Banks around the globe rush into CBDCs and they want to issue or plan to issue their own CBDCs. So what is CBDC and how does it actually work? What may potentially happen if one country uses CBDC and what individuals can do as CBDC? How is CBDC different from cryptocurrencies and how cryptocurrencies will become after CBDCs?
Let’s explore starting from what CBDC is.
So what is CBDC really?
People may wonder isn’t banks already have digital cash and services like Visa, Mastercard, Paypal, Venmo, and many others have already used digital cash to transfer money between banks.
CBDC shorts for Central Bank Digital Currency. It is denominated in the national unit of account which is directly the liability of the central bank.
To translate into human language, CBDC is a digital currency directly issued from the central bank or Federal Reserve in the US. (from now, I am using Fed Reserve as equivalent to Central Bank here)
Let’s discuss how the Federal Reserve issues money!
There are three types of money Fed Reserve issues: physical cash, electronic central bank deposits or reserves or settlement balances and private money.
Physical cash: this one is easy to understand as it is a peer-to-peer fiat paper money.
Electronic central bank deposits: this one only issues to qualified financial institutions or banks in general to become their cashes to facilitate loans
Private money: this one is more complex as it acts in multiple roles in commercial banks to 1) settle interbank payments, 2) become convertible banknotes, 3) offering contingent liquidity for last resort. Or you can just forget about what I wrote previously and think of private money as insurance for the banks in case they run into trouble or out of money, it can immediately become money to pay off debts.
Let’s go back to Banks and Visa, Mastercards, Paypal companies
So, all banks or companies handle your payments either credit cards, debit cards, they can only provide services around the three types of money above. In other words, none of them are capable of issuing all three types of money.
For example, Visa and Mastercards, they provide private money between business and individuals services to handle payments transactions and settlement.
Paypal and Venmo, digitized physical cash to consumers then provide services to settle cash payments (different from credit cards services above).
Banks use digital payments systems as a layer to handle electronic central bank deposits.
In short, all digital payments are handled through digital accounting transactions but money already exists.
CBDC on other hand, integrated digital payments and did it all from Fed Reverse issued digital cash directly into individual bank accounts. It will make all the above services useless.
That is why VISA, Mastercard are so excited about cryptocurrencies and not to forget about Paypal either!
There are of course many risks involved around CBDC which I will introduce in another article.
What is up with stablecoin then?
If you have not yet read my article about stablecoin, you can read it here.
Stablecoin is unstable because its assets back them to be 1:1 ratio of fiat currency is very difficult unless they have exactly the same amount of cash that Fed Reserve has which makes it absurd for a company to own the Fed Reserve ?!
CBDC, therefore, is both stablecoin 2.0 and its killer to make stablecoin out of business.
Not to mention, Bitcoin and other cryptocurrencies out of business as our Majestic Fed Chair Jerome Powell once said,
“U.S. Digital Currency will make Bitcoin become obsolete!”
Now, you learn where he got confidence from.
Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose cryptocurrencies are mentioned in this article. This information is only for educational purposes.