What is CBDC? (Central Bank Digital Currency)
Stablecoins, in a way, prevail on the territory of banks. After all, they transfer the process of issuing a new (crypto)currency to a private company and also allow users to directly manage their finances instead of needing a bank account.
Now you may be thinking “surely the end has come for the banks then” but, as it turns out, this is probably not the case.
In contrast, a huge number of banks worldwide have begun experimenting with their own view of the stablecoin known as the central bank digital currency or CBDC. Overall, according to a 2020 survey conducted by the Bank for International Settlements (BIS), a whopping 80% of banks are now working on their own CBDC or researching alternatives around it (as of January 2020).
They can be quite similar to stablecoins, as they are digital currencies that represent a fiat currency and are based on a blockchain (or something similar), but they have many key advantages and disadvantages.
Advantages
The main difference is obvious but significant, they are issued and distributed by a bank. This brings with it great credibility and often security, as banks must adhere to all sorts of licensing regulations and conditions that keep them under control.
In addition, CBDCs will likely also have absolute price stability as opposed to stablecoins, which can sometimes deviate slightly from their bond for various reasons, such as sudden changes in demand and fear, uncertainty, and doubt (FUD).
Compared to real money, CBDCs are arguably faster, easier to use, and most importantly cheaper to handle. For you, this means that domestic and international transfers may be settled within minutes (not days) and will no longer cost an arm and a leg, as blockchain brings dramatically improved performance.
They may also lead to better financial inclusion (in theory at least), as you may not need to set up a bank account to hold your CBDC assets. This has potentially huge consequences for those who either can’t or simply don’t want to open a bank account – i.e. about 1.7 billion adults worldwide!
Disadvantages
But, despite their clear advantages over cash and stablecoins, they also have their share of negatives.
If you use cash, cryptocurrencies, or stablecoins for the freedom and privacy they offer. This is likely to be removed with CBDCs – since chances are that you’ll need to complete identity and anti-money laundering checks to hold stablecoins.
It is also likely to be quite costly to implement, as banks will have to develop the infrastructure behind it, go through regulatory links and become more involved in the settlement process.
Unfortunately, the cost of this will most likely be passed on to you and other users, in the form of increased minimum deposits, extra fees, and reduced interest rates.
In any case, you may have to wait some time before your local bank starts supporting a CBDC as they are currently still in the development stage.
Looking to the future
In recent years, a huge amount of funding and effort has been put into building a blockchain-based currency that could represent a suitable alternative to paper money and bank deposits.
Stablecoins are currently widely used among cryptocurrency holders, but have not yet been accepted, while CBDCs are still experimental and not yet ready for public use.
But as progress is made faster than ever, it may not be long before one of these future currencies becomes a regular part of society, and the possession and spending of stablecoins and CBDCs becomes the norm.