CBDC-How CBDC Differs From Cryptocurrency In The World? -2023

Though the idea stems from cryptocurrency, CBDC is not a cryptocurrency .

What is CBDC?

A central bank digital currency is a currency issued by a central bank. Rather than by a commercial bank.

It is also a liability of the central bank and denominated in the sovereign currency as is the case with physical banknotes and coins.

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How CBDC works?

This is the digital form of a country’s fiat currency. Moreover, CBDC is issued and regulated by a nation’s monetary authority or central bank.D

CBDC’s promote financial inclusion and simplify the implementation of monetary and fiscal policy.

Rather than a new currency, CBDC is a form of central bank electronic money that could be used by households and businesses to make payments.

A report by the Bank for International Settlements states that, although the term “central bank digital currency” is not well-defined

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What are the Use cases of CBDC?

CBDCs offer the potential to improve legacy cash use cases, such as by reducing cross-border transaction costs and enhancing financial inclusion.

As of 2022, countries with CBDC are below or around ten.

Examples of countries with CBDC initiatives include the following.

The Sand Dollar by the Central Bank of the Bahamas

The Naira in Nigeria

The Digital Rupee launched by the RBI of India

Digital Ruble by the Bank of Russia

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Will a U.S. CBDC, replace cash or paper currency?

The Federal Reserve is committed to ensuring the continued safety and availability of cash. As well as considering a CBDC as a means to expand safe payment options.

Is CBDC an opportunity for Global Cooperation ?

Additionally, CBDC is being explored in over 100 countries. Moreover, an opportunity to implement the innovation in a way that will have the best macro-economic and societal impact.

What’s more there are more than 100 CBDC’s in research or development stages. However, each country has a different motive for implementation .

Now it is exacerbated by geographical fragility and financial instability.

Essentially, with the increasing impetus to issue a sovereign digital currency, there is a clear need to ensure that the new systems and currencies in place are interoperable .

Additionally, improve the global financial infrastructure .

Can You Invest in CBDC?

Firstly, CBDCs are no different than an issuing nations existing monetary supply.

This means the only way you invest in a CBDC is to hold the currency in your account.

In other words, investing in CBDCs is just like holding a nation’s physical cash in your hand today.

What technology will CBDC use?

Blockchain or Distributed Ledger Technology (DLT) is one technology that can facilitate a CBDC . What’s more it is likely a key feature that CBDC shares with other crypto assets, such as Bitcoin.

Is CBDC the end of crypto?

Unlikely, since they serve different purposes. Although CBDCs will undoubtedly have an impact on the cryptocurrency sector. But , to what extent depends on the policies between jurisdictions.

Is CBDC a good thing?

Firstly , The current banking system necessitates an elaborate system of bank regulation to prevent bank failures. And bank runs.

Secondly, A government bankruptcy is less likely than a banking crisis. Certainly, there is much less probability of a run on a CBDC.

As a result, a CBDC can promote financial stability in the banking system. How will CBDC affect Banks?

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CBDC

Banks lower their maturity mismatch when depositors have access to CBDC.

As well as reducing their exposure to depositor runs.

Banks provide depositors with liquidity services. essentially , it is the ability to withdraw funds and make payments as needed.

Bank of America says CBDCS are the Future of Money .

According to the Bank of America , CBDCS and stablecoins can revolutionized global financial systems.

CBDCs use blockchain technology to improve efficiency and reduce expenses. While stablecoins are cryptocurrencies wherein market value is attached to another stable asset.

Analysts led by Alkesh Shah, BoA Global Crypto and digital asset strategist wrote that “CBDCs do not change the definition of money . But will likely change how and when value is transferred over the next 15 years. “

Also, CBDCs have the potential to revolutionize global financial systems and may be the most significant technological advancement for bank deposits .

Additionally, it will promote inequality among nations , and will result in a loss of monetary sovereignty.

Bank of Japan has decided to Launch CBDC Pilot Program

Only 4% of Japan’s total population uses or owns cryptocurrencies. Experimental testing of the digital Yen is expected to begin in April 2023.

The Bank of Japan revealed on February 17, 2023 that it plans to launch a pilot program in the month of April 2023 to issue digital yen.

Additionally, the Bank is working hard to launch it’s own Central Bank Digital Currency (CBDC) in Japan to ease payment systems.

During a central bank meeting with private-sector executives Shinichi Uchida , Executive Director of Bank of Japan , said ,”our hope is that the pilot program will lead to improved designs through discussion with private businesses. “

The concept of CBDC became popular after Nigeria and China successfully tested their digital currencies. Additionally, made them available to the public .

The United Kingdom and UAE , among others , are in the process of preparing a road map for launching and regulating their central bank digital currencies.

The Central Bank noted that it depended on the public whether to issue a digital yen . Therefore, the Bank of Japan will “continue to make thorough preparations” and launch the CBDC as per the suitable circumstances .

Which Crypto is best for CBDC?

Further, Blockchain technology brings unique advantages to CBDC.

