CBDC 101: What Are Government-Controlled Digital Currencies For And How Are They Different From Cryptocurrencies?

In the light of the recent CBDC-related events such as the potential creation of a Ripple-based climate-friendly stablecoin in Palau and the proposal to ban cryptocurrencies in India supposedly in support of its CBDC, central bank digital currencies have become a hot topic in the crypto space nowadays. But do all people know what exactly it is? Probably not. CBDCs have been insanely interesting to me in the past few weeks (hyperfixations can hit you where you least expect them), so I’ve decided to do a little review of the main projects and discuss the differences and similarities between CBDCs and cryptocurrencies for everyone to enjoy.

So, Central Bank Digital Currencies (CBDCs) are digital currencies issued by the government central bank that are equivalent to the country’s official fiat currency. CBDCs have an official legal tender status in the state where they are issued. Many CBDCs will likely use a distributed ledger technology similar to blockchain. However, central bank digital currencies will always be different from cryptocurrencies in that they are completely centralized by their nature, controlled by the government and tied to the economy of its political entity. 

As of today, central bank digital currencies are still mostly at the hypothetical proof-of-concept stage, although many countries are already developing their own CBDC projects. Let’s review some of the most important ones.

What Countries Have a CBDC?  The Most Prominent CBDCs The Chinese Digital Yuan

China is considered to be the first major economy to launch a governmental digital currency and one of the countries that contributes the most to the development of CBDCs. The digital yuan or eCNY is issued by the People’s Bank of China and is equivalent to other forms of CNY. The digital renminbi project began in 2014 and led to the first trials of DCEP in four China’s regions in April 2020 with six more regions joining the CBDC’s testing in April 2021. Some of the goals of the project include challenging the dominance of the US dollar and replacing cash. China’s move to ban all crypto transactions in the country this fall might also have to do with the government trying to promote its CBDC and get rid of the other digital currency competitor. 

Apparently, China's CBDC is already a big hit. The People’s Bank of China reported that as of the end of October, 140 million people had already opened digital wallets for eCNY, and almost $10 billion of transactions involving the digital yuan had been conducted. There is still no set date for the official launch of the CBDC, though.

The Bahamian Sand Dollar 

The Bahamian Sand Dollar is officially the world’s first launched central bank digital currency. The project was piloted on the Exuma and Abacos islands in 2019 and fully launched in October 2020. The intention for creating this CBDC was to make digital payments more secure and accessible to communities of any status, banking the unbanked and all that. The currency can be used in a digital wallet, which can be accessed through a mobile application or a physical payment card, although users have to go through KYC and AML procedures first. The central bank confirms that around 20,000 people are now using Sand Dollars, with approximately $300,000 being in circulation. 

The Marshallese Sovereign

The government of the Marshall Islands has also decided to launch its own central bank digital currency. The Marshallese digital currency is called Sovereign (SOV) and is built on the Algorand blockchain. The project was unveiled in February 2018 and introduced in 2020. Having no national currency or central bank, and using the US dollar as legal tender, a CBDC might be a good way to reduce US influence for the Marshall Islands. Aside from being a powerful means to decolonization, the Sovereign is different from other CBDCs in that it claims to have low transaction costs, promotes financial inclusion and stands against climate change. 

The Swedish E-Krona

Due to the tremendous decrease in the use of cash in Sweden, the country has piloted its own central bank digital currency called e-krona. Backed by the Riksbank, the project began developing in 2017 and entered into a more practical stage in 2020. In 2021, E-krona continued its testing. As of now, the CBDC can only be purchased through the trusted Riksbank exchanges.

Other CBDC Projects with Great Potential European Union

The European Union has confirmed that it might also launch its own CBDC. If approved, the digital euro will be issued by the European Central Bank and will become a legal tender in 19 countries, the potential broadest CBDC range. The European Union said it would see how relevant digital payments will be in Europe in 2021 and make a decision regarding the European CBDC based on the current trends in digital payments. The project might be fully launched by 2025.

The United States

The United States is also examining the possibility of creating its own CBDC. It has been reported that the Federal Reserve is working on a US CBDC called FEDCoin. The US might even have two different CBDCs developed by the Fed and the Massachusetts Institute of Technology. In September of this year, the Fed said it would release a paper on its CBDC soon, although no particular dates were confirmed.

Peru

Peru has recently confirmed that it joins the race to introduce its own central bank digital currency. It is reported that the Peruvian CBDC is in active development, but no time frames have been named yet. With Brazil, Mexico, Venezuela and others working on CBDCs, as well as El Salvador adopting Bitcoin as its legal tender, Peru is hardly the first South American nation to experiment with digital payments.

India

India is also planning to introduce its own CBDC in hopes of improving the country's economy. The Reserve Bank of India has recently reported that their CBDC project might be piloted already in April of next year. 

There are many other countries that are working on their own CBDC projects, including the UK, Canada, Japan, Thailand, Ukraine, South Korea, and many others. Altogether, around 60 countries have already either launched, piloted or at least started developing their own CBDCs. More and more governments are joining in, paving the way to a fully digitalized world economy. 

CBDCs vs Cryptocurrencies: Differences and Similarities

So, now that we have reviewed some of the most prominent CBDC projects, let’s take a look at how these central bank digital currencies differ from cryptocurrencies.

Fully Digital

The one common thing that CBDCs and cryptos share is digitalization. Both of these currencies are fully digital and are not issued as paper bills or coins. Many CBDCs allegedly also utilize blockchain technology.

Centralization

Unlike cryptocurrencies, CBDCs are centralized, tied to the state’s central bank, and dependent on the country’s government and economy. This is the key difference between cryptos and CBDCs, which makes the latter much closer to fiat money than to cryptocurrencies.

Bottom Line

In light of the major differences between the two digital counterparts, it is easy to understand that the CBDC creators have goals that are totally different from the purposes of crypto. While cryptocurrencies are meant to open an alternative economic system and provide security, anonymity and a big range of financial choices to its users, CBDCs do exactly the opposite: they support the old government-controlled economy and are merely a replacement for the regular fiat currencies.

Cryptocurrencies are shaping the new digital economy and present an amazing alternative to fiat money. However, while CBDCs are really good as a concept, as of now they’d be a much harder pick, as compared to good old cryptocurrencies. The goal of the crypto community should be to make cryptocurrencies work for what they were made for and create a broad, stable, and secure decentralized financial system. 

About the author

Pauline Shangett is the Chief Business Development Officer in ChangeNOW.io. She has extensive experience in music marketing and promotion, a career she pursued before entering into the crypto space in 2018, where she’s stayed ever since. Pauline’s favorite things include decentralization, crypto mass adoption, marketing, videogames, and tattoos.