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March 23, 2022

What is a Central Bank Digital Currency?

Central bank digital currency is a blockchain asset that is tied to a national fiat currency. This allows for national currency to be more inclusive while allowing for regulation and policies to be more easily implemented as well. There are many countries that are either currently implementing central bank digital currency, or considering it.

Is it actually Cryptocurrency?

This digital currency is very similar in structure to a stable coin in cryptocurrency. This centralized digital currency is tied to a real asset, a nation fiat currency, similar to stablecoins. However, the key difference is the ownership or management of the currency at hand. Within crypto, the goal is to have a decentralized financial network that lives on the blockchain. With central bank digital currency, there is still a central bank entity that is controlling the rules and condition of the currency, and thus not decentralized.

Why is now the right time for a central bank digital currency?

Traditional physical currency is still widely used and accepted across the globe, but it does have it’s pitfalls. Many developed countries are beginning to see a fairly steep decline in its overall usage and that has since accelerated in the past few years with everything going on in the world. Now that digital currency is an option for banks and the technology has been proven, many countries are beginning to theorize and actually test how feasible a national digital currency is. These central bank digital come with many other benefits as well. As blockchain technology has a wide range of capabilities, this step will begin to minimize the complexity that is the current financial system and the included maintenance costs.

In 2019, it was recorded that over 5% of US households are “unbanked”. This statistic shows that there are some citizens who also hold a distrust of the current system. Whether security reasons, convenience, accessibility, or any of the flurry of other potential issues, the digital system looks to either help or do away completely with them.

As of March 2022, 9 different countries around the world have started offering a central bank digital currency.

  • The Bahamas
  • Antigua and Barbuda
  • Kitts and Nevis
  • Monserrat
  • Dominica
  • Saint Lucia
  • Vincent and the Grenadines
  • Grenada
  • Nigeria

Most recently, President Biden has issued an initiative to begin researching and developing an American strategy on digital currencies. This means as time progresses, we may begin to see more developed regions begin to adopt and accept this new form of finance.

Are there issues with a central bank digital currency?

The Federal reserve has been heavily looking into the issuance of CBDC’s, and with that has figured out a few potential pitfalls and positive that the initiative brings. The key positives are that it promotes financial inclusion by expanding general access, it is free from credit and liquidity risk, and there is now more support for cross-border transactions without the need of a physical exchange.

It is not without its issues to keep in mind though. Any form of digital currency on the blockchain is open to a cyberattack. The Fed has to be hyper-aware to have the proper cybersecurity measures in place to protect the digital currency. With a digital asset, more research will need to be done on how it affects the stability of the traditional financial market as well. There is also privacy concerns as the blockchain is traditionally public access.

Crypto Taxes

With all that being said, If you do decide to jump into this world of crypto and even pick yourself up some tokens, you need to make sure that you have the proper tools on hand to help you manage your financial accounting needs. One of the best solutions for you will be Ledgible.

With Ledgible, you can report and keep track of your crypto transactions with the supported integrations as you dive into the crypto space with this new information. If you want to learn more about Ledgible and get started for free, click here.

Disclaimer: The author and Ledgible do not provide investment advice and nothing in this article is meant to be taken as such. This website is presented solely for informational and entertainment purposes and is not to be construed as a recommendation, solicitation, or an offer to buy or sell / long or short any securities, commodities, cryptocurrencies, or any related financial instruments.

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