CDBC or Central Bank Digital Currencies are a type of digital fiduciary currency that seeks to gain ground by taking advantage of the power of central banks, governments and the enormous impact that technologies such as blockchain and Bitcoin have obtained thanks to their vision of digital money.
El birth and subsequent increase in value of Bitcoin has led the world to show its interest in this technology. A situation that has led to the appearance of tens of thousands of cryptocurrencies; some of them with interesting value propositions, but others with hardly any interest.
Remember that Bitcoin seeks to completely displace fiat money, the institutional money of the banks. The International Monetary Fund (IMF) and central banks are aware that the current monetary system is deficient, but they do not want to lose control of money and the economy.
This battle to avoid losing the monopoly of monetary control has led to the birth of the CBDC (Central Bank Digital Currency or Central Bank Digital Currency).
With this, it seeks to move towards a future of digital money, in which some of the limitations of the current monetary model disappear. Although, while maintaining control of the economy in a world that increasingly distrusts banks and institutions.
What are CBDCs really? Do you use blockchain? What are its pros and cons? Do they currently exist? Find out the answers to these and other questions below.
What is a CBDC?
A CBDC or Central Bank Digital Currency (in Spanish, Central Bank Digital Currency), is a form of digital fiduciary money that is issued by the central bank of a country and therefore has legal tender value in that nation.
CBDCs seek to give fiat money a new face. This together with functionalities similar to cryptocurrencies, responding to the needs of today's world. But all this without ceasing to be a control mechanism, one that is in the hands of a few.
CBDCs are not cryptocurrencies, they are not Bitcoin. They are hybrids, a response from countries concerned about the appearance of free cryptocurrencies in the world, especially, concerned about the loss of their economic and financial power in the world.
They are the latest attempt by institutions to stay alive in times when society already rejects them in a massive way.
This in addition to the fact that CBDCs are a form of money that can help them achieve different political, economic, geopolitical and geoeconomic objectives around the world, and where the espionage of citizens will reach levels never seen before.
The concept of CBDC is not something new, as is that of cryptocurrencies. The first mention of a CBDC was made James Tobin, in your paper "Financial innovation and deregulation in perspective" in 1985. Since then, the idea of creating CBDC was always there in the air, forgotten by the sense of control that banks still had with the traditional model of money.
However, with the birth of the Internet, the arrival of digital payment systems, and especially with the arrival of cryptocurrencies, led these entities to rethink how to continue to have control of money. This led to the study and issuance of the first CBDCs in the world.
Objectives of CBDC
Let's start by solving a basic question: What are the objectives of the CBDC?
In principle we can identify the following:
- generate a new form of money able to take advantage of the new technology we have created so far.
- Facilitate the means of economic and financial interaction both nationally and internationally.
- Create new financial and economic structures capable of opening important investment doors for nations and the world.
- Stimulate competition between different payment systems making them cheaper and with greater range.
- Create monetary policy control mechanisms whose action is immediate.
- Reduce the level of state intervention on banks by lessening the danger of the “Too Big to Fail” problem. This is a problem created by the fear that the failure of a major bank or company will bring down the economy. A digital system like that of a CBDC would be less susceptible to this problem.
Of course, these are the objectives for the economy and finances, but we can also mention:
- Create a structure that allows trace the course of money, from its origin to its last actor at all times.
- Replace the anonymity of money with a controlled anonymity by the entities that control the CBDCs.
The objectives of CBDCs may vary from those described above, depending on the interests of the state and the central bank that issues them. In any case, the previously stated objectives are the bases for the issuance of most of the CBDCs that currently exist.
Nations, institutions, empires end up disappearing. Central money too. But Bitcoin is free money, of humanity, and it is based on mathematics, which will last until the end of humanity. In centralized money, all the financial information collected will be stored, sooner or later ending up in the wrong hands. Hacking happens all the time, but even information can end up in the hands of bad politicians.
Characteristics of CBDCs
However, CBDCs, like the cash we know today, claim to have certain characteristics for the purpose of being recognized as money. In such a case, among the inherent characteristics of CBDCs that we usually find, we can mention:
- It is possible to exchange it between peers (without the knowledge of the sender).
- Su acceptance is universal, a fact that is supported by its legal framework granted by the State and the institution that issues it. In this sense, its possession and use by any citizen is legal.
- Es anonymous and private.
- your tenure does not accrue interest.
However, most of the CBDCs as they are proposed do not meet some of these characteristics, and we explain why:
- Yes, it is possible to exchange it between peers. But said movement is real-time knowledge of the bank. The structure that controls the currency is under the management of the banks, and therefore, they will know at all times that you have made a transaction, the amount, to whom and even in which part you have done it.
- It is not freely accessible, banks decide who is given access and who is not.
