What are CBDCs?
In recent months, centralised financial institutions have been making strides in developing their own central bank digital currencies (CBDCs).
For example, the Bank of England and the UK Treasury have discussed the potential for a digital pound, but while a formal timeline has not yet been set, they are actively working on research and consultations, aiming to move toward the digital pound in the coming years.
Meanwhile, Japan has ramped up its digital yen pilot, moving from initial experimentation into more comprehensive trials, engaging both commercial banks and non-bank settlement firms in the process.
What are CBDCs?
CBDCs, or Central Bank Digital Currencies, are digital versions of a country’s national currency, issued by the central bank.
Unlike typical cryptocurrencies, the value of a CBDC is fixed and pegged directly to the national currency, ensuring it is stable and secure. The purpose of a CBDC is to provide a digital means for consumers to make payments without the volatility associated with cryptocurrencies like Bitcoin or Ethereum.
Users of CBDCs will have access to a digital wallet via a smartphone or other device, where they can manage their balance, receive government-issued funds, and make transfers easily. While this is similar to traditional banking apps, CBDCs benefit from blockchain technology to enable fast, low-cost payments.
Furthermore, CBDCs are designed to enhance financial inclusion by providing access to digital payments for unbanked populations, such as those in remote areas or those unable to access conventional banking services.
Types of CBDCs
There are two primary types of CBDCs: Retail and Wholesale.
- Wholesale CBDCs are primarily used by financial institutions to facilitate efficient settlement and payments. They help reduce counterparty risk and improve liquidity in financial systems.
- Retail CBDCs are digital currencies that individuals and businesses can use. There are two subtypes:
- Token-based CBDCs: These allow for anonymous transactions using public and private keys.
- Account-based CBDCs: These require users to authenticate through digital identification to access and use their account.
- Token-based CBDCs: These allow for anonymous transactions using public and private keys.
Are CBDCs a Positive Move for Crypto?
Many countries are now exploring CBDCs, with over 110 nations having shown interest, and several—such as China—already piloting digital yuan. China’s digital currency initiative, launched in major cities, is an example of how countries are leading the way in CBDC development.
While CBDCs have advantages in terms of accessibility and efficiency, they raise concerns about privacy. Critics argue that central banks could gain deeper insights into citizens' spending habits, leading to potential surveillance and control over individual spending. Additionally, there are concerns about the impact of cyber-attacks on these centralised systems, which could cause significant disruptions.
Despite these concerns, many believe that CBDCs and cryptocurrencies can coexist. Itai Avneri, Chief Operating Officer and Deputy CEO of INX, suggests that the interplay between CBDCs and cryptocurrencies could help expose both to a wider audience. This would enable crypto investors to feel more comfortable trading in regulated environments.
Similarly, Mikkel Morch, Executive Director of ARK36, views CBDCs as a potential risk to stablecoins but does not see them as a direct threat to cryptocurrencies themselves. The availability of government-backed stablecoins could reduce demand for privately issued ones in certain countries.
Does Baanx Work with CBDCs?
Baanx does not directly engage with CBDCs. However, as we are fully regulated by the UK Financial Conduct Authority (FCA), we help businesses offer crypto-friendly services that comply with regulations. These services include prepaid cards and White Label Apps for businesses wishing to enter the digital assets space.
Looking to Enter the World of Web3?
Baanx offers a comprehensive compliance solution to our partners, including KYC, AML, and Fraud Prevention services. Our expert team provides a range of transaction monitoring and investigation services, ensuring that your business stays compliant while minimising costs and compliance concerns.
Ready to learn more? Get in touch with us today and enter the world of Web3!