What Does Central Bank Digital Currencies Mean For Bitcoin and the Like?
Central Banks in various countries around the world are slowly gearing towards creating centralized digital currencies to try and curb the rising influence and adoption of decentralized cryptocurrencies. China is known to be the first country to unveil its central bank digital currency (CBDC) referred to as the electronic Chinese Yuan (eCNY).
The eCNY is currently being tested in various cities like Shanghai, Beijing and Shenzhen, across China
The eCNY is designed to be controlled by the central bank of china and it is an electronic version of the normal Chinese Yuan. Therefore, its value is equivalent to that of the Chinese Yuan.
Currently, the first users of the electronic currency are being awarded the digital currency through a government lottery which people are free to participate through WeChat. If lucky to win the lottery to try the national cryptocurrency, about 200 eCNY in an electronic envelope and it can be used in purchasing things from the local stores.
No other country has made such bold strides when it comes to digital currencies. And while the project is still in its testing phase, it is an indication of how the Chinese administration views the future and if it were to be successful the country would end up being too far ahead as other countries follow suit.
But why do the CBDCs matter?
Central Banks are viewed as the ultimate guardians of the traditional monetary architecture around the world and their inclination towards digital currencies represent the final ratification of cryptocurrencies. Times moves fast since it is just a few years ago when the same central banks were fiercely against digital currencies due to fear that they would undermine the national currencies. But today the tide has changed especially after the widespread adoption of cryptocurrencies like Bitcoin which has attracted a lot of corporations.
A look at how the eCNY works
The electronic Chinese Yuan (eCNY) is the exact opposite of the normal cryptocurrencies as we know them.
To start with the eCNY does not store its data on a blockchain network. The ledger of the transactions and who owns the digital currency is stored by the Chinese central bank. That means immutable transaction records and decentralization are not part of eCNY characteristics.
And while cryptocurrencies like Ethereum (ETH), Bitcoin (BTC) and the like are decentralized and governed by no central authority, Central Bank Digital Currencies (CNDCs) like the eCNY are centralized and controlled by the central banks.
If the eCNY is to eventually go global, it would mean that the Central Bank of China always know how much eCNY any person owns and this can prove to be a major trust issue.
Besides China, India has also shown interest in creating a CBDC
In a recent bill tabled in parliament, India seeks to ban all private cryptocurrencies like Bitcoin and introduce a national digital currency pegged on the national currency.
USA digital dollar
Last year, there were also suggestions that the USA central bank should introduce a digital dollar to aid the government in distributing the covid-19 economic stimulus package.
At the time, Maxine Waters, the Chairwoman of the House Financial Services Committee in her proposed Financial Protections and Assistance for America’s Consumers, States, Businesses and Vulnerable Populations Act (H.R. 6321) had included a pitch for a digital dollar. The mention of the digital dollar was however scrubbed from the economic stimulus package that was offered by Nancy Pelosi, the Speaker of the House of Representatives.
But although the USA is yet to officially announce that it is pursuing a CBDC, there are clear indications that the country is seriously considering the option with the Federal Reserve already outlining the preconditions for a digital dollar by the central bank.
Although it is yet to be proved how much completion the CBDC will offer the already existing cryptocurrencies which currently exists alongside the fiat currencies that are controlled by the central banks, it will be interesting how the digital currency industry would look like if central banks ventured into CBDC.