- Many CBDCs are looking to get a “controlled anonymity” to "deceive" citizens, however: if you have to ask permission to have privacy, do you really have that right?
- As for interest, it is true, the State and the banks do not want people to amass fortunes to make staking. The exception to the rule is when there are superior political or economic interests involved, under these conditions, interest could be triggered as a form of inflation in disguise within the economic ecosystem of the CBDC. It is a new and revolutionary concept of helicopter money. So they decide the particular rules, not working the same money for everyone.
As you can see, we are dealing with a technology and a type of money with which we must be careful. Because while CBDCs can help, they can also be a terrible double-edged sword in terms of freedom and privacy.
How do CBDCs work?
The operation of a CBDC responds to the technology and needs with which it was created. In a nutshell, each CBDC works uniquely and the technology used may vary according to the way in which it has been implemented by the interested central bank.
At present many central banks have been interested in the technology blockchain and DLT to carry out this type of construction. Because this technology allows to minimize the inherent risk of creating monetary systems that are supported exclusively by a digital medium.
Likewise, DLT and blockchain technology facilitates the building interoperable systems with other currencies, as cryptocurrencies have shown today. In addition, they also allow the implementation of technologies that would otherwise be more complex or less flexible, such as the case of smart contracts.
An example of this can be the project HyperLedger from the Linux Foundation. This project is promoted by some of the largest technology companies in the world, such as Intel, IBM or Oracle, undoubtedly heavyweights in the industry.
In any case, three of the HyperLedger projects (Fabric, Sawtooth and Burrow) are designed to apply blockchain technology to various business cases, and one of them is banking.
In fact, a number of central bank digital currency proof-of-concept (CBDC) systems have been built on the HyperLedger Fabric. A prime example would be the Singapore currency, the Ubin, and along with this other experience of Japanese-European origin, Stella. With this, we get an idea of how important blockchain and DLT technology is as the backbone of the operation of a CBDC.
Of course, there is much more behind the operation of a CBDC and here we will comment on other important points in this regard.
Operating models
The operation of CBDCs will depend on the objectives pursued by said currency. In this way we find four operating models:
- Improve the functioning of wholesale payment systems
- Replace cash with a more efficient alternative
- Improve available monetary policy instruments, especially when faced with the lower limit of zero
- Reduce the frequency and cost of banking crises.
As you can see, each case generates (in gray) different areas where CBDCs are possible, each with its own characteristics. In any case, it is clear that the objectives of the bank and the State They define how a CBDC will work and what characteristics it will have at certain times.
Pros and cons of CBDCs
Among the pros of CBDCs we can mention:
- In the first place, a CBDC allows the creation of payment systems, issuance of money, and control of it in an much more efficient, even in real time. This is something impossible to do with current technology.
- On the other hand, CBDCs can open the doors to greater financial inclusion of the citizens of a state. This is thanks to the fact that it would be possible to create CBDC wallets in a much simpler way.
- would generate a increased competition in payment system companies reducing their rates.
- Provide better tools for generate a sounder monetary policy.
But on the other hand, among the cons we can limit:
- There is no clear legislation on how CBDCs will be issued and controlled.
- There conflict between individual rights and freedoms, the use of CBDCs and their ability to spy on citizens.
- The fact that they are completely digital systems opens the possibility that can be manipulated by hackers.
- financial inclusion means manipulation and control. Since with Bitcoin anyone can have financial inclusion without asking anyone for permission.
A CBDC is not a cryptocurrency. It is not Bitcoin.
But beware! It is easy to confuse a CBDC with a cryptocurrency. In fact, we suspect that the institutions seek it that way. If people think that a CBDC is a cryptocurrency, what would they want to use Bitcoin for?
It is important to understand that a CBDC is very different from the quintessential cryptocurrency, Bitcoin.
- While Bitcoin is freely accessible, a CBDC is not. Neither in the participation of the confirmations, nor to have an address where to have a balance.
Transactions are monitored, creating a consumption pattern for each citizen: purchasing power, the places where they consume, the frequency,... everything. - The issuance of money is centralized, controlled by an institution dominated by people who favor those they want: banks, companies, governments,... Think every time there are issues of money to "save people" from the financial catastrophes they create, does the money go to people? No.
- The money goes back to banks or companies, that between intermediaries all the money remains along the way. On the other hand, in Bitcoin it is issued mathematically, in a decentralized way to no government.
- The powers suffocate those who do not like. And the network of interests involves governments, financial institutions, companies,... Think of the United States, and so many other countries, and how their pressure has led countries to absolute misery. Or think about how WikiLeaks has been tried to be silenced in every possible way, even by suffocating it financially. With Bitcoin they cannot suffocate anyone, be it Wikileaks, Cuba or any citizen.
