Explanation of Central Bank Digital Currencies?
A CBDC is a dystopian central bank digital currency. It is a new type of money that governments around the world are testing to replace existing fiat (paper) currencies. Another reason is that many many government agencies are threatened by the decentralized blockchain technology used in cryptocurrency. This is because cryptocurrency challenges central bank and government control. Another concern is that fiat money is being withdrawn from the banking system to fund cryptocurrency exchange or other digital asset accounts. In turn, banks are experiencing reduced lending reserves, loss of transaction fee income, and increased competition. As an example, wire transfers using the SWIFT system for international transfers may cost up to $100 and take 2 to 3 days to settle. On the other hand, the transfer of digital assets around the world costs only a few dollars and the transfer is immediate after the transfer is verified by the digital asset blockchain.
Per an article on CoinDesk updated Mar 9, 2022: This new type of currency is still early in its development. Most countries are still only starting to explore the idea, such as the U.S. form of a digital dollar. A few ambitious countries, including China with its digital yuan and South Korea, have already finished a demo and are piloting the technology. But a CBDC has yet to be deployed on a large scale. Each country exploring a CBDC has its own approach. Several CBDCs are based on the same general principles and blockchain technology underlying Bitcoin, the original cryptocurrency. Blockchain technology allows many different entities to hold a copy of a history of transactions so that history is distributed and not controlled by a single entity.
CBDCs are digital, but with a different technological makeup than de-centralized blockchains. They are generally proposed to reengineered money from the ground up, with many borrowing from Bitcoin’s underlying technology with distributed ledger technology (DLT). Instead of one central database storing all the financial records of people, DLT is composed of several copies of this transaction history, each stored and managed by a separate financial entity, and usually managed from the top by the country’s central bank. These financial entities share DLT together in a distributed manner.
This sits in contrast to a permissionless blockchain, such as Bitcoin, which allows anyone to run the software and participate in sending transactions on the network. No central entity can turn users away. There’s a reason CBDCs choose this permissioned blockchain. Though DLT has some similarities with bitcoin and other cryptocurrencies, the goals are very different. Bitcoin and other public blockchains like Ethereum are unique in that no central entity or group of entities (as is the case with DLT) is in charge. That’s typically not a property that sits well with governments. Governments are choosing DLT technology because they can still retain control over certain aspects such as:
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- The supply: Bitcoin has a limit of 21 million bitcoins built into the protocol, and it is very hard, perhaps impossible, to change this limit. In contrast, governments each have a central bank, which is in charge of the country’s money supply. These powerful banks choose when to remove or add money to the supply, such as to stimulate the economy in troubled times, and set national interest rates, among other tasks. These roles aren’t going to change with CBDCs.
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- Who runs it: A central entity will choose which financial entities participate in managing the distributed ledger. This differs from Bitcoin, which allows anyone to run the software, without permission.
In our opinion, CGDCs are dangerously utopian — and are to be avoided. We feel that the decentralized digital asset blockchains eliminate government and central bank control.
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