Central Bank Digital Currency

There has been much talk about cryptocurrencies, like Bitcoin and Ethereum, in the last few years. However, a recently surfaced phenomenon has erupted in the media, this phenomenon is called a CBDC or a Central Bank Digital Currency. There are many of us who already have a vague idea of what cryptocurrencies are and what they stand for, but before I compare cryptocurrencies and CBDCs, I will give a brief background to cryptocurrency for those who do not. Cryptocurrency, sometimes called crypto or sometimes simply Bitcoin, is any form of currency that exists digitally and uses cryptography to secure transactions (Blockchain Technology). Cryptocurrencies do not have a central issuing (Central Bank) or regulating authority (SEC/FCA), instead using a decentralised system to record transactions and issue new units (tokens/coins), which in the case of Bitcoin, is completely transparent, yet anonymous. Two words that don’t often come hand in hand. Bitcoin wasn’t the first digital currency to be created, nor was it the last, however, as you will discover, Bitcoin was a revolutionary step in the transition to a new form of currency and value. 

What is Bitcoin? 

Bitcoin is a ‘Peer-to-Peer Electronic Cash System,’ as described by the developer(s) Satoshi Nakamoto when they first announced it to the public. In the first line of the whitepaper released about Bitcoin, Nakamoto refers to Bitcoin as “a purely peer-to-peer version of electronic cash (that) would allow online payments to be sent directly from one party to another without going through a financial institution.” In lay terms, bitcoin is a currency, like the dollar or pound sterling, which when transacted, does not require a third party like Visa or Mastercard to send or receive. It cannot be printed or debased, through quantitative easing, by any central authority like a central bank, whether that be global or national. Only you and you alone have access to your Bitcoin wallet. Every transaction made on the bitcoin network is transparent, yet anonymous, as users employ pseudonyms, or addresses — alphanumeric cloaks that hide their real identities, called a public key. Every bitcoin address (wallet) has its own public key, which appears as the identifier on all transactions made by the corresponding wallet.  

An example of a public key is: 02b4632d08485ff1df2db55b9dafd23347d1c47a457072a1e87be26896549a8737 

As you can see, this is not an identity that can be easily traced back to your name and date of birth, it does not contain your home address nor does it contain any personal details of any nature, a truly anonymous identity.  

Accessing your Bitcoin Wallet is another key entirely. One that is only seen and know by you. One that is truly private, nobody on the bitcoin network can identify your private key, other than yourself. It can be digitally stored, written on a piece of paper, card, metal or stone, or memorised and destroyed. It is your choice.  

An example of a private key is: 

E9873D79C6D87DC0FB6A5778633389F4453213303DA61F20BD67FC233AA33262 

What makes Bitcoin decentralised? 

As stated above, Bitcoin exists digitally and uses cryptography to secure transactions, which are stored on a public transaction list called a ledger. Unlike many ledgers, which are private, this ledger is completed transparent and public; stored using a relatively new technology called the blockchain.  

What is a CBDC? 

A CBDC (Central Bank Digital Currency) is a type of digital currency issued and backed by a central bank. Unlike cryptocurrencies, such as Bitcoin, which are decentralized and not issued by a central authority, CBDCs are designed to offer the benefits of digital currencies while retaining the stability and security associated with traditional currencies. 

CBDCs are typically designed to function as a digital representation of a country's fiat currency and can be used for various purposes, such as making purchases, paying bills, and transferring funds. They are intended to provide a secure and convenient alternative to traditional fiat currency and can offer benefits such as lower transaction costs, faster and more efficient payment processing, and increased financial inclusion. 

Several central banks around the world are exploring the potential benefits and challenges of CBDCs, and some are already piloting or launching CBDC initiatives. However, the widespread adoption of CBDCs remains in its early stages and is subject to regulatory, technological, and practical challenges. 

As CBDCs continue to evolve, it's likely that their features and use cases will continue to expand, and their impact on the financial sector and the broader economy will become more apparent. Businesses and individuals should be aware of the potential implications of CBDCs and seek professional advice to ensure they are prepared for the changes that may come with their adoption. 

CBDC’s and their relationship to Government Control: 

CBDCs (Central Bank Digital Currencies) are digital currencies issued and backed by a central bank, and as such, they may give the central bank greater control over the monetary system and financial transactions. 

One potential advantage of CBDCs is that they can provide greater transparency and traceability of financial transactions, which can help central banks monitor and regulate financial activities more effectively. Additionally, because CBDCs are issued and backed by central banks, they can provide increased security and stability compared to other forms of digital currencies. 

However, the greater control and visibility that CBDCs provide to central banks also raises some concerns, particularly around privacy and the potential for government control over financial transactions. For example, with CBDCs, central banks may have the ability to track and monitor individual financial transactions in real-time, which raises questions about privacy and data protection. 

It's important to note that the specifics of how CBDCs will be implemented and the level of government control they may entail are still being evaluated and may vary by country. Businesses and individuals should stay informed about the development and implementation of CBDCs and seek professional advice to understand the potential implications of their adoption. 

What are your thoughts on CBDC’s?

Daniel Quinn – February 01, 2023