Central Bank Digital Currency (CBDC) is a new form of currency that uses an electronic copy or digital coin to reflect the virtual embodiment of the fiat currency of a particular country or region. It is centralized, distributed and controlled by the central bank responsible for the country.
CBDC differs from other currencies in that it supports innovative payment technology, in this case blockchain, to potentially improve payment efficiency and reduce costs. While several countries are exploring the viability of developing and circulating CBDCs, no country has publicly introduced such a currency.
It is essentially a database managed and regulated by the government (or presumably approved entities in a private sector). CBDC is an authorized database, which means that only authorized users can transact on the system. The centralized organization in charge of the database can also prohibit transactions, reverse transactions, “freeze” of assets and blacklist addresses.
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The issuing country would most likely approach the creation of a CBDC in quite a variety of ways. Concept-based applications can use blockchain or other distributed ledger technology (DLT). In the meantime, it could just be a centralized database. Blockchain-based ones, on the other hand, will use a token or coin to tokenize the digital version of fiat currency.
CBDCs are often touted as revamped money, built from the ground up by combining Bitcoin's core technology with distributed ledger technology (DTL). To keep track of money, banks keep financial data in a ledger, such as the amount of money a customer has and the type of transactions they have made.
Instead of keeping all customer financial data in a single database, DLT is made up of many replicas of previous transactions which are kept and controlled by a separate financial institution, usually managed from above by the country's central bank. /P>
DLTs keep a complete record of all transactions. Some countries, notorious for their massive surveillance infrastructure, may seek to use this financial data to keep a closer watch on their population.
CBDCs are more likely than decentralized cryptocurrencies to achieve the goal of “banking the unbanked”. It allows any legal entity to easily obtain a bank account at a lower cost in order to promote its financial inclusion.
Another benefit of technological improvements in the financial system is that while a lot of fiat money is basically numbers in a database, most of the structure is very old. Due to the complexity of the current banking system, a simple money transfer can take several days.
Due to the economic crisis caused by the COVID epidemic, it is clear that central banks must act more quickly. CBDCs can play a role in enabling central banks and financial institutions to make fiscal policy adjustments more firmly than before. A CBDC also makes it easier for governments and central banks to detect fraudulent behavior.
The two are relatively similar in that they both symbolize fiat currency in the form of a digital asset. However, they are extremely different in several respects. Stablecoins are usually issued by a private company and function as a representation of fiat currency or another asset. Although investors can redeem them for the value they indicate, they are not fiat money. CBDCs, on the other hand, are distributed directly by the administration in the form of fiat currency.
CBDCs, as mentioned earlier, are authorized by a central bank and legal tender by the government. Users can associate them with banknotes, which serve as a unit of account, a method of payment and a store of value. Meanwhile, cryptocurrencies are not issued by governments and do not cross national borders. They don't need permission, aren't trustworthy, and are immune to censorship. Moreover, there is no centralized organization in charge of the network. No one has the power to prevent an investor's Bitcoin address from entering into a deal with another Bitcoin address.
While the ability to reverse transactions or blacklist addresses can be beneficial, it is more convenient to take advantage of the benefits that a decentralized network like cryptocurrency can offer the world.
