clearinghouses, money transfers and payments can be made instantaneously from payer to payee.
Financial inclusion (accessibility of financial services to all)
Safe money accounts in central banks can provide a powerful tool for financial inclusion and provide a low-cost basic bank account for legal residents and citizens.
Prevention of illegal activities
Central banks can determine the exact location of each currency unit through CBDCs, and traceability can be increased by requiring the serial number of banknotes to be reported in each transaction. One of the advantages of tracking tax collection is:
Tax collection
Tax collection makes tracking tax evasion and tax evasion very difficult; Because it makes it impossible to use methods such as offshore banking and unregistered employment and to hide financial activities from the central bank or the government.
Fighting crimes
It becomes much easier to detect criminal activities by monitoring financial activities; For this reason, it puts an end to these types of crimes. Also, in case of criminal activities, tracking them makes money laundering more difficult; Therefore, reversing the transaction and returning the money to the crime victims will be easier and faster.
Protecting money as a public asset
Issuance of digital currency by central banks will be an advanced alternative to physical money, which is predicted to become obsolete.
Security of payment systems
A digital payment instrument that is secure and standardized and issued and managed by the central bank and used as a digital payment method at the national level will promote the confidence of private sector supervised monetary systems and increase confidence in the entire national payment system. and will improve positive competition in payment systems.
Protection of Synergy Revenue
Issuance of public digital currency will prevent the predictable decrease in government revenue if paper money is eliminated.
Banking competition
By providing a free bank account that benefits from full security for deposit funds, the central bank can strengthen the competition between banks to attract customers' capital; such as providing "visual accounts" for customers.
Risks
The general concern about the introduction of central bank digital currencies may weaken banks' funding position. However, the Bank of England has realized that if the introduction of a CBDC can set a number of basic rules, the risk of widespread banking crises will be removed.
Since CBDCs are centralized, a central bank's digital currency issuer can withdraw or increase money from a person's account with the push of a button. On the other hand, cryptocurrencies prevent this event with their decentralization; Unless a group of people can take over 51% of the network mining power and form a 51% attack.
Central bank digital currency list
There are two central bank digital currency lists, which we will examine briefly below:
Wholesale CBDC: This type of central bank digital currency can be exchanged and traded between central banks and private banks. These exchanges promote payments between these institutions, speed up cross-border transactions, and reduce liquidity risk and credit risk. CBDCs are recognized as the most attractive project due to their ability to make financial systems faster, more economical and safer.
Retail CBDC: This type of central bank digital currency is referred to as digital money that customers and ordinary people use to transact in their daily activities. Retail CBDC is built on distributed ledger technology like blockchain and offers traceability and anonymity and availability 7/24/365. This method reduces third party involvement; Therefore, it minimizes criminal activities.
Central bank digital currency federal reserve
Bank of America digital currency strategists Andrew Moss and Alex Shah wrote in a note that central band digital currencies are the inevitable evolution of today's cryptocurrencies. We expect the adoption and use of stable coins for payments to increase significantly over the next few years, as financial institutions explore digital asset custody and transaction solutions, and payment companies adopt blockchain technology in the future, they noted in the note. Their platforms are included.
Meanwhile, on Thursday, the Federal Reserve Bank (FRB) examined the pros and cons of the US's potential adoption of central bank digital currencies in a report titled "Money and Payments, the US dollar in the peak of digital transformation. The report examines whether a central bank digital currency could potentially enhance a secure and efficient domestic payment system for individuals and businesses.
It is also pointed out that payment systems are still evolving, so it is possible to use national digital currencies as an option to make fast international payments. The Federal Reserve has said that national digital currencies may have negative aspects and endanger the country's financial stability. According to this government body, the launch of the national digital currency will change the structure of the money market, treasury management practices and monetary policies of the country, and it will have consequences for the issue of privacy and security.
Last word
China has practically implemented its central bank's cryptocurrency. The US Federal Reserve is also looking for research in the field of central bank cryptocurrency and digital dollars. Many market participants consider this behavior of central banks and governments as their reaction to the boom of the digital currency market.
While many countries have talked about their CBDC, this new currency is more of a digital currency than a cryptocurrency. One of the basic elements of these digital currencies is their centralization and dependence on the central bank of the countries. Exactly what cryptocurrencies seek to eliminate.
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