Blog: Central bank digital currency - CBDC
Several central banks are currently developing their digital currencies based on blockchain technology. By developing their own digital currencies, central banks aim to move society towards more controllable currencies. Digital currencies based on blockchain technology offer central banks numerous advantages over traditional currencies. This text aims to tell about central banks’ digital currencies and how they differ from traditional cryptocurrencies. Finally, it is also described at what stage the development of central banks digital currencies is today.
Digital currencies of central banks
The digital currencies of central banks are commonly known by the abbreviation CBDC (Central Bank Digital Currency). Central banks worldwide are currently in fierce competition for the release of their own digital currencies. Central banks have begun to develop their digital currencies in the background of bitcoin, ethereum and other cryptocurrencies. Central bank’s digital currencies, like traditional cryptocurrencies, are based on blockchain technology. This is where the similarities end. The main goal of central banks’ digital currencies is to take societies away from cash towards a more controllable model. Blockchain technology also makes it possible to program various features inside digital currencies that would not be possible in current systems.
Although most of the currencies in use today (e.g., the euro and the dollar) are already in digital form. However, a digital currency based on blockchain technology is still a giant leap forward. The blockchain technology behind central banks’ digital currencies allows full tracking of those currencies. With the help of monitoring, central banks basically strive to prevent things like money laundering. However, authoritarian countries like China are likely to use digital currencies to advance the government’s ideology and control citizens’ daily lives.
Certainly, at this point, many are wondering whether the digital currencies of central banks threaten the position of traditional cryptocurrencies such as bitcoin? The answer to this does not threaten. The maximum number of bitcoins is 21 million bitcoins, and it is not possible to create anymore. Bitcoin is also not under the control of any single party. Central banks’ digital currencies, in turn, are under the control of central banks, just like traditional currencies. This means that central banks can put these currencies on the market as much as they ever want. The biggest difference between central banks’ digital currencies and bitcoin is that Bitcoin is designed with peoples’ needs. In contrast, central bank digital currencies only serve the interests of central banks and governments.
Central banks’ digital currencies and traditional cryptocurrencies have in common an electronic ledger enabled by blockchain technology. This allows the recording and tracking of transactions. The digital currencies of central banks are mainly a technological leap in the current monetary system towards stronger central banks’ control.
China and DCEP
DCEP is China’s own digital currency. DCEP is an abbreviation of the words Digital Currency Electronic Payment, and it’s an entirely digital currency based on blockchain technology. DCEP is, in effect, a stablecoin, whose value is fully pegged into China’s current currency, the renminbi. Thus, by purchasing DCEP, it is impossible to catch up with similar exchange rate fluctuations like traditional cryptocurrencies. Currently, DCEP is being tested in several major Chinese cities.
DCEP is still in trial use now, but in the future, it will become the only official digital payment instrument alongside China’s current currency, the renminbi. China has been exploring its digital currency for several years. The DCEP is intended primarily as a currency operating within China, but China will likely try to spread the DCEP to other countries and increase its own influence. DCEP correctly serves China’s own interests as it allows its users to be fully monitored. Every transaction made with DCEP is stored in a blockchain that the Chinese government can use to serve its interests.
Venezuela and Petro
Although China is well on its way to developing its digital currency, Venezuela, suffering from hyperinflation, has already adopted its own digital currency, petro. Launched in 2018, Petro was the first national digital currency in history.
In theory, Venezuela’s massive oil reserves should serve as a guarantee of the value of petro, and the value of the currency should follow the price of oil. In reality, however, this is not the case. The value of petro is under the control of the same individuals who also managed to collapse the value of Venezuela’s traditional currency, the bolivar. Petro is today the official currency of Venezuela along with the bolivar.
Venezuela collapsed the value of the bolivar by their own actions. The question is how Venezuelans could trust that the same would not happen with the petro. Indeed, a lack of confidence in the current system has led to increased bitcoin popularity among Venezuelans.
The ECB and the digital euro
The ECB (European Central Bank) has also begun to develop its digital euro. Plans to develop the digital euro are already well underway, and the digital euro, like other CBDC currencies, would probably take advantage of possibilities offered by blockchain technology.
Blockchain technology provides the ECB effective tools, for example, to prevent money laundering. With the digital euro, the ECB would also take tighter control over economic developments in the eurozone. The ECB would be able to, e.g., to distribute the stimulus directly to citizens’ bank accounts. It remains to be seen whether the banks will maintain their current position in the future or whether citizens will increasingly manage their finances directly with the ECB.
Digital currencies issued by central banks will undoubtedly become more common in the future. Central bank digital currencies should in no way be confused with traditional cryptocurrencies such as bitcoin. Central banks ’digital currencies are entirely developed by central banks, so their governance and technology are also fully controlled by them. The overriding goal of central banks ’digital currencies is to take societies away from traditional cash toward a more controlled model.
Indeed, central banks can put their digital currencies in circulation into the market like traditional currencies indefinitely. The digital currencies of central banks are by no means the solution to the casting defects of the current monetary system and can therefore be seen as an extension of the current monetary system.Mikko Soon Cryptocurrency specialist