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What are CBDCs and How Will They Change the Financial Status Quo?

Lincoln Murr

Summary: Central bank digital currencies, or CBDCs, are a hybrid between fiat and digital currencies. They are controlled by one entity, a bank, but bring some of the benefits of a blockchain, like cheap transactions and fast finality. With countries like the Bahamas, China, and the United States working on prototypes, there could be major changes ...

Central bank digital currencies, or CBDCs, are a hybrid between fiat and digital currencies. They are controlled by one entity, a bank, but bring some of the benefits of a blockchain, like cheap transactions and fast finality. With countries like the Bahamas, China, and the United States working on prototypes, there could be major changes in the way that we bank in the near future. 

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Ever since the proliferation of Bitcoin into the mainstream, governments around the world have been attempting to find a way to utilize its revolutionary technology in a way that will benefit their countries. This has led to the creation of the central bank digital currency, or CBDC. Though the term and idea are still very new, so the definition is still somewhat vague, a CBDC is basically a digital currency issued by a government, backed by the central bank. Right now, there is no native way to send USD from one person to another over the internet. There are services like PayPal and Venmo, but these companies act as the middleman and handle the transfers. There is no way to send money from person A to person B like would be possible in person. CBDCs hope to change this by creating a government-backed centralized blockchain, allowing anyone to send money to one another over the internet quickly and cheaply. 

Unlike Bitcoin, Ethereum, or many other blockchains, the blockchain that a CBDC is based on is centralized and controlled by the government. This means that there is a possibility for governments to chargeback transactions if there are hacks, scams, or other unforeseen circumstances. They also have control over the coin and can print more at their discretion, like with paper fiat currency. 

The first country to have a successful implementation of a CBDC was the island country of the Bahamas. Their Sand Dollar digital currency can be used through a state-created phone app, and allows anyone in the Bahamas to transact using the currency. For people who hold small amounts of the Sand Dollar, KYC is not needed, but it is for higher amounts. Unfortunately, the Sand Dollar is region-locked to the Bahamas, so people outside of the area cannot use the coin. 

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Almost a year after release, the Sand Dollar has had much success in its implementation and development, and is nearing a full commercial rollout within the coming months. 

One of the most interesting facts about the Sand Dollar is that it is actually pegged to the US dollar, effectively making it a trial run of a United States CBDC. If everything continues to go as planned with the Bahamas, the United States will certainly take note. 

CBDCs offer lots of benefits, both to consumers and governments, but also have their fair share of drawbacks as well. One of the biggest benefits would be the potential to create a completely cashless society where anyone can send money to anyone else without the worry of price volatility, high fees, or long transaction times. Though this was also Bitcoin’s main intention, and there are stablecoins on smart contract platforms like Etheruem and Stellar which allow this today, the full faith and trust of the U.S. government is important to a lot of consumers, and these privately-backed stablecoins cannot guarantee that they will keep their peg or continue to be unregulated. The security that comes with a government-backed digital dollar would bring lots of people into the cashless blockchain ecosystem. 

One of the biggest concerns for users of a CBDC is also one of the biggest advantages for the government: full visibility of every transaction. When a transaction takes place in cash, the government has no idea that it happened, and as a result cannot effectively tax it. However, when every transaction is recorded in a ledger, along with the amount and social security numbers of the people involved, it becomes impossible not to tax. This newfound declaration of every transaction could lead to billions in more in tax dollars for governments around the world. Along with the tax money, governments will also be able to determine and block suspicious or illegal transactions, leading to greater control over their citizens. 

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Obviously, this would have massive negative implications for the consumer. Not many people want the government to know about every single transaction they make, big and small, and be required to pay taxes on them. As a result, the CBDCs will bring a large invasion of privacy to users, who will either accept it as an inevitable tradeoff for the efficiency of CBDCs or stick to traditional methods of payment for as long as possible. 

With sixty to eighty percent of central banks researching CBDCs, their implementation in some of the world’s largest currencies seems inevitable. With this will come greater efficiency and ease of use for citizens, at the cost of privacy and tax money. Even though the CBDC may be a net negative for society as a whole, it will make people more aware of the alternative forms of payment and money, such as Bitcoin, and have a positive influence over the blockchain ecosystem as a whole. 

By Lincoln Murr

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