Today, individuals across the globe are increasingly encountering blockchain technology on the internet. It can be in the form of news, rumors, or actual utilization of blockchain for financial transactions and various other purposes. The fundamental idea is that blockchain technology has undergone significant development in recent years and is now in the phase of widespread adoption in many countries.
Alongside blockchain, people are delving into the realm of cryptocurrencies, including coins, tokens, and NFTs. There is a wide array of cryptocurrencies, each differing in their operational principles, transaction fees, processing speed, and more. However, the majority of cryptocurrencies share the common principles of anonymity and lack of centralized control. This means that when using cryptocurrencies, individuals remain anonymous, with no personal information revealed. From the system's perspective, they are simply identified by their wallet address. Furthermore, cryptocurrencies are resistant to modifications or confiscation since they are not subject to centralized control. They exist, evolve, and cannot be taken away through transfers or blocks.
Despite the apparent advantages of this approach, it also presents challenges. For instance, the combination of finances and anonymity raises concerns among regulators in many countries. Currently, numerous nations are contemplating or have already enacted legislation to regulate cryptocurrencies. They aim to monitor and control this domain by overseeing entry and exit points, such as cryptocurrency exchanges. As a result, the concept of cryptocurrency anonymity is compromised, but regulatory oversight is introduced. Whether this development is positive or negative is a matter of personal perspective.
The increasing popularity of cryptocurrencies among the general population has also prompted governments to take action. However, in its current form, cryptocurrencies are not particularly suited to meet the needs of governmental structures. Creating a decentralized or centralized solution solely for the purposes of a country would be inefficient and impractical. Within a national context, there is no necessity for unrestricted global transfers, but there is a demand for high-speed system performance, comprehensive control, and programmability. These requirements lead governments to conclude that the concept of blockchain, at least in its current state, does not align with the needs of governmental institutions.
Overall, Central Bank Digital Currency (CBDC) is emerging as a potential solution to address these challenges. CBDC represents a digitized form of a country's official currency, issued and regulated by the central bank. It aims to leverage the benefits of blockchain technology while incorporating necessary regulatory frameworks, such as know-your-customer (KYC) requirements and transaction monitoring. CBDC offers the potential for improved efficiency, transparency, and financial inclusion while ensuring regulatory compliance. For banks, CBDC holds importance as it enables them to adapt to the changing landscape, enhance operational capabilities, and potentially streamline processes related to transactions, settlements, and regulatory compliance.
CBDC - A State's Choice
The emergence of CBDC (Central Bank Digital Currency) addresses the need for a government-backed cryptocurrency analog. While it shares some similarities with cryptocurrencies, CBDC is primarily a digital currency that can resemble stablecoins in terms of price stability.
CBDC can be classified into two main types:
- Wholesale CBDC: This form of digital currency is designed for use between financial institutions, including commercial banks and central banks. Wholesale CBDC facilitates fast and secure transactions, improving the efficiency and transparency of the financial system. It helps reduce risks and costs associated with interbank settlements.
- Retail CBDC: This form of digital currency targets the general public for their daily financial operations. Retail CBDC can be accessed by individuals and businesses through digital wallets or similar means. It enables users to make electronic payments, conduct transactions, and store digital assets directly, offering enhanced security and efficiency.
CBDC is built on the following key principles:
- Control: Governments or central banks can gather information about all transactions within the CBDC system. This level of control allows for timely and effective responses to potential law violations. However, it also raises concerns about user anonymity.
- Programmability: CBDC offers the flexibility to evolve, improve, adapt, and scale the system over time. This adaptability ensures its long-term viability as technology and user needs evolve.
- Efficiency: The speed and simplicity of CBDC transactions contribute to a more efficient financial ecosystem, reducing the resources required for processing.
- Moreover, CBDC serves as a government-sanctioned alternative to decentralized cryptocurrencies, which present challenges for regulatory bodies.
Governments worldwide have shown significant interest in CBDC, evident from their active development of such solutions. As a result, the CBDC landscape continues to evolve rapidly. For example, here is how the CBDC landscape looked in December 2020.
After only 3 years in which the world has become increasingly exposed to blockchain, the map has changed to:
As can be seen, some countries have gone from abandoning the CBDC to studying it again. Some countries have moved abruptly to concepts. All in all, there is not much left on the map where absolutely nothing is being done as part of the creation of CBDC. However, it is quite possible that the information is only non-public, and the work is being done in secret.
CBDC: Problem or Panacea?
At first glance, the CBDC system may appear contradictory, especially when compared to cryptocurrencies, which offer anonymity and the preservation of your funds. However, the reality is more nuanced.
CBDC is a government-driven system with predefined objectives. These objectives include increasing payment efficiency, improving accessibility for citizens, and ensuring the security and reliability of the system. The proliferation of cryptocurrencies, which pursued different goals and posed potential threats to traditional banking systems, acted as a catalyst for the active development of CBDC.
It would be incorrect to perceive CBDC as a threat to citizen anonymity and confidentiality since governments already have access to our data through our activities within the country. While certain transactions can still be hidden from the government or disguised as something else, the overall situation remains unchanged. The introduction of CBDC will not alter this reality.
In essence, the emergence of CBDC can be seen as an enhanced version of domestic financial transactions. It is evident that CBDC will likely simplify the lives of ordinary citizens, as well as companies and businesses, rather than cause problems. For individual citizens, transitioning from card-based payments to CBDC will not significantly change their experience. It merely replaces the ephemeral "card" with an electronic wallet number.
Undoubtedly, the introduction of CBDC in various countries will have some impact on cryptocurrencies, as CBDC aims to supplant blockchain solutions within domestic financial sectors. However, cryptocurrencies will continue to evolve in their current directions based on entirely different principles and ideas. CBDC is designed as a large and flexible system, but its application is limited to the government and its financial institutions. Once we consider the potential of blockchain for storing and transmitting various forms of information (such as NFTs), the boundless possibilities of cryptocurrencies compared to CBDC become apparent.
In conclusion, it is important to reiterate the essence of CBDC in relation to cryptocurrencies and blockchain technology. CBDC is a government-led solution aimed at displacing cryptocurrencies from the financial sector of nations. However, it does not seek to achieve complete dominance or destroy the concept of blockchain. CBDC operates within defined objectives and tasks, while blockchain, with its uniqueness, flexibility, and wide range of possibilities, can serve as the foundation for numerous other applications, offering a distinct approach to finance and information management.
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