5 Things You Need To Know About Central Bank Digital Currencies

Last Modified:3 Apr 2021 19:41:04
5 Things You Need To Know About Central Bank Digital Currencies

Just a few years ago, the idea of central banks adopting anything resembling cryptocurrency seemed unlikely. Cryptocurrencies were still the subject of a great deal of doubt around the world, and many governments and financial institutions were making a specific effort to note that they had nothing to do with digital currencies. More recently though, things have changed fairly dramatically on this front. For one thing, we have begun to see more links between cryptos and traditional currencies, generally in the form of Stablecoins. For instance, the Counos E represents a Stablecoin solution operating on an independent network but linked in value to the Euro. Specifically, it's guaranteed that each individual Counos E is equal to the value of EUR 100. Similarly, the Counos CAD is pinned to the Canadian Dollar (such the one Counos CAD is equal to CAD 100). In some cases, options like this one are helping more people to view cryptos as reliable, ordinary stores of wealth. However, recently, we've also seen more central banks specifically opening up to the idea, not of adopting existing crypto or Stablecoin options like bitcoin or Counos E, but of actually creating their own digital currencies.


What exactly this means, or how it will ultimately play out, is difficult to say. However, there are some things worth knowing at this point about central bank digital currencies.


  1. CBDCs Are NOT Cryptocurrencies


To be clear right off the bat, central bank digital currencies (which are now being referred to as CBDCs) are not cryptocurrencies. It may seem obvious to those who are particularly familiar with these matters, but it’s important to draw the distinction between “digital” and “crypto.” In a piece exploring CBDCs’ emergence in different parts of the world, CoinTelegraph explained the difference: “By design, CBDCs are fully regulated by the state. They don’t aim to become decentralized like most cryptocurrencies — instead, they simply represent fiat money, only in digital form.”


  1. CBDCs Will Use Blockchain


In an older article on the evolution of financial transfers, we noted that Blockchain technology is bigger and more extensive than merely being the backbone of original cryptocurrencies. For instance, we discussed how Counos Platform can use blockchain principles to offer more financial transfer options involving stablecoins like some of the examples mentioned above. Accordingly, it appears that among its myriad uses beyond traditional cryptos, blockchain will be involved with CBDCs. That doesn’t mean things will work the same way, particularly given that one of the benefits of Blockchain for cryptocurrencies is its ability to support their decentralized nature. However, it does appear that some version of a Blockchain-like ledger system will be used to facilitate digital transfers of wealth where CBDCs are being implemented (thus enabling quick, transparent, low-fee transactions).


  1. This May Be Legitimate Competition For Cryptos


CBDCs are unlikely to replace cryptos among the most hardcore cryptocurrency advocates — those who believe firmly in decentralized currency as the way of the future. Among those who aren’t already on board with cryptocurrency, however, or who don’t have ideological interest in it, CBDCs appear well positioned to appeal as more conventional digital currencies. In other words, it's reasonable to expect that someone who doesn’t care about cryptocurrency one way or the other may be more likely to adopt digital dollars than, say, bitcoins. In that sense, CBDCs may well be a legitimate threat to cryptos’ hopes of mainstream expansion. Then again, this is another point of appeal for stablecoins like those available on the Counos Platform as well; cryptos pinned to traditional currencies can be somewhat less intimidating to digital currency newcomers than regular cryptos.


  1. CBDCs Could Spawn A New Forex Market


It’s important to consider CBDCs’ potential use in investment as well, and in this regard they may end up comprising a sort of new-age forex market. Right now, the forex market (which is effectively the global currency trade) is valued for its high volume and convenience. Specifically, FXCM explains that the sun never sets on forex trading, with markets open 24 hours a day throughout each work week. This accessibility combined with extraordinarily high liquidity makes for a nonstop trading environment — and CBDCs may just make it all the more convenient. Blockchain-based digital currencies could be traded with even greater efficiency, albeit within the same principles that define the existing forex markets.


  1. The World Economic Forum Is In On The Action


As a final note, it also seems only right to point out that as of this year, the World Economic Forum is taking an active role in the global expansion of CBDCs. Back in January, The Block reported that the Forum had developed a toolkit that is meant to help central banks determine whether or not CBDCs are for them. It provides information on various types of CBDCs meant to suit different purposes and even countries of different sizes, and is effectively a universal guide to the transition process. This may or may not ultimately prove to be of much significance, but if anything it may nudge more central banks toward experimenting with digital currency.

Submitted by: JBelinson