So much Ado about CBDCs -Central Bank Digital Currencies
Published: 2022-10-24 08:36:15

## **What is a CBDC**

A CBDC is a central bank digital currency (CBDC), and it is a digital form of fiat currency. 

First, what is Fiat? [According to this Investopedia Article,](https://www.investopedia.com/terms/f/fiatmoney.asp)  Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it. Most modern paper [currencies](https://www.investopedia.com/terms/c/currency.asp) are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.

The current idea of CBDCs was inspired by Bitcoin and other blockchain-based cryptocurrencies, but they are different from these because a CBDC is or would be issued by a state.

Depending on the country issuing the CBDC, the design process will most likely be very different. A centralized database may be used in certain implementations, while others may be built on the blockchain or another distributed ledger technology (DLT).

### **A brief of CBDCs and Monetary Transformation**

Like every other known innovation, there is a background story, that of money is a long and complex one, but it can be summarized in three stages. First came barter, then gold and silver, finally came paper money, credit cards and digital money. According to Wikipedia, digital currencies all started with a research paper published in 1983 by [David Chaum](https://en.wikipedia.org/wiki/David_Chaum) introducing the idea of digital cash. Then came  [e-gold](https://en.wikipedia.org/wiki/E-gold) which was the first widely used Internet money, introduced in 1996, and grew to several million users before the US Government shut it down in 2008. 
In 1997, Coca-Cola offered buying coke from vending machines using mobile payments.
Paypal launched its USD-denominated service in 1998. In 2009, [bitcoin](https://en.wikipedia.org/wiki/Bitcoin)
was launched, which marked the start of decentralized [blockchain](https://en.wikipedia.org/wiki/Blockchain)
based digital currencies with no central server and present concept of CBDCs was inspired by bitcoin
 and similar blockchain  based [cryptocurrencies](https://en.wikipedia.org/wiki/Cryptocurrency) with the  difference being that 
 CBDCs are issued by a central government.

The COVID-19 pandemic, the transition to digital payments, the desire  for cross-border transactions, and worries about financial inclusion are all driving CBDCs to the forefront with the race among the world's leading central banks to produce the first real use case of digital money  getting steeper. [China, for instance, is experimenting with a digital Renminbi](https://www.orfonline.org/expert-speak/digital-yuan-is-the-renminbi-ready-to-take-on-the-dollar/) that enables customers to make purchases using their mobile phones.

In a similar vein, Europe declared the establishment of a digital euro as part of the five-year plan. The pandemic sped up the switch to contactless payments, highlighting how important it is for everyone to have access to safe, efficient, and affordable payment methods.

In the US, the Federal Reserve is also accelerating its research on central bank digital currency.

Several public declarations claim that CBDCs are more than merely digital versions of conventional banknotes and coins. Some governments view CBDCs as programmable money. Altogether, 105 countries representing more than 95 percent of global GDP, are investigating and carrying out research on CBDCs. 10 countries have already launched their CBDCs

Nigeria, The Bahamas, Dominica, Saint Lucia, Antigua and Barbuda, St. Kitts and Nevis, Monserrat, St. Vincent and the Grenadines, Grenada, Jamaica.

As we've learned from history's lessons, each new generation of money has been associated with greater levels of efficiency, security and convenience than its predecessors CBDCs are not short of this promise. 

*Bitpowr provides ready-to-deploy blockchain infrastructure to financial institutions, including banks, to simplify asset management and international payments while increasing customer base and revenue. **[Reach out to us to learn more](https://bitpowr.com/contact-sales).***

### **CBDCs vs cryptocurrencies**

A central bank issues CBDCs, and the government declares them to be legal money and exercise full control over it while cryptocurrencies, like Bitcoin, are not issued by the government, they are permissionless, and trustless. Nobody can prevent your Bitcoin address from making a transaction to another Bitcoin address since there is no central authority regulating the network  unlike with CBDCs.

### **CBDCs vs Stablecoins**

Stablecoins and CBDCs are quite distinct forms of money, yet they both stand for the same thing: digital money in the form of a digital token.The difference though is Stablecoins are issued by a private party, whereas CBDCs are issued as fiat currency by the government.

### Types **of CBDCs**

The two main types of CBDCs are Wholesale and Retail CBDCs.

**Wholesale CBDC**

The main users of wholesale CBDCs would be banks and other financial organizations. It would enable banks to make payments more quickly and automatically, cross-border transactions become more reliable and faster too.

**Retail CBDC**

Individuals would be the primary users of retail CBDCs. People could essentially use them as digital cash, with the assurance that it is issued and backed by the country's central bank.
This innovation has the potential to eliminate the need to carry paper cash while also reducing the high fees associated with transactions in the legacy financial system.

### **Benefits of CBDCs**

1. CBDC has far-reaching implications for the economy. For starters, it has the potential to significantly [improve cross-border payments (IMF 2020)](https://www.imf.org/en/News/Articles/2020/10/30/sp103020-new-forms-of-digital-money). Payments could be made almost instantly with digitalization. It would generate social savings in the same way that the first transatlantic cable did in 1866.
2. A CBDC could lower financial inclusion barriers and transaction costs, which would benefit low-income households. Though more research is needed to determine how well CBDCs could support financial inclusion.
3. Consumers would not have to take the risk of storing their money with a commercial bank that could fail. Their funds are safe as long as their country's central bank is stable.
4. Since all CBDC transactions are recorded on a digital ledger, money is much easier to track this way. This could help authorities in detecting fraud and other illegal activities.

### **Some Drawbacks**

1.  Privacy concerns are always a possibility when a big company has a lot of customer data.  In this case, the central bank would have control over user information and transaction details. The risk with this is the government can have a lot of influence on how one uses their money therefore users lose the ability to transact anonymously
2. For CBDCs to become popular, time will be needed. Some people won't have the resources to access digital currency. Others could be wary due to their lack of confidence in the digital currency or Government policies.
3. Commercial banks might see a big drop in revenue if customers have access to retail CBDCs.
4. If the platform's security is poor, there is also the danger of hackers using this to steal money.

### **In conclusion**

Bitpowr provides ready-to-deploy blockchain infrastructure to financial institutions, including banks, to simplify asset management and international payments while increasing customer base and revenue. **[Reach out to us to learn more](https://bitpowr.com/contact-sales).**