What is a central bank digital currency (CBDC)?

Tokens, which are created by central banks around the world, represent the legal currency of the country in which it was created, and are generally based on distributed ledger technology (DLT), are called central bank digital currency (CBDC).

CBDCs, in the simplest terms, are digital currencies printed by a country representing its own currency. Although most CBDCs use the same technology as cryptocurrencies, the two asset classes diverge in some respects.

What is the difference between cryptocurrencies and CBDCs?

Cryptocurrencies such as Bitcoin, which entered our lives in the 2010s, made a great revolution in the financial sector. There are some differences between cryptocurrencies such as Bitcoin that uses DLT, such as CBDCs, and CBDCs.

First, blockchain networks such as Bitcoin and Ethereum represent permissionless open blockchain networks where all participants can access and record transactions. These types of cryptocurrencies, which have a completely decentralized structure, are not created or controlled by any person or entity. For this reason, cryptocurrencies that do not need regulation and are resistant to censorship differ from CBDCs at some points.

On the other hand, CBDCs are projects that are planned to be developed and controlled by central entities such as a country’s central bank. While most CBDC projects are based on blockchain technology just like Bitcoin, these blockchain networks will be “permission-based”, that is, networks where only selected individuals and entities can access or make changes. For this reason, unlike the situation in cryptocurrencies, these formations will have the authority to block the transactions they want, freeze accounts and block addresses.

On the other hand, most cryptocurrencies such as Bitcoin (except stablecoins) do not hold any reserve assets to support the value of the cryptocurrency. In contrast, CBDC projects are developed to be backed by gold and foreign exchange reserves, as they represent a legal currency.

There are also uncertainties around the world on how to classify cryptocurrencies (commodity, securities or currency). For this reason, it is not clear which institutions are under the supervision authority of crypto coins. CBDCs, on the other hand, will have the legal currency status as they are developed by the central banks of the countries and will be under the control of central banks.

What do CBDCs do?

The current financial system is not enough to keep up with the needs of the increasingly global and digitalizing world. At this point, CBDCs can bring great benefits to the financial system.

Today, while opportunities such as instant messaging are an integral part of our lives, in money transfer services, it can take hours or even days to complete transactions. CBDCs, on the other hand, make it possible to send money from one point of the world to the other within minutes, just like crypto coins.

In addition, central bank digital currencies make it possible to send money at much lower fees compared to traditional money transfer systems by eliminating the dependence on intermediaries.

One of the problems with cryptocurrencies, usage for illegal purposes, is also solved with CBDCs. Regulated by a central entity, CBDCs allow us to seize funds or block transactions if illegal use is detected.

Which countries have developed CBDC?

CBDC is only one project for most countries as of February 2021. Venezuela was one of the countries that implemented this project.

Venezuela launched Petro, a CBDC pegged to oil price in February 2018. However, Petro did not reach as high a number of uses as predicted in the country.

Another country conducting CBDC studies is China. China, which has been developing the digital yuan project for several years, launched its first CBDC tests in April last year. China, one of the countries at the forefront of CBDC, continues to test digital yuan.

Russia is one of the countries researching the CBDC issue. Considering that CBDC would benefit the country, Russia announced on October 13 that research on the subject had begun.

In Europe, where CBDCs are still in the research phase, the European Central Bank (ECB) plans to make a final decision on the subject in 2021.

Finally, Turkey is carrying out an active CBDC project. Chairman of the Central Bank Naci Ağbal, Turkey’s central bank for digital currency “conceptual” to complete the process of research and pilot testing is scheduled to begin in the second half of 2021 was announced.

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