Home Crypto CBDC: A Bridge Between Cryptocurrencies and Fiat

CBDC: A Bridge Between Cryptocurrencies and Fiat

5 min read

Paying for products and services with the help of a phone app has become common these days. Perhaps, this practice is even more common than using cash right now. According to Statista, 427 million users were using payment services like Apple Pay, Google Pay, and Samsung Pay. Not to mention other wallet and payment apps, including the ones that enable using cryptocurrency wallets, like CEX.IO.

As a result, paper money loses its popularity and the domestic economy of a particular country may suffer from this. First of all, the government doesn’t have a clear idea, or accurate statistics of how much currency circulates in a financial realm, when countless wallet apps have their own ledgers of electronic transactions. So, naturally, the issuance of a digital equivalent of money becomes unregulated and currency may inflate without control. Unless Central Bank regulates the issuance of digital coins, the government won’t be able to regulate the economic factors of money to improve the lives of citizens and businesses.

CBDC is a fairly new concept, yet statistics show that 81 countries were developing their own digital currencies as of July 2021. Some of them reviewed the possibilities that CBDC brings and stopped the active phase of development due to internal factors. Some of them are in the stage of active proposals and developments, while other countries like China are already at the stage of implementing digital currency in a closed testing environment. Let’s explore the concept of CBDC a bit closer and take a look at the perspective of this technological breakthrough. If you want to learn more about CBDC you can check Hungary news.

What is CBDC?

CBDC stands for Central Bank Digital Currency and refers to an electronic equivalent of a fiat currency, that is being backed and regulated by a central bank of the country that issues this particular currency.

According to many concepts of CBDC introduced by now, digital coins will not be interchangeable with fiat (paper) money. Instead, digital currencies may completely replace paper and metal money.

Another possibility is that CBDC is an appropriate solution for countries with large unbanked territories like India as well as a number of countries in the African region. In some regions, it is too difficult and expensive to start a whole banking sector from scratch. That’s why digital currency might become a cost-effective and fairly quick method of the financial inclusion of unbanked territories into the country’s economy.

What CBDC can be used for?

CBDC can be used as regular money for everyday transactions on a personal level. However, they also bring some benefits to interbank communication for both domestic transfers and cross-border financial activities.

A lot of people have got used to electronic payments by now. It’s so much easier to pay with your phone than to carry stacks of cash with you, which is not even safe. But the economy of any country still depends on the circulation of cash. If we conduct a thought experiment and imagine that all of us have suddenly stopped using cash, the economy of all our countries would simply go underwater. What’s more, the government doesn’t have a clear picture of how much money circulates and in which directions in the digital space because they are counting cash as a standard for economic analyses and predictions. If they would include digital cash in their strategy, perhaps the overall economic growth would be possible to achieve much faster.

As for instant interbank communication, it would benefit people and businesses as well. Either for receivables or payables like employee compensation. How many times did you have to wait for the settlement of your transaction? This happens because of the outdated policies that regulate the traditional communication between different financial institutions. If we excluded cash from the equation and the banks would have the ability to instantly exchange values without maintaining the paper money operations, we could use regular bank transfers as easy as e-wallets, and presumably, with much fewer commissions and reduced waiting time due to instant and automated performance of KYC and AML standards.

The controversies

On the other hand, the concept of CBDC puts a high load on the regulatory system. By introducing the official digital currency, the country’s government would have to set specific policies for the issuance and burning of coins, for the procedures of exchanging and trading them, and much more. The centralized regulation of all these processes shouldn’t be cumbersome. It should employ a range of technical capabilities that allow high speed and throughput of transactions, as well as the ability to instantly get accurate information and to perform regulatory actions in an effective manner.

Some cryptocurrency believers view this perspective as harmful and inefficient for the society of the future. Their concerns are reasonable, considering the overarching philosophy of cryptocurrencies as unregulated stores of value and means of payment. The need behind such an approach is the democratization of the international financial systems. As much as some single entity would like to regulate the globalized flow of currency, the latest tendencies show that in the nearest future, such a strict control is close to impossible. Unless the CBDC system becomes autonomous and maintained by multiple independent data centers like any genuine blockchain, the system might face issues like the clogged network and delayed service with multiple layers of bureaucracy.

The reports conducted by independent companies also suggest the inclusion of some risks due to the implementation of CBDC. For example, one of the concerns states that the issuance of CBDC may replace bank deposits. Without deposits, the ability of banks to lend money would reduce in direct proportion. As a result, the effect of this situation could place the overall economy at risk.

However, the issuance of CBDC may increase the trust of users since they will be able to get money directly from the institution that created it, not from the middlemen like banks. CBDC strategy that meets the desired adoption level may also benefit the liquidity of a currency and reduce the risk of transaction reversals.

Consumer needs may vary depending on the economic situation and current structure of the country. That’s why, the approach of certain countries towards introducing CBDC may vary, too.

Last Updated: November 8, 2021

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