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US, China, Europe and India — all are mulling the possibility of a digital currency, but no one is ready to bite the bullet, yet

May 25, 2021, 19:16 IST
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  • Central banks in Europe, US, China, India and more have been working on Central Bank Digital Currencies (CBDCs).
  • Facebook’s Diem moved to the US recently, to issue a Stablecoin backed by the US Dollar.
  • China is already testing a digital version of the Yuan.
A lot has been said about cryptocurrency prices recently, especially with regulations in China stirring up prices over the past week. While governments around the world have been resistant to accepting cryptocurrencies as legitimate payment systems, they aren’t opposed to the underlying blockchain technologies that run all of these currencies. Enter Central Bank Digital Currencies (CBDCs).

What are CBDCs?

Simply put, CBDCs are digital versions of the currencies you use right now. In the US, a CBDC would be a digital dollar, in India it’s a digital rupee, China has already started testing a digital Yuan, and so on. As the end-user, using a CBDC won't be the same as making digital payments right now, because the real change lies in the background.
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Essentially, a CBDC is a digital version of a fiat currency that’s run using a private blockchain system. That’s the first big difference between CBDCs and cryptocurrencies — the private blockchain. Almost every cryptocurrency you see today runs on a public blockchain, meaning they’re maintained by users and miners worldwide. Private blockchains are controlled by one organisation, which in this case will be central banks.

In the case of a CBDC, a central bank can issue and track the whole lifecycle of a country’s currency digitally. It essentially eliminates the need for printing paper money. If you’re thinking of the game Watch Dogs right now, you’re on the right track. CBDCs can be issued digitally by the central bank, and since they are essentially just pieces of code, their flow will be trackable right from their creation.

CBDCs have great importance in the future, with respect to environmental concerns, curbing bank frauds and more. They are also Stablecoins, meaning their value remains stable and doesn’t fluctuate the way cryptocurrencies do. They are backed by federal banks, instead of consumer sentiments. They also give the government great powers of surveillance.
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CBDCs are not cryptocurrencies

Despite the brouhaha around CBDCs though, what many industry experts say is that CBDCs aren’t cryptocurrencies. This is because they are designed to be trackable and do not allow anonymity. This is against some of the fundamental principles of cryptocurrencies.

Even more importantly, the fact that a central bank controls them means there’s no public control on these currencies, another central element of almost every cryptocurrency. Unlike Bitcoin or Ethereum, you can’t create a CBDC by mining. Only the concerned bank can issue it.
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Which countries have been considering CBDCs?

The US Federal Bank has been considering a digital dollar for quite a few years now. In fact, according to a report by CNN, Lael Brainard, a member of the Federal Reserve Board of Governors, even argued a case for the digital dollar yesterday. The US Fed was amongst the first to consider the creation of a CBDC.

Industry watchers have also said that Facebook’s Diem, which was originally called Libra, will become the blueprint for the US CBDC. The company recently gave up its Swiss Bank license in order to shift operations to the US.
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But if there’s a leader in the CBDC space right now, that’s China. As mentioned before, the country has already started testing a digital Yuan. “In order to protect our currency sovereignty and legal currency status, we have to plan ahead,” said Mu Changchun, deputy director of the People’s Bank of China told the Wall Street Journal in April.

US and China aside, the European Central Bank (ECB) had also published a report on the issuance of a digital Euro in October last year. “A digital euro would be an electronic form of central bank money accessible to all citizens and firms – like banknotes, but in a digital form – to make their daily payments in a fast, easy and secure way. It would complement cash, not replace it. The Eurosystem will continue to issue cash in any case,” the ECB noted.

The Reserve Bank of India has been considering CBDCs since as early as 2017 as well. The bank mentioned the creation of a digital rupee early this year, and the same was also expected to be taken up in the Budget session of the Parliament this year. The RBI-issued digital currency is expected to reduce the job of intermediaries when it comes to settling payments, and give the central bank tighter control over the country’s growing concern around bank frauds.
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