The Rise of Central Bank Digital Currencies

Daria Sannikova, Man Drawing on Floor

We are hearing a lot about acronyms like DeFi and NFTs, but a lot less so about CBDCs. This will likely change in the coming months so it will be good to know what’s going on here.

Central Bank Digital Currencies (CBDCs) are emerging now and not fully defined, but the idea is to take properties of Bitcoin and other cryptocurrencies and to centralize them so they are controlled by governments.

It is important to note that CBDCs will not just be a digital payments extension of a centralized currency. Instead, they will represent a fundamental shift to an underlying digital infrastructure.

WSJ recently reported that China has begun making this shift. They write, 

China’s version of a digital currency is controlled by its central bank, which will issue the new electronic money. It is expected to give China’s government vast new tools to monitor both its economy and its people. By design, the digital yuan will negate one of bitcoin’s major draws: anonymity for the user.

It will be critical to observe how other countries approach the construction and properties of CBDCs. Some might opt to build on decentralized technologies.

Algorand is building out its technologies to facilitate CBDCs. In a recent post on their website, Andrea Civelli writes,

Centralized financial and payment systems serve as the foundation of our global economy today and ensure trusted transactions for the creation, management, and exchange of value. But they are built on legacy technology and systems that can no longer keep up with the pace and accessibility requirements of all participants.

The introduction of a blockchain-based CBDC, on the contrary, represents the opportunity to overhaul the entire payment system and make it more efficient, accessible, and secure. A decentralized CBDC approach allows Central Banks to build modernized infrastructures around key design goals that only systems based on the most advanced next-gen blockchain technology.

Over the next 1-3 years, the CBDC space could heat up significantly, so it’s worth attending to know before the crowd.

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