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CBDCs: The Future of Money or a Threat to Cryptocurrency?
After the recent scam and bloodbath in the crypto market. Banks are speeding up the process of their digital currencies. Will these digital currencies turn out to be crypto killer? Let’s see what the estimates say (12 min read)
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CBDCs, or Central Bank Digital Currencies, are becoming a concerning topic of much discussion in the world of cryptocurrency. With their centralized nature, CBDCs have the potential to revolutionize the way money is used and stored. But are they a threat to crypto, or could they be the future of money? In this article, we’ll explore the implications of CBDCs and how they might affect the cryptocurrency industry.
What Is CBDC
Central Digital bank currency is a country’s fiat currency in digital form. They are created and supported by the central bank of the country. Similar to money and bank deposit, it is intended to be a legal tender in digital format. They can be used just like a country’s currency such as in investing, payment or saving.
The difference between CBDC and the actual hard cash of a currency is CBDC will operate entirely digitally using blockchain technology. Blockchain is a digital public ledger which will store all the data of transactions done using CBDC. They may also be used for the verification of transactions.
History Of CBDCs
Difference Between CBDCs And Fiat Currencies
Why CBDCs Are Being Considered
How CBDCs Are Being Implemented In Countries
- Central banks conduct research and evaluate the technical, legal, and operational feasibility of issuing a CBDC during this phase.
- Central banks conduct pilot tests and experiments with CBDCs during this phase to assess their performance and identify any challenges.
- Following testing, a limited rollout of CBDCs may take place in a particular geographic area or among a select group of participants
- If the CBDC is successful in its limited rollout, it may be expanded to include the public or a larger group of participants.
- Once the CBDC is fully implemented and widely used, central banks may continue to monitor and evaluate its performance, making any necessary adjustments.
Cryptocurrencies are virtual currencies. They are not governed by a centralized authority like the government or the central bank. Instead, they rely on a computer network to validate and record transactions on a public ledger known as a blockchain.
Some popular examples are Bitcoin and Ethereum. They are frequently traded on digital exchange platforms known as cryptocurrency exchanges.
How Is Cryptocurrency Different From Traditional Fiat Currency And CBDCs
- Cryptocurrencies are decentralized, meaning they are not controlled by authorities such as government agencies or central banks. Traditional fiat currency and CBDCs, on the other hand, are issued and backed by central governments and central banks respectively.
- Some cryptocurrencies, such as Ethereum, are programmable and support smart contracts, whereas traditional fiat currency does not support it. CBDCs are under development in major economies for the possibility of smart contracts support.
- Cryptocurrencies are highly volatile, which means their value can fluctuate rapidly and unexpectedly. Traditional fiat currency and CBDCs, on the other hand, tend to be more stable, with lower fluctuations in value.
- Cryptocurrencies rely on cryptography to handle large-scale transactions and regulate the production of new units of currency. Traditional fiat currencies are protected by physical and institutional security measures, such as vaults and banks. CBDC’s security and handling are managed by the private entity on which the blockchain is present.
- Because cryptocurrency transactions are recorded on a public ledger using keys known as public addresses, they can provide a higher level of anonymity. Transactions involving traditional fiat currency and CBDCs can be traced back to the individuals involved using various personal identification methods such as personal bank accounts or bank cards.
Impact Of CBDCs On Cryptocurrencies
The exact impacts are highly speculative. However, They may reduce the need for cryptocurrencies by providing a digital alternative to cash backed by a central authority.
Conversely, CBDCs may increase the use of cryptocurrencies by raising awareness and encouraging more people to use them. Additionally, the introduction of CBDCs may lead to increased regulation of cryptocurrencies, which could affect their adoption and use. The exact impact of CBDCs on the use of cryptocurrencies remains to be seen and will depend on their design and implementation.
Why Cryptocurrency Still Has The Upper Hand
- Cryptocurrencies enable borderless transactions, which means they can be sent and received anywhere in the world without requiring the services of a centralized intermediary. This facilitates cheaper cross-border transactions or any transactions. This makes them especially useful for people living in countries with volatile currencies or for those who want to conduct cross-border transactions without the use of a bank.
- Cryptocurrencies are decentralized, which means they are not governed by a single authority or institution. As a result, they are resistant to restrictions and government control.
- Crypto is used on a blockchain network, transactions are stored in blocks that are linked together in chronological order, making it difficult to tamper with historical records. Unlike private blockchains used in CBDCs.
- Cryptocurrencies provide users with a high level of anonymity because transactions are recorded on a public ledger (blockchain), but the users’ identities are not revealed. This allows users to maintain their privacy while conducting transactions.
Impact Of Regulations On Crypto
While CBDCs and cryptocurrency have a lot of potentials, they also have a lot of uncertainties and risks. This is why governments all over the world have put in place regulations to ensure that digital currencies are used responsibly and safely.
CBDC and cryptocurrency regulations vary by country, but they all aim to protect investors from potential risks while allowing for innovation in this new field. CBDCs have already been launched and are being tested for use in everyday transactions in some countries, such as China.
In other countries, such as the United States, regulations on cryptocurrencies remain ambiguous as governments struggle to comprehend this new technology. India has imposed a 30% tax on crypto, while it has launched a pilot phase of CBDC. While, Nigeria, Jamaica, The Eastern Caribbean and the Bahamas have already launched CBDC.
- A Central Bank Digital Currency (CBDC) is a digital form of fiat currency issued and backed by a central bank that can be used in the same way as physical cash for transactions.
- The future of CBDCs and their relationship with cryptocurrencies is uncertain; some experts predict that CBDC use will increase and reduce the need for decentralized digital currencies, while others argue that it may increase the use of cryptocurrencies.
- The growing interest in CBDCs may lead to stricter cryptocurrency regulations.
- Currently, the crypto market is unharmed by the CBDC’s development.
The future of the relationship between CBDCs and cryptocurrencies is uncertain, and will most likely be determined by several factors, including the specific design and implementation of CBDCs, as well as the regulatory system for cryptocurrencies.
CBDCs are likely to become more widely used in the future as more central banks investigate the potential benefits of issuing a digital currency. CBDCs have the potential to improve payment system efficiency and security while also increasing financial inclusion.
The future of cryptocurrencies, on the other hand, is uncertain. While some experts predict that the use of cryptocurrencies will increase in the future, others argue that the increasing adoption of CBDCs may reduce the need for decentralised digital currencies. Furthermore, increased regulation of cryptocurrencies may have an impact on their adoption and use.
It’s also possible that we’ll see a hybrid future in which CBDCs and cryptocurrencies coexist and even interact. Some CBDCs, for example, could be built on top of blockchain technology and provide the same benefits as cryptocurrencies while being backed by a central authority.