CBDCs: The Gray Area Between Fiat and Cryptocurrencies

Central Bank digital currency research and development have exploded. We answer common questions about this new financial technology.

What are CBDCs?

CBDC stands for central bank digital currency. A CBDC is a form of digital cash issued by a country’s central bank. Their value is fixed by the central bank and reflects the country’s fiat currency.

There are two kinds of CBDCs. Retail CBDCs are intended for the general public and facilitate transactions between consumers and retailers. Wholesale CBDCs help settle wholesale financial transactions by acting as reserves. These are primarily used by large financial institutions for interbank settlements for handling sizable transactions like security trades.

Are CBDCs cryptocurrencies?

CBDCs may resemble stablecoins, which are pegged to various currencies such as USD. However, they are very different - primarily due to how they’re created.

While both are digital currencies, cryptocurrencies are created through mining, the process of validating and adding new blocks to the blockchain. Cryptocurrencies are decentralized, with no relationship to governmental groups, and, in an ideal world, are meant to eliminate the middle person from the financial system.

Meanwhile, CBDCs are created and issued by the central bank, making them centralized and reliant on banks and governments. While CBDCs can use blockchain technology, not all of them do.

Why CBDCs?

The goal of CBDCs is transferability, convenience, accessibility, and security. They lower maintenance costs and cross-border transaction fees. Many governments tout them as a solution to quick stimulus checks and as a method to bank the unbanked.

While there are many upsides to CBDCs, there are concerns about trust, surveillance, and privacy as digital cash would allow greater tracking than fiat cash. The state of Florida banned CBDCs, with the governor calling them “Big Brother’s Digital Dollar”.

Recently, research funded by The Bill & Melinda Gates Foundation at MIT found the financial inclusion aspect of CBDCs are difficult to prove. The research indicates that the efficacy of inclusivity in digital currency relies on the intermediaries who facilitate it. It further argues that replicating the existing payment systems would fail to create a meaningful difference. In fact, a CBDC may reproduce social inequality instead of reducing it.

How do CBDCs impact crypto markets?

Currently, there are many barriers to cryptocurrency in America such as regulatory uncertainty and Operation Chokepoint 2.0, which we detailed in a previous Insight. At the same time, the Federal Reserve has stated that they are exploring CBDCs. Ultimately CBDCs may be seen as competing with cryptocurrencies due to their similar function. However, the cryptocurrency company Ripple is notably launching its own CBDC platform.

Are CBDCs really happening?

The first CBDC came out of the Eastern Caribbean in 2021 and was spearheaded by a Barbados-based firm. As of March 2023, 11 countries and territories have already existing CBDCs, including Nigeria and the Bahamas. Eighteen countries have pilot programs, and 32 countries have programs in development.

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