As cryptocurrencies prove themselves a viable and efficient alternative to current payment systems, winning over ever more sectors of the economy, it’s only natural that arguably the most powerful player wouldn’t want to be left out: government. That’s where central bank digital currencies come in.
CBDCs are not cryptocurrencies, nor are they Stablecoins – but they include elements of both. They are “stable”, since a CBDC is nothing more than a reengineered form of a national currency that incorporates some of the features that make cryptocurrencies so powerful.
It’s worth mentioning that, apart from a few small scale pilots – particularly in China by the PBOC – no nation has implemented a CBDC yet. Therefore, existing projects vary wildly in form, technology, and monetary structure.
How are CBDCs similar to cryptocurrencies
In many ways, it’s useful to think of CBDCs as a hybrid between Bitcoin and a fiat currency.
The main feature used by most CBDC proposals is the use of a blockchain or other distributed ledger system (DLT) to keep a single ledger of payments and transactions.
The advantage of this is that it enables more efficiency, and allows central banks to use a single ledger to account for money supply. This also reduces central bank reliance on commercial banks to control the issuance of new money into the economy.
How are CBDCs different from cryptocurrencies
Even if each country exploring a CBDC has its own approach, one thing that most governments aren’t particularly known for is for their being keen on giving up control.
Therefore, it’s very likely that most – if not all – CBDCs will be permissioned networks, as opposed to Bitcoin’s open nature.
Transaction validation will probably remain under the control of regulated entities, although it’s unsure if these will include the private sector as well as government.
Finally, also unlike Bitcoin, both money supply and monetary rules will probably remain under full control of the currency’s national – much like fiat currencies today, but allowing for more direct control by the central bank.
However, given the highly experimental (and sometimes secretive) nature of CBDC projects, and given that no central bank digital currency has been rolled out yet, it’s too early to know with any certainty how any of this will play out.
While this happens, stablecoins are doing a very good job of bridging the gap between fiat and crypto.
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