CBDC — Future Replacement for Fiat Currencies

Central Bank Digital Currency or CBDC is a cryptocurrency analogue of the national currency of the state which can perform the same functions as the usual fiat money: to be a means of payment and a measure of value. Such a currency can combine the benefits of fiat money and digital assets.

CBDC differs from cryptocurrencies in that their centralized body is the Central Bank: it issues, regulates the process of their distribution and use.

Benefits of CBDC

Safety. Such assets will be difficult to counterfeit or use in fraudulent transactions, especially if they are based on the blockchain.

Convenience for everyone. CBDC could be the beginning of the formation of a new financial system based on digital technologies. This will reduce most of the operating costs and speed up the operation of payment systems through automation processes.

Control and transparency. Thanks to the digital format, it will be much easier for regulators to track financial flows. This will greatly simplify the fight against fraud, corruption, theft, etc.

Types of CBDC

Central bank digital currencies can be divided into two categories: wholesale (commercial) and retail.

Wholesale CBDCs will make up funds available to the central bank and related financial institutions and directly involved in the financial policy of the state.  They will be able to simplify interstate payments, reduce the cost of transfers and other costs of banks, and become an excellent instrument of monetary policy.

Retail CBDCs are a mass of funds in the public domain for all individuals and legal entities in the country, which can be a means of exchange, payment, savings and investment for them. They must have a 1:1 rate to the national currency of the country and be issued by the central bank.

CBDC developments in the different countries

The Bank for International Settlements believes that the first full-fledged CBDC projects will appear within the next three years.

According to the latest data in the United States, the possibility of introducing a digital dollar is still under consideration, because this is a rather serious step for the financial sector of the economy. The country believes that for the introduction of CBDC on a par with fiat money, careful analysis and preparation must be carried out. The authorities are wary of tokenizing the dollar, because it is the world’s reserve currency.

The Central Bank of Russia has already announced development of digital rubles. The first prototype will be created by the end of 2021. The creators plan to make transfers between individual citizens of the country absolutely free, but it is possible to charge a small commission for paying for goods and services. It is also likely that digital coins can be used independently of an internet connection.

In April 2020, the digital yuan has already become available in China in test mode. According to the latest data, the project will become available to the masses in 2022.

Also, back in 2020, the European Central Bank for the registration of the “digital euro” trademark. It is believed that the final decision on the launch of CBDC in the European Union will be made before the end of 2021.