Are Central Bank Digital Currencies Really Set to Replace Crypto?

Cryptocurrencies are becoming more widely accepted every day, with increased support from consumers, businesses, and governments. However, can we be sure that the direction crypto is headed today is where the digital currency landscape will be in the end? Central bank digital currencies (CBDCs) could be the next big thing, and here’s everything you need to know about them.

What Is a Central Bank Digital Currency?

CBDCs are an idea that will see governments have actual digital currency used for transactions among their citizens. While there are plenty of ways to do digital transactions today, most of them rely on banks, credit cards, or online payment processors as an intermediary.

When you shop online, you aren’t actually digitizing a dollar bill and sending it to someone. You’re making an agreement with PayPal or another company to take one of your dollars and give the seller one of their dollars. That’s not what CBDCs are. You would actually be sending digital money back and forth.

That’s a lot like how cryptocurrencies work today. When you send someone Bitcoin, that’s what you’re doing. You aren’t making a deal with an intermediary (unless you’re using an exchange). So, what makes these CBDCs different from cryptocurrencies?

The most important difference is that cryptocurrencies are decentralized, and CBDCs are not. Nobody is in charge of Bitcoin. They can’t freeze your accounts. They can’t reverse transactions. With a CBDC, the central bank of that specific country is in charge. That means they have even greater control than with a cash system because there’s no way to hide your CBDCs inside a mattress.

It’s also worth mentioning that there are services like the Immediate Edge system which supposedly offers new members access to CBDC’s. However, this is contentious at best as we have found out here.

When Are CBDCs Coming?

They’re already here. At least in some countries and at varying levels of integration. There aren’t any countries where CBDCs have replaced physical currency. Many countries are currently in the testing phase, with nearly 100 nations having stated their interest in developing a CBDC.

One of the most notable CBDC projects so far is the Sand Dollar of the Bahamas. It was among the first CBDCs to go live, first launched in October 2020. Today, it can be used for just about any purpose that the Bahamian Dollar (the country’s official currency) is good for.

The Bahamian CBDC is considered by most experts to be the most successful implementation of a CBDC so far. Residents can use a convenient digital wallet to manage their Sand Dollars, along with using a physical card for payments at retail establishments.

Other major projects underway include the Chinese e-CNY, which is undergoing targeted testing in certain regions with over one hundred million users so far. Nigeria currently has a fully launched CBDC called the e-Naira, although it has not developed to the point of the Bahamian Sand Dollar.

What Will Determine the Success of CBDCs?

It’s still early on in the development and implementation of CBDCs, so there’s a lot we don’t know about how they’ll work in the long term. In general, there are a few key areas that could make or break CBDCs.

Privacy is among the most important features of any CBDC. Cryptocurrencies offer privacy in the sense that there isn’t any concrete link between a wallet and an identity. That isn’t true for CBDCs. Your CBDC wallet is directly linked to your identity, so privacy needs to be assured.

The legal framework surrounding CBDCs will also be a major area of contention. It’s essentially uncharted territory, so an entirely new set of policies and regulations will need to be developed in order to make the system work.

Finally, there’s the fact that each country will have its own unique needs when it comes to CBDCs. Different economies and varying ways of life could call for any number of features. We could see a world where countries each have their own highly individualized CBDCs in place.

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