Central Bank Digital Currency (CBDC) is not a cryptocurrency

It is unlikely that CBDCs will make cryptocurrency obsolete. Instead, their potential introduction will likely increase the adoption and acceptance of cryptocurrencies worldwide.

Seeing the impact and massive potential of cryptocurrencies globally, sovereign countries are now working tirelessly to launch their own digital currencies.

The idea of digital currencies is clearly creeping into the minds of governments and banks worldwide after the success of cryptocurrencies like Bitcoin, Ethereum, Ripple, Klever and many others, which have become increasingly popular and used daily with growing transaction and trading volume across the globe.

Apart from this, the current crypto market is now valued at over USD $1.3 trillion. Just a few months back, it even touched USD $2.2 trillion in total market cap, showcasing the potential for unimaginable growth in comparison to global assets.

In an obvious attempt to emulate cryptocurrencies and digitize their own currencies, global central banks funded and operated by governments have been working on their own digital currencies, which are popularly known as Central Bank Digital Currency (CBDC).

However, CBDCs are very different from the cryptocurrencies, as they are totally and fundamentally centralized, controlled and operated by the government and central banks, serving their own national interests.

But, cryptocurrencies are in essence decentralized, operating on platforms supported by distributed computing. Bitcoin for instance, not only lacks a known founder since the anonymous creator Satoshi Nakamoto took a step back after establishing an operational protocol, ensuring decentralization in the long-term, but has a finite supply of 21 million BTC.

This makes holders of BTC sure that their currency cannot be debased by a central authority, which is true for many other cryptocurrencies that have a total supply that cannot be exceeded.

In contrast, central banks are notorious for printing money at whim, clearly evident in the US where the Fed is relentlessly printing new money supply, increasing the USD supply by over 40% since the corona pandemic began. The growing inflation that is being witnessed in real time throughout the world’s fiat currencies will also plague their digital representations, their CBDCs, since the money printer doesn’t stop.

Jerome Powell, the chair of the US Federal Reserve has said that a central bank digital currency would undercut the need for cryptocurrencies.

During a hearing before the US House of Representatives Financial Services Committee he stated: “that, in particular, you wouldn’t need stablecoins, you wouldn’t need cryptocurrencies, if you have a digital currency – I think that’s one of the stronger arguments in its favor.”

However, it is unlikely that CBDCs will make cryptocurrency obsolete. Instead, their introduction will likely increase the adoption and acceptance of cryptocurrencies worldwide.

The more the government has control over their own CBDCs and their supply, the interest in decentralized currencies have the potential to reach new heights, with prices of popular and useful cryptocurrencies likely to follow.

The General Manager of the Bank for International Settlements (BIS), Agustin Carstens, has indicated that central banks will have absolute control on the rules and regulations of CBDCs, and that they have the technology to enforce such measures. 

China has already launched its pilot for their own CDBC, the digital yuan, and countries like India, Sweden, UAE, Saudi Arabia, Mauritius, Singapore, Thailand, Canada, Senegal, Russia, South Africa, the Bahamas, the Eastern Caribbean Currency Union, and the Marshall Islands are working to launch their own in the coming month and years.

Experts believe that CBDC will only help the existing system, as digital currency are already in adoption in the form of credit and debit cards, and other mobile payment gateways. 

The major difference of CBDC is that it will be completely centralized by the central banks, or government, whereas, cryptocurrencies are inherently aimed to be decentralized. For this very reason, to achieve more decentralization around monetary systems, crypto came into existence.

Let us take an example of Ripple (XRP), which is already being used in various degrees by several banks worldwide for cross-border transactions.

Ripple is creating an ecosystem set to merge the cryptocurrency world with the fiat community. The company uses XRP to provide liquidity to its partners. However, it is also facing a high-profile lawsuit by the US Security and Exchange Commissions (SEC) for selling its tokens as unregistered securities.

The legal challenge will surely determine the fate of Ripple, but also shape the future regulatory landscape of all crypto, even globally. 

Though in the coming few months, when CBDCs are tested and later on officially launched, there will be a difficult and costly affair to convert the existing legacy finance world of each country that sets out to digitize their fiat currency.

To manage CBDCs, governments will have to educate a new workforce, sell the idea to its populace, and fundamentally alter its economy in many ways, especially the banking sector.

It’s also important to note that CBDC projects will not be independent as we see the developments happening in the crypto sector, which in the long run could hamper innovation and speed of development. A plague often seen on government agencies and among bureaucrats today.

But don’t worry, cryptocurrencies are here to stay and Klever is here to serve you, our users, as well as ready to work with all legitimate projects who are building useful products to their communities and who aim to tap into the power of the global klever community for growth and innovation.

Written by Jagdish Kumar,

Klever News Editor

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