CBDC – do they need blockchain?
What are central bank digital currencies (CBDCs), what are their advantages over other forms of money, how do they differ from stabelcoins, and do they need a blockchain to work? We explain it all in simple terms.
Why CBDCs are needed?
CBDC, Central Bank Digital Currency or CBDC is a digital analogue of paper money.
Here are the main advantages of digital currencies:
- Central Bank will be able to compete with commercial banks, in theory offering loans with lower rates;
- financial inclusiveness – no need to open a bank account to use CBDC, digital payments will be available to more people;
- National budget savings, as countries spend 1.7% of GDP on operating costs to handle cash
- controllability by regulators through CBDC’s programmability and transparency;
- accessibility 24.
CBDCs do not differ in appearance from non-cash money in bank accounts, but they are two different types of currency.
Cashless money is issued by a particular bank, and the ability to use this money fully depends on the bank. The bank is closed and the card doesn’t work.
CBDC works like cash but in digital form. People and legal entities can transfer them without the intermediary of banks and payment providers.
Also, CBDC cannot be considered as stabelcoins because digital money is directly backed by the central bank. Roughly speaking, it is not coins that the central bank issued against paper money, but a full-fledged part of the money supply. Digital currency does not represent money, it is money.
CBDCs use blockchain?
CBDCs need a digital registry with reliable data storage, backup and protection against changing previous records. Blockchain protocols fit this description, but with a few caveats.
First, it is hard to imagine a public and transparent blockchain at the heart of CBDC. Otherwise, knowing a person’s wallet address would mean that other people could keep track of that person’s financial life.
Second, the central bank must retain a monopoly and full control over digital currency. Decentralization does not fit this objective.
Third, the bandwidth of robust blockchains may not be enough to satisfy millions of users.
But that doesn’t mean CBDCs won’t use blockchain protocols like a distributed ledger, heuristic analysis to track the movement of funds, and smart contracts to automate financial tasks. That’s what the French Societe Generale – Forge and the National Bank of Ukraine experimented with Tezos as a platform for CBDCs.
CBDC will replace cryptocurrencies?
No, because they have different tasks. The task of digital money is to be digital money, that is, a universal exchange commodity and legal tender. Cryptocurrencies in their current state are both an investment vehicle, an infrastructure solution for launching financial projects, and art galleries, but just not a common means for payments.
Still, CBDC could, in theory, make cryptocurrencies a little easier to deal with. For example, when legalizing cryptocurrencies, the National Bank can launch the most common bridge to transfer digital euros or hryvnias to blockchain.
What countries already have CBDC and what users say?
The Atlantic Council website has an interactive map of countries that show the progress in the development and implementation of digital money.
So far, the most active country in terms of digital money is China, with the digital yuan e.CNY. Little is known about the technical side of e.CNY little is known and its Whitepaper only describes the challenges it faces and its impact on the financial system.
China’s central bank tests digital yuan in four major provinces. Journalists from technology publications occasionally conduct interviews with residents and businessmen to find out their opinions on the new form of money. So far, everyone agrees that the digital yuan is more profitable than the cashless yuan: the Central Bank does not charge transfer fees and acquiring e.CNY, and store owners are literally agitating customers to pay with it.
In doing so, the Central Bank of China originally solved the problem of payment anonymity. Director of Digital Money Mu Changchun said the bank will only track large payments, while small “household” transactions will remain anonymous.
Despite the regulability and centralization of CBDC – it is still the way to introduce digital currencies to the masses. From this perspective, national digital currencies could lead to the popularization of cryptocurrencies among the country’s population by making it easier to convert fiat into crypto and back.
Public blockchains like Tezos aren’t really necessary to achieve CBDC’s goals, but digital currency creators are adopting their expertise and technological advances.