CBDC stands for “central bank digital currency” and is a combination of cryptocurrency and centralized banking.
So, this means a centralized bank, like the Federal Reserve of the United States, establishes a government-issued and back digital currency.
A CBDC combines the efficiency of cryptocurrency and the security of centralized finance into one package. It makes sense that countries around the world are starting or started establishing their own digital fiat currencies.
I’m sure you’re wondering how this impacts you on your quest to become a cryptocurrency millionaire?
Well, throughout this guide, we explain everything you need to know about the rising popularity of CBDCs.
We’ll cover the possible benefits, countries currently rolling them out, and some risks you should consider if you plan to invest.
Table of Contents
- 1 Benefits of CBDC
- 2 Countries rolling out CBDCs
- 3 Resistance to CBDCs
- 4 The impact on other cryptocurrencies
Benefits of CBDC
You could be thinking: “They sounds an awfully lot like cryptocurrency”, and you wouldn’t be far off the mark. However, they come with some benefits that other cryptocurrencies cannot offer.
Trusted because there’s less risk
These digital currencies carry more weight because central banks back and distribute them.
They are also pegged to real fiat currency, much like how Tether is pegged to $1 US dollar. The currency’s regulatory body can control the supply and thus has more control over its value. As a result, a currency issued by a centralized bank is generally a lot more stable.
So, you can invest in CBDCs with much less worry knowing that it is backed and regulated by a national government.
Cross-border payments would be much easier
Cross-border payments are transactions between businesses or people from different countries.
In our current global banking system, they are rather difficult, have to be done manually, and you usually pay a lot in exchange rate and transaction fees.
CBDCs on the other hand would handle these international payments far more efficiently. Digital currencies could instantly be exchanged daily through the web with practically no need for financial middlemen.
Increased security and less illegal action
The most crucial benefit of CBDCs to consider is their increased security against illegal activities.
Cryptocurrency is plagued with hackers and digital thieves because it lacks the regulatory power to protect the system. A centrally controlled digital currency give governments a good reason to make the system secure and safe from hackers.
If you are a low-risk investor, you should consider them because decentralized cryptocurrencies at this point cannot offer this increased security.
Remember, these are all the added benefits of CBDCs that standard cryptocurrencies cannot offer. You still benefit from the efficiency and ease of financial transactions the cryptocurrencies provide, but central bank digital currencies would be a much less risky option. Cryptocurrencies are the more high-risk and high-yield option for investors.
Countries rolling out CBDCs
Countries are starting to recognize the value of cryptocurrencies which explains why many are trying to create their own central bank digital currency.
They want to create financial systems that benefit from efficient, easy, and secure money transactions. While many of these CBDCs are still in their trial phases, they could drastically change the global financial system.
Cross-border payments are one crucial way. If more and more countries adopt digital currencies issued by their central banks, it would be easier for people and businesses to exchange money across country borders. An optimistic economist might even say that this’ll trigger worldwide economic growth!
Here are some of the countries that are testing or deploying their own digital currencies:
The Bahamas has the Sand Dollar
The Central Bank of the Bahamas launched the Sand Dollar in 2020. You can purchase the digital currency since it went public after launch. There are many different issuing agents you can access to add the currency to your e-wallet.
China has the Digital Yuan
China was the first major economy in the global environment to release its own digital currency. During the trial phase the central bank gave away 6.2 million through a lottery system. The trial period is still in effect, so the currency is unavailable for wide public access until 2023.
Marshall Islands use the Sovereign
The Sovereign or SOV went on presale in 2020 and is issued by the Marshall Islands. The goal of the state issued cryptocurrency was to reduce the country’s dependency on the dollar and help citizens avoid transactions fees for money wiring through Western Union.
Sweden issued the e-krona
One of the more recent trial runs, the country issued a small amount of the e-krona this year. After China, Sweden is the largest economy to begin exploring CBDCs as a more efficient currency.
Ukraine is using the E-Hryvnia
The country’s trial run included around 5,000 of the cryptocurrency which was valued around $200. Many officials and bankers in the country are worried about the CBDCs impact on the country’s banking system.
Resistance to CBDCs
Many bankers and officials are skeptical of the new type of financial system.
From their perspective, their worries make sense. Uprooting a country’s entire way of handling its money is going to cause some problems.
Some CBDC trial runs in other countries have proven this point. Ecuador, for example, tried a cryptocurrency back in 2015, which failed miserably. The citizens were suspicious of the new type of currency but also of the government distributing it.
That’s the double-edged factor regarding CBDCs. If nations want success for their CBDCs, they must get their citizens on board, otherwise they simply won’t use it.
The failures haven’t deterred other countries from trying, as you can see by the ones listed above. Besides China, Russia is another economic superpower with plans to trial its own CBDC soon: the digital ruble.
The impact on other cryptocurrencies
CBDCs are just another example of governing bodies trying to keep up with citizen demands.
Bitcoin and other cryptocurrencies grew in popularity because of the power people gave them. These people and investors fled traditional finance because they were tired of the inconvenient fees and barriers when exchanging money.
Whether CBDCs overtake cryptocurrencies in popularity is still too early to definitively say. Some governments are worried about cryptocurrency that they can’t control, with some trying to ban Bitcoin outright. However, it is worth considering that a centralized cryptocurrency is more likely to attract attention from the public, because they are more comfortable knowing it is backed by the central bank.
The best thing you could do is continue to watch the trial runs in the countries listed above to see if the public starts to use and circulate the currency.
That could indicate whether citizens might accept the new form of money as their preferred choice. By watching the trial runs, you might find the best time to jump in and invest in a growing CBDC.