Ethereum in particular is the most production-ready blockchain to support CBDC.

Requirements in terms of scalability and privacy.

Why are countries adopting CBDC?

Some common motivations are promoting financial inclusion. As well as, by providing easy and safer access to money. Although, for unbanked and underbanked populations.

Essentially, Introducing competition and resilience in the domestic payments market.

Moreover, which might need incentives to provide cheaper and better access to money. By increasing efficiency.

What factors we need to consider for successful implementation of CBDC ?

Firstly, these are becoming more and more interesting for governments . Eventually, as effective ways of managing the digital economy. Although, most central banks have begun implementation of the currency as concerns remain.

Additionally, an important success factor for the future of a CBDC regime is co-operation between the public and private sector.

Secondly, participation of the private sector in developing , testing and deploying a CBDC will have several benefits.

Also, it will become important as CBDC’s could play a huge role in the future of financial systems.

3 Ways Digital Currencies could change Global Trade ?

Firstly, the growth in digital currencies could make cross-border payments more efficient. And essentially , help address the $1.7 trillion global trade financing gap.

Although, these burgeoning currencies may not solve all trade issues. However, it could further complicate the supply and demand of foreign exchange .

Especially, for countries with limited existing international trade.

Basically, to realise their full potential , the advancement of payments technology needs to be accompanied by the digitization of trade.

Digital Currencies – Currently, these are growing. Additionally, the market is valued at more than $2 trillion and involves more than 15,000 varieties . In 2021 , El Salvador even adopted Bitcoin as its legal currency.

Similarly, while private digital currencies are blooming ,Central Banks are catching up .

In October 2021, Nigeria joined the Bahamas , the Eastern Caribbean States and Cambodia as one of the first jurisdictions to officially launch CBDC’s.

Based on the Atlantic Council’s CBDC tracker , 14 countries have launched CBDC pilots . And then, 41 are conducting research.

3 Potential Ways Digital Currencies could change International Trade

1. Digital currencies could cause an increase in efficiency for cross-border payments.
2. These could provide alternative credit information for trade finance
3. They could alleviate the issues of de-risking.

Issues Caused by Digital Currencies

Additionally, despite promising potential, digital currencies however, solve some existing problems facing International trade. Although it could also raise new issues.

a. Financial Inclusion – It will remain problematic for countries or communities that can not afford the digital devices needed to hold digital currencies .

Similarly, for those who do not have access to basic infrastructure such as electricity , internet , identification services .

Also, who do not have outlets to convert cash into digital formats.

b. Supply & Demand of foreign exchange – It is debatable whether digital currencies could encourage all countries to trade more.

Additionally, while the potential benefits may help increase trade volume for certain countries. Further, it does not change the fundamentals of international trade.

Which depend on comparative advantages. Similarly, for countries that struggle with economic or political stability . Similarly, they may continue to face these challenges even with digital currencies.

c. Implications for foreign direct investment (FDI) – Many questions are raised by the intersection of cross-border investments and digital currency.

Additionally, as the current framework , such as the bilateral investment treaty (BIT) and the protection it offers. Essentially, it was built well before the age of digital currencies.

Essentially, would digital currencies be considered as “covered investments” under BIT? Would BIT protection apply to investments made by and in digital currencies ?

How would the tokenization of FDI work under the current rules ? Both states and foreign investors need guidance on these questions.

What will replace Dollar?

The currency wars are getting hot and it’s looking increasingly likely that the world is going to start moving away from US Dollar.

As a reserve currency gold or Bitcoin are the front runners to replace it.

Conclusion

A CBDC would preserve the coexistence of sovereign and private money in a digital world. This is not an abstract benefit.

It is the basis for financial and monetary stability . Ensuring competition and efficiency in payment markets.

But a CBDC could generate even more benefits for users.

In an increasingly fragmented world , how can you ensure the innovations in financial market infrastructure are created with cooperation in mind ?

Comparison between a typical Cryptocurrency Bitcoin and CBDC – Table

	Bitcoin	CBDC
Monetary Policy	Fixed. Only 21M Bitcoin will be created. Can not be debased	As determined by policymakers CBDCs are susceptible to monetary inflation.
Geography	Global, Accessible to anyone in the world with the internet.	Determined by policymakers. International settlement may mirror
Storage	Anyone can securely receive and store value with a Bitcoin private key.	Determined by policymakers. Users could be at risk of security if they don’t meet requirements.
Transfer	Anyone can transfer value with a private key and internet access	Determined by policymakers. Users could be at risk of censorship if they don’t meet requirements.
Hours of Operation	99.9% unique since inception.	Determined by policymakers. Automated monitoring may allow 24/7 uptime.
Blockchain Type	Permissionless (public) blockchains	Permissioned (Private) blockchains
Structure	Decentralized	Centralized
Anonymity	Anonymous	Linked to an existing bank account and a corresponding amount of personal information.
Usage	Payments and speculation	Payments & other monetary transactions

Please comment below about what you think of CBDC.

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