As central bank digital currencies, or CBDCs, have continued to gain traction in the global economic landscape in recent years, nearly all central banks are actively evaluating the benefits and risks of digital currency adoption for the public.
In its simplest sense, a central bank’s digital currency is a digital form of paper money backed by sufficient cash reserves, such as foreign exchange reserves. Each CBDC acts as the secure equivalent of a digital instrument and can be used as a payment method, safe, and official billing unit. What sets it apart from stack coins – similar digital offerings whose value is tied to banknotes – is that they are issued by the government and backed by funds issued by the central bank, making them fully regulated.
On the subject: have central bank digital currencies impact cryptocurrencies in 2020 and what will happen in 2021? Experts answer
China’s Digital Currency Online Payments Project, or DCEP, is arguably the most advanced CBDC experiment already deployed to test consumers in major regions of the country including Beijing, Suzhou, Shenzhen and most recently Chengdu with the country’s goal of launching the digital yuan. before the Olympics. In the winter season next year, China will position itself as a global leader in the cryptocurrency sector.
Although initially the total use of the digital yuan was very limited, the expansion has been very significant in the past few months as the digital currency has recently been used in a number of large digital transactions, including online purchases and device withdrawals. ATM, etc.
In addition, the Chinese government has already participated in several educational blockchain projects to help people understand the value proposition presented by the CBDC to help citizens deepen their understanding of decentralized technologies, smart contracts and other areas related to this continuous development. Space.
Related Topics: How A Stable Digital Yuan Affects China’s Cryptocurrency: An Expert Answer
Visualize Decentralized CBDCs
For a central bank to accept digital currency from any country, it must comply with the monetary policy in force in the region. Despite central banks’ interest in central bank digital currencies, they remain quite concerned about digital assets as they introduce a level of decentralization into the equation that directly challenges how current governance protocols work.
For those governments looking to digitize their economies using central bank digital currencies, it seems pretty obvious that in order for these transactions to truly succeed, they must take advantage of the most revolutionary aspect that cryptocurrencies and blockchain technology have to offer: decentralization.
RELATED: A Nightmare on Stable Street: This Could Be the Fate of the Central Stable Coins
While most CBDC projects developed in recent years aim to enable peer-to-peer transactions, they tend to benefit from authoritarian structures, meaning they are centralized and controlled by a single authority. However, as public confidence in governments and banking institutions continues to wane, there is little incentive for consumers to switch to this type of digital currency for central banks.
Related: Central Bank Digital Currencies Are Dead In The Water
Hence, there is a reason why there is already a real opportunity to create digital currencies that are decentralized in their governance and general use. In fact, there are already solutions on the market today that can help bring this vision to life.
There are blockchain ecosystems full of decentralized digital identity solutions that can enable central bank institutions to easily and efficiently get rid of suspected criminal identities while protecting the privacy of other CBDC users.
On the subject: Decentralized Identity is a way to combat data theft and privacy.
These platforms do not require users to upload information directly to the server, but instead upload encrypted information that is only sent over a secure, encrypted network that cannot be intercepted. Moreover, since such structures allow cryptocurrencies in central banks to operate in a completely decentralized and transparent manner, they can facilitate the creation of complex logical contracts and financial instruments such as bonds, derivatives, etc.
This is why decentralization is better
The most common architectural design for using a CBDC for retail is a licensed distributor system that does not need to be hosted on the blockchain. As a result, these systems tend to show a point of error.