Do CBDCs Need Blockchain?
Digital money is of interest to 80% of the big banks. Two years ago, the French central bank experimented with a private fork of Tezos to issue and test the digital euro.
What are central bank digital currencies (CBDCs), what are their advantages over other forms of money, how do they differ from stablecoins, and do they require a blockchain to work? This post explains it all in simple terms.
What CBDCs Are For?
CBDC (Central Bank Digital Currency) is a digital version of cash.
Digital currencies have numerous advantages, including:
- giving central banks an opportunity to compete with merchant banks and even offer loans at a lower interest (in theory);
- ensuring financial inclusiveness: using CBDC doesn’t require one to have a bank account, so more people will have the opportunity to make digital remittances;
- saving the national budget as operational expenses on working with cash eat up 1.7% of the GDP.
- enabling regulators to have full control through the programmability and transparency of CBDCs;
- giving banks a 24/7 access to liquidity.
CBDCs do not seem to differ from cashless money on bank accounts, but they are two different types of currency.
Cashless money is issued by a particular bank, and the ability to use this money depends entirely on that bank. If the bank gets closed, the card doesn’t work, and no money can be withdrawn.
CBDCs, on the other hand, work like cash, but in digital form. People and legal entities can transfer them without the intermediary of banks and payment providers.
Also, CBDCs cannot be considered stabelcoins because digital money is directly backed by the central bank. Roughly speaking, it is not a coin the central bank issued against paper money, but a full-fledged part of the money supply. Digital currency does not represent money, it is money.
Do CBDCs Use BLockchain?
CBDC requires a digital ledger with reliable data storage, backups, and protection against changing previous records. Blockchain protocols fit this description, but with some caveats.
First, it is difficult to imagine a public and transparent blockchain at the heart of CBDC. Otherwise, knowing a person’s wallet address would enable other people to monitor that person’s financial life.
Second, the central bank must retain a monopoly and full control over the digital currency. Decentralisation does not fit this objective.
Third, the TPS of reliable blockchains may not be enough to satisfy millions of users.
Still, it doesn’t meant that CBDCs won’t be using the know-how of blockchain protocols like distributed ledger, heuristic analysis for tracking of funds, or smart contracts to automate financial operations. The latter is the area where Societe Generale — Forge and Ukraine’s National Bank experimented with Tezos as a platform for a CBDC.
Will CBDCs Supercede Crypto?
No, because they have different objectives. The purpose of digital money is to be digital money, that is, a universal exchange commodity and legal tender. Cryptocurrencies in their current state are an investment vehicle, an infrastructure solution for launching financial projects, and art galleries, but they are not a common means of payment.
Still, CBDC could, in theory, make cryptocurrencies a little easier to deal with. For example, when legalising cryptocurrencies, the national bank could launch the most common bridge to transfer digital euros to the blockchain.
What Countries Already Have CBDCs and What Do Their Users Say?
The Atlantic Council’s website features an interactive map showing the progress of different countries in developing and introducing digital money.
For now, China and their digital yuan e.CNY is the most active country in the world when it comes to digital money. There’s little known about the technical aspects of e.CNY. Its Whitepaper only describes the tasks it seeks to solve and the impact it will have on the financial system.
China’s central bank is testing the digital yuan in four major provinces. Journalists from technology publications occasionally conduct interviews with residents and local entrepreneurs to get their views on the new form of money. So far, everyone agrees that the digital yuan is more profitable than the cashless yuan: the Central Bank does not charge fees for transmitting and acquiring e.CNY, so shopkeepers are literally pushing customers to pay with it.
At the same time, China’s central bank has tackled the problem of payment anonymity in a peculiar way. The bank’s director for digital money Mu Changchun said the bank will only track large payments, while small “casual” transactions will remain anonymous.
Despite the regulated and centralised nature of CBDCs, it is still the way to introduce digital currencies to the masses. From this perspective, national digital currencies can lead to the popularisation of cryptocurrencies among a country’s population by making it easier to convert fiat into crypto and back.
Public blockchains like Tezos are not really necessary to achieve CBDC’s goals, but digital currency creators are adopting their expertise and technological advances.