What is CBDC and how can it become a disruptor of traditional finance?

Central bank digital currencies, or CBDCs, are a fusion of fiat and digital currencies. They are directly controlled by a single entity, the central bank, and are superior to fiat currencies in that they bring blockchain technology, which allows for transactions at lower costs and faster speeds. As countries such as the Bahamas, China, and the United States develop their CBDC prototypes, the traditional banking system may see significant changes in the near future.

Ever since Bitcoin was gradually accepted by mainstream society, governments around the world have been trying to find a revolutionary financial technology that would benefit their countries. Thus, the Central Bank Digital Currency (CBDC) was born. The term and the idea are both in their infancy, so the definition is somewhat vague, but basically CBDC is a digital currency issued by the government, backed and controlled by the central bank. Right now, there is no way to actually send dollars from one person to another over the Internet. There may be online money transfer services like PayPal and Venmo, but in reality these companies are just middlemen, processing the transfer of the currency. It is impