Paper notes and coins are likely far in the past because of a new financial instrument – central bank digital currencies (CBDCs). In this article, we’ll explain what CBDCs are, what their benefits are, and how crypto-assets could supplant traditional fiat. And to understand how this new kind of digital money was born, we’ll also look at the history of cryptocurrencies in general.

What is CBDC

CBDCs are central bank digital currencies or national cryptocurrencies. In theory, businesses can use CBDC for all payment options using a range of technologies. They are the digital local currency equivalent. Rather than the conventional dollar, for example, banks may issue a crypto version in CBDC format. According to some experts, central bank digital currencies combine the capabilities of fiat and electronic money.

History

Cryptocurrencies had their origins as a project created by people who were not connected to officials, politicians, or authorities at all. Who was Satoshi Nakamoto, bitcoin’s anonymous creator, after all? We can assume that he was not connected to any government. The first message that appeared on the Bitcoin network was “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks” – a reference to a Times headline in early 2009. At the time, the UK Chancellor of the Exchequer Alistair Darling was considering state aid for banks that had suffered losses from the global financial crisis. Mocking the 2008 crisis, Nakamoto offered an alternative to the global financial system. The benefits of blockchain-based data protection became clear, and the capitalization of the cryptocurrency market went up. After that, some central banks began to consider their digital money – in contrast to bitcoin, it was managed by central authorities. With a large economy, it is difficult to create a working central bank digital currency. Smaller economies, on the other hand, have more space for a maneuver.

CBDC functions

There are several versions of the national cryptocurrency production scenarios. The selection defines how CBDC will impact the country’s financial system. For example, CBDC could be used directly as opposed to cash. Customers have the option of changing from conventional money to a handy digital version of it. The introduction of such cryptocurrencies will have barely any impact on the country’s coinage policy. CBDC will be a substitute for billing procedures. Paying for goods and services would be more convenient and simpler, but the role of the Central Bank in the payment system market would radically grow. National cryptocurrency would compete with other forms of payment systems in direct competition, resulting in a significant monetary policy shift. CBDC instead of deposits. In some cases, a fundamental shift in monetary policy is expected. Furthermore, the commercial banks’ role will change. The national bank may produce cryptocurrency for physical persons or financial institutions. In this case, the use and application scenarios of this new money will be varied. The direction chosen depends on the extent of the need of market participants for an fiat money alternative and a concern that regulars plan to address with CBDC.

Difference between CBDC and Fiat

The issuer of CBDC, as with fiat, is the country’s central bank. As a result, domestic cryptocurrency becomes a financial tool centrally controlled by a single government body. Unlike fiat money, all crypto-asset transactions can be fully digitised. The benefits of CBDC compared with fiat money is about reducing transaction costs and increasing the speed of transactions. In addition, the quality of payment systems is excellent due to the automation of the process. CBDC provides the ability for the regulator to control the turnover of funds and monitoring of the flow of money, as well as expenditures of government agencies. As a result, the authorities will have the necessary tools to combat embezzlement, scams, laundering, and other illegitimate activities.

However, CBDC could be the next stage in money’s evolution. It could move citizens to a national cryptocurrency and simplify the central bank’s control over the funds’ circulation. If the CBDC is successfully adopted in several countries, their experience could be the basis for the further proliferation of central bank digital currencies.