CBDC projects today
Now, what CBDC projects exist today? As of today, only Jamaica and the Bahamas have a fully functional CBDC. However, more than 114 countries around the world have started to implement programs for the launch of their own central bank digital currencies.
Although it is difficult to know at what stage of development each of these projects is, there are tools such as cbdctracker.org that allows us to closely monitor the status of these projects.
You have to keep in mind that all these projects, although they have their nuances, are similar and are built on the same model: fiat money.
e-CNY
El Chinese digital yuan or e-CNY It is the CBDC of China and one of the ones that has attracted the most attention in the world. China is the first major economy in the world that has strongly committed to transforming its money into a form of digital money. To achieve this, they have opted for private blockchain technology, with an unknown consensus algorithm.
The reality is that e-CNY is currently the project with the most media coverage in China, but about which we know very little. What we do know is that China seeks to link its current fiat 1:1, the RenMinBi (RMB) and transform e-CNY into the national and international currency that projects Chinese power. In this way, China seeks strengthen its political and economic presence around the world.
China has been for many years a country with a very contrary position to free cryptocurrencies. It has even gone as far as financially persecuting the nation's miners, banning trade and establishing cryptocurrency companies on its territory. Despite all this, bet on the private blockchains under their political control and economic.
The task of carrying out this project falls on the People's Bank of China (PboC) together with a conglomerate of private and public companies that serve as a development committee for this currency. Systems that the digital yuan will use include giants like Apple Pay China, AliPay and WeChat, making the currency available to more than 1,8 billion users worldwide.
e-CNY is subject to Chinese law and that brings serious problems. First of all, the coin is declaredly non-anonymousIn fact, everything is controlled by the central bank. Thus, from its entry into the system, each e-CNY unit that you control and in which you use it is known to the Chinese government.
The situation is worse, considering that China reserves the right to veto and restrict access to the system if it deems it convenient for its national interests. In fact, one order is enough to freeze the entire system and render e-CNY useless for a country and its citizens should they adopt it.
EUROChain
EUROChain on the other hand, it is a research project of the European Central Bank with which they seek to recognize the potential of a digital currency based on the euro and issued by the ECB. The project was made public in December 2019 by a paper named "Exploring anonymity in central bank digital currencies".
In this paper, DLT technologies (more specifically R3's Corda) are explored for the construction of a CBDC for Europe. The result? Something very similar to the DCEP of China, a currency with controlled privacy, and with a control structure that exceeds that of current systems.
FEDCoin
On the other hand, FEDCoin is a digital currency project, but in this case carried out by the United States Federal Reserve. The US project is driven by the need to compete with China's e-CNY, its main competition and global threat.
Together with FEDCoin, FEDNow was also born, a service that seeks to allow banks and other institutions trade US currencies instantly 24/7. The service is intended to be a flexible and neutral platform that supports a wide variety of instant payments.
The launch date for FEDNow is 2024. For their part, the first FEDNow proofs of concept launched in November 2022 and have had the participation of commercial banks such as BNY Mellon, Citi, HSBC, Mastercard, PNC Bank, TD Bank, Truist, US Bank and Wells Fargo. On the other hand, those in charge of implementing the technology have been SETL, Digital Assets, Amazon Web Services and SWIFT.
On the other hand, the United States government is also working on the creation of a digital dollar with the collaboration of web3 companies such as Hyperledger.
Petro
El Petro is a digital currency designed by the Venezuelan government. Its creation and implementation is perhaps the most controversial coin development that exists. If you want to know everything that this project contains, read our article What is the Petro? In it, we report all the points of interest about this project.
JAM-DEX
The digital currency of the central bank of Jamaica, the JAM-DEX (Jamaican Decentralized Exchange), has been operational since 2022. The pilot program was launched in May 2021 and lasted until the end of the year. The Jamaican CBDC aims to revitalize the country's economy and encourage the use of digital money to try to modernize a financial and economic system based essentially on cash.
Sand dollar
Another pioneering country in officially launching a CBDC has been the Bahamas, with its Sand Dollar. In 2019, the Central Bank of the Bahamas launched its official pilot program, the currency was officially put into operation in October 2020, being the First CBDC in the world.
Other CBDCs in development
As we have said, more than 100 countries are developing their CBDC project and, among those that are already more advanced, we can find:
- France: France CBDC, developed by the Bank of France.
- Singapore: Project Urbin, developed by the Monetary Authority of Singapore.
- India: Digital Rupee, developed by the Reserve Bank of India.
- e-Naira: the CBDC of Nigeria.
- DCash: a digital currency developed by the Eastern Caribbean Central Bank.
- E-di: Ghana's digital currency.
- Jasper: the CBDC of Canada.
- But: Developed by the Central Bank of Saudi Arabia and the Saudi Central Monetary Authority.
- e-Weight: developed by the Central Bank of Uruguay.