Will CBDC Overpower Cryptocurrency

February 28, 2023

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A Central Bank Digital Currency which commonly refers to CBDC is a  digital form of central bank money. It is created by ledger tender and represents a claim against the central bank not towards any Payment Service Provider (PSP) or Commercial bank. It is managed on a digital ledger and increases the security of payment for banks, institutions, and individuals. The recent study conducted by Bank for International Settlements (BIS) indicates that more than 70% of institutions are actively conducting research for developing Proof of Concept for CBDCS.

There are generally three aspects attached to the concept and development of Central Bank Digital Currency (CBDC) which are as follows –

  • Digital Assets: CBDCs are the digital assets that are accounted for in the digital ledger which does not necessarily be distributed. However, it acts as the single source of truth.
  • Central bank – Backed: The CBDCs are completely backed and controlled by Central Bank. Thus, it represents the claims against the central bank just like the bank notes.
  • Central bank controlled: Th supply of CBDC is determined and controlled by the central bank. Thus, it is said that the value of CBDC is largely driven by the decision and actions of the central authority.

Use Cases of Central Bank Digital Currency (CBDC)

CBDCs are generally built for facilitating retail and wholesale payments. The retail CBDCs refer to the digital version of cash whereas the wholesale CBDC indicates the new infrastructure for facilitating the interbank settlements.

Uses of Retail CDBCs

Retail CBDCs are used for facilitating payment between individuals and businesses. Thus, they have a greater volume which is usually more than 100,000,000 transactions. It increases the availability of digital currency on mobile devices and thus makes it more accessible and usable for the end-users. Moreover, since these are natively digital therefore they do not require time – a consuming and costly reconciliation process. It also helps the government in streamlining the distribution of benefits to individuals and improving tax controls.

Uses of Wholesale CBDCs

Wholesale CBDCs are used to facilitate interbank settlement between a few banks and other entities with accounts at the central bank. The daily volume of Wholesale CBDCs is lower than Retail CBDCs and is less than 100,000 transactions. The wholesale CBDCs make it possible to settle counterparties’ payments instantly while reducing the risk of overnight batch processing and collateralization. Alongside this, it also provides a large-scale asset register and clearing house to foster the digital asset revolution while reducing the cost of real-time money transfers.

Contrast Between CBDCs and Cryptocurrencies
Both cryptocurrencies and CBDCs have gained attention from millions of digital assets enthusiasts across India. However, the regulated digital coins which are referred to as the future of digital tokens/coins. This can be traced back to the rapid rise of stablecoins over the past few years which allowed central banks to take initiative to explore their stable digital currencies.

There are some contrasts between CBDCs and Cryptocurrencies which are as follows –

  • Generally, CBDCs operate on private and authorized blockchains while cryptocurrencies operate on Permissionless or public blockchains.
  • The CBDCs are centralized while the Cryptocurrencies are decentralized digital assets or tokens.

The identity of the CBDC customers is linked to an existing bank account where the central bank determines the regulations for this network. Furthermore, the authority of the user base in this crypto network is defined through consensus.

Cryptocurrencies And CBDCs Co – Exist In Blockchain Network

The emergence and development of Blockchain technology have certainly created an era of cashless societies where governments across the globe plan to bring their own digital currency to life. The purpose of such an initiative is to provide transferability, ease, accessibility, privacy, and financial security for the companies. CBDCs are also seen minimizing the maintenance required or conducting complicated financial transactions across borders. Both these forms of digital tokens/coins can certainly co-exist in the common blockchain ecosystem. However, their approach may vary depending on the use cases they offer and individual preferences.

Final Words

The introduction of CBDC is aimed at finding the delicate balance between keeping pace with technological development and the policy front. CBDCs are perceived as the substitute for versatile digital assets by the authorities. The success of CBDS is largely dependent on the underlying trust in authorities which grease the wheels of nations’ economies. Thus, looking at the present scenario it can CBDCs can be seen overpowering cryptocurrencies in the long run for conducting financial transactions whereas cryptocurrencies seem to be popular only on the investment front.

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