CBDCs are the hottest topic in almost every country's parliament nowadays; some have already started the implementation or launched the pilot. But why is every country trying to implement a digital currency? What is CBDC? and is it good or Bad for the people?
let's dig into it.
What is CBDC?
A CBDC or Central-Bank-Digital-Currency is a government-issued digital currency (i.e., digital cash) that exists purely in electronic form. They are pegged to the value of that country's fiat currency.
(Fiat currency- or fiat money is a government-issued currency that is not backed by a physical commodity like gold or silver. It is considered a form of legal tender that can be used to exchange goods and services. Traditionally, fiat money came in the form of banknotes and coins, but technology has allowed governments and financial institutions to supplement physical fiat money with a credit-based model in which balances and transactions are recorded digitally.)
Since the dawn of cryptocurrencies and blockchain technology, the world is shifting towards cashless and digital societies. Thus the govts and countries around the world are exploring the possibility of implementing and using CBDC to provide Govt-backed digital currency to the public.
Before getting into if CBDCs are good or bad, let's dive into the Implementation of CBDC.
How CBDCs can be Implemented?
Now this is tricky, cause how a govt. chooses to implement CBDC will decide the fate of the people of that country. The govt can either code the CBDC to gain total control over the population or code in such a way that it respects the rights given to the people in the constitution.
The government and the central bank of a country, have a few options with regards to how they choose to implement their CBDC-
Create a network where nodes are commercial banks. The end user has an account with the bank, and the nodes are able to move the money around on the network. lets call this the Wholesale Model.
Create a network where there is only one node, the central bank. Every citizen has an account directly with the central bank. Lets call this the Direct model.
Wholesale Model- Here the existing commercial banks becomes the nodes of a network created by the Central Bank. As Banks (nodes) already have users, they just process the txs of the users on network. In this model, banks are still an important part of the Financial System but they get much less power as the Central Bank is the one who will control and track the CBDC. The Banks will have to share the data to govt. when asked and they have to comply. Also, the banks will only handle the general purpose txs i.e. P2P txs. The merchant to merchant txs (mostly business txs) will be processed by the central bank itself.
Direct Model- Now this is the extreme model of CBDC where in the Govt codes the CBDC to gain total control over its people.
There will be 1 Central Server (setup by the Central Bank) and all the txs will be processed through it. you will be using a govt issued Wallet. In this case you are at the mercy of your Govt. They can choose to let you spend your money freely or lay restrictions on the spending. Maybe target a few communities and not let them spend a penny or give extra privileges to a group that they like. The possibilities are endless.
for example, China has implemented an expiration Date to the Digital Yuan, That means that people of China need to use the money in their wallet before a certain date else it will expire and the money is will be gone. NO SAVINGS!
Another Example is the Digital EURO, The European Central Bank will test launch it in 2023 and in the image below you can see the restrictions that they will implement in the Digital Euro.
These are just a few examples, you can imagine the possibilities what the govt can do to control the population.
Lets Hope your govt dont choose this model to implement the CBDC!
Now that we have seen How CBDCs can be Implemented in diff ways, Lets get into the Pros and Cons of the concept in general.
Pros
No need to print money and spend millions in printing, then distribution.
Easy Access- everyone can access CBDC directly from their phones.
Instant Payments (P2P, P2M, or M2M)
Easy Cross-Border Payments
Free from Credit or Liquidity risk
Free from Fraud as it is backed by the govt.
Tracking Black Money, Money used for illegal activities becomes easier
CBDC will also help central banks penetrate a country’s unbanked or underbanked population.
Cons
Say good bye to Privacy- Govt will be able to track each and every tx done by you.
direct competition for Banks, CBDCs can lower bank lending to the general economy and the economic growth.
total control over peoples' finances (if govt wants to).
CBDC can also increase the risks of system-wide bank runs.
High Risk of Cyber Attack- CBDC may attract malicious parties who want to swindle large amounts of money from one source.
CBDC may lead to Social Credit System (already being implemented in China)- people can be barred from spending their CBDCs on buses or trains, which will effectively limit their freedom to travel as they wish.
Conclusion- To say that CBDC is Good or Bad right now will be unfair to the technology. we saw the diff implementations and extreme cases like China and we have also covered the Pros & Cons of the CBDC. Honestly Speaking, whether CBDC will turn out to be Good or Bad will totally depend on how the Govt and Central bank of country will choose to implement it. But as far as the Democratic Countries are concerned, the people of the country (especially those who are leaders in the crypto space) will have to take the initiative and have talks with govt officials and help them implement CBDC for the good of the People and Country.
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