As central bank digital currencies, or CBDCs, continue to gain traction in the global financial landscape in recent years, almost all central banks are actively pursuing the benefits and risks of offering a digital currency to the public.
In its most basic sense, a CBDC is a digital form of fiat money, backed by an appropriate amount of monetary reserves like gold or foreign currency reserves. Each CBDC unit acts as a secure digital instrument equivalent and can be used as a means of payment, store of value and official unit of account. What sets them apart from stablecoins – similar digital offerings whose value is pegged to fiat – is that they are issued by the government and guaranteed by currency issued by the central bank, making them fully regulated.
Related: Have CBDCs affected the crypto space in 2020 and what’s next in 2021? Expert response
China’s Digital Currency Electronic Payment Project, or DCEP, is arguably the most advanced CBDC trial, which has already been rolled out for consumer testing in major regions of the country, including Beijing, Suzhou, Shenzhen and more. recently, Chengdu. As the country aims to release the digital yuan ahead of next year’s Winter Olympics, China is positioning itself as a global leader in the digital currency industry.
While the digital yuan was initially quite limited in its overall scope of use, its expansion has been quite explosive in recent months, with the digital currency having recently been used for a number of large-scale digital transactions, including online shopping. , ATM withdrawals, etc.
In addition, to help people understand the value proposition offered by CBDCs, the Chinese government has already engaged in several educational blockchain projects, to help its people deepen their understanding of decentralized technology, smart contracts and other niches linked to this constantly evolving evolution. space.
Related: How the digital yuan stablecoin is influencing crypto in China
Conceptualized decentralized CBDCs
As it stands, for a CBDC to be adopted by a state, it must conform to the region’s existing monetary policies. Central banks, while curious about CBDCs, are still quite worried about digital assets, as they introduce a level of decentralization into the equation that quite directly challenges the way their existing governance protocols work.
For governments looking to digitize their economies through the use of CBDCs, it seems pretty obvious that for these deals to be truly successful, they need to benefit from the most revolutionary aspect brought to the fore by cryptocurrencies and technology. blockchain as a whole: decentralization. .
Related: A nightmare on Stable Street: centralized Stables can be doomed to fail
While most of the CBDC projects that have been considered in recent years seek to enable peer-to-peer transactions, they tend to use governance frameworks that are authoritarian in nature – that is, they are centralized and controlled by a single body. . However, as public confidence in governments and banking institutions continues to erode, there is little incentive for consumers to adopt this type of CBDC.
Related: Central bank digital currencies are dead in the water
Therefore, it stands to reason that there really is a real window of opportunity for the creation of decentralized digital currencies in their governance and overall scope of use. In fact, there are already solutions on the market today that can help make this vision a living reality.
There are blockchain ecosystems that are teeming with decentralized digital identity solutions that can allow central banking institutions to quite easily and effectively remove the identities of those suspected of committing crimes while protecting the privacy of its other users. by CBDC.
Related: Decentralized identity is the way to fight data and privacy theft
These platforms do not require users to upload information directly to a server, but rather upload encrypted information which is only transmitted through a secure end-to-end encrypted network that cannot be intercepted. Additionally, as these frameworks allow CBDCs to operate in a fully decentralized and transparent manner, they can facilitate the creation of complex logical contracts and financial instruments such as bonds, derivatives, etc.
Here’s why decentralization is better
The most commonly used architectural design for retail CBDCs comes in the form of an authorized distributed system that does not have to reside on a blockchain. As a result, these systems tend to present a single point of failure, and given the potential importance of CBDCs to a country’s economic growth, these risks must be mitigated at all costs.
That being said, if a CBDC were to be designed in a distributed fashion, the aforementioned risks could be completely knocked out of the picture.
Related: Interoperability will determine the winners and losers of CBDCs
Another point to consider is that centralized blockchains are still relatively slow, so using decentralized solutions, such as distributed ledger technology, makes CBDC transactions much faster and much more streamlined. To help digital currencies grow, transaction speeds must be extremely efficient, otherwise a payment system that relies on these tokens is unlikely to be successful.
Decentralization also allows individuals to own their own wallets, as well as being in possession of their private keys – which essentially means that the custody of one’s coins is always with the individual, not with a centralized body. This can help prevent many of the data breaches we’ve seen in the past that could otherwise be catastrophic if, for example, funds were stored in one place.
The ECB wants a veto on stable coins operating in the euro zone
Another argument for decentralizing trust-backed cryptocurrencies is that as more countries begin to use CBDCs and stablecoins, central banks around the world will try to tighten their regulatory strings on these offers because they are interfering with their control over payments, banking and money supply.
In this regard, the European Central Bank, or ECB, recently told European Union lawmakers that it wants a full veto right over the launch of stablecoins, such as Facebook’s Diem in the eurozone. , as well as a greater role in the supervision and regulation of digital assets.
EU members have been striving to create a comprehensive set of rules for the governance of crypto assets – including stress tests and capital and liquidity requirements – since September 2020. A recent directive bed as following:
“Where an asset benchmark arrangement equates to a system or a payment system, the assessment of the potential threat to the conduct of monetary policy and the proper functioning of payment systems should be the sole responsibility of the ECB. “
Even the ECB is working on its own digital euro, the asset most likely to find its way into the global financial ecosystem after extensive regulatory scrutiny and testing over the next four years or so.
The views, thoughts and opinions expressed herein are the sole ones of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Sky Guo is CEO of Cypherium. His in-depth knowledge of consensus, transactions and cryptographic blockchain algorithms comes from his background in IT. With a Bachelor of Science degree from Pepperdine University and an Entrepreneurship degree from Draper University, Sky is also a columnist for Caixin, a Chinese financial media.