Why Central Bank Digital Currency (CBDC) Matters

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A digital currency is basically electronic cash, a currency used by a decentralized payment system. It is not issued by any kind of central authority, such as a government or bank, and they are not backed by any physical asset like gold. 

The Central Bank Digital Currency (CBDC) is an emerging form of currency issued by central banks that enable digital transactions. In the United States, the popularity of mobile wallet app Venmo offers a glimpse into what using CBDCs might look like due to its digital nature. However, there are many gray areas surrounding CBDCs that need to be addressed.

During the Global Blockchain Summit in Bataan, financial technology (fintech) leaders were tasked to explore the pros and cons of CBDCs, which include concerns about privacy and security. Bataan is a province in the Philippines that aims to integrate blockchain technology in government processes. 

The possibility of using CBDCs in the Philippines was explored during the summit. And Gareth Roberts, product manager of blockchain research and development firm nChain, talked about CBDCs and they can benefit adult Filipinos, over 40% of which remain unbanked to this day. 

“CBDC is a tool with great potential for global financial inclusion. It can be used for micropayments, online service payments, and introducing unbanked citizens to CBDCs, among others,” said Roberts. However, to fully maximize the benefits of a CBDC, a “truly scalable blockchain” is necessary to serve as its foundation.

A scalable blockchain, such as the BSV blockchain, is an immutable distributed ledger that is able to increase its data block sizes and throughput, which is measured in transactions per second (TPS), according to demand of usage. Aside from lowering fees to an insignificant $0.000003 per transaction, it allows for a blockchain to accommodate global businesses. 

And because it can scale, it can handle a business’ future growth efficiently and in a cost-effective way. In this context, a scalable blockchain can easily handle when a CBDC goes mainstream, which will generate a massive amount of data and an extremely high throughput. A bigger block size means more transactions can be processed per block, which contributes to the increase in the throughput of the network. 

A high throughput blockchain is crucial in allowing a network to handle more transactions without the network experiencing latency or crashing—all while keeping fees low. Imagine billions of transactions being processed in a day when most of a country’s population is already using it. It is necessary for a blockchain to scale in order to keep up with this kind of growth.

According to a Google Trends graph, interest in CBDC significantly increased in 2020, and it continues to grow. CBDCs operate within the traditional monetary system, comparable to cash and bank deposit money. 

Essentially, CBDCs act as a digital form of central bank money as it is dependent on a real-time price of a fiat currency. Thus, it can be used as a real currency since it is not as volatile as cryptos like Bitcoin Core (BTC) and Ethereum (ETH).

However, CBDCs can be misunderstood as being the same thing as traditional e-money. While both are digital forms of money, they have different characteristics, like how CBDCs are issued by central banks, and e-money is issued by commercial banks and other private financial institutions.

Furthermore, e-money may or may not be backed by physical assets like gold or silver. While CBDCs are not backed by a physical asset, they are supported by the full faith and credit of the issuing government. This means that the issuing government has provided a guarantee to redeem the CBDCs for its fiat currency.

A CBDC has some, if not most, of the positive qualities of both fiat currencies and e-money. CBDCs, as they are always available, makes payments and settlements nearly instantaneous and secure. Like e-money, all it takes to gain access to CBDCs is a smartphone and Internet connection.

Because of this, it provides easier access for the unbanked, which then increases financial inclusion. The prevention and detection of illegal activities, like money laundering and terrorist financing, are also done more efficiently with CBDCs. This is because transactions can be tracked and traced more easily because they are recorded immutably on the blockchain in a chronological manner. 

There is also the benefit of reduced reliance on intermediaries, as CBDCs do not really need commercial banks or payment processors. This is because CBDCs can be issued directly to individuals and businesses.

Ultimately, CBDCs can potentially revolutionize the way people and industries think about money and payments. Instant and secure transaction capabilities, enhanced security, and greater financial inclusion can be attained through proper use of CBDCs. This offers a more promising future, not only for the financial industry, but for the world as a whole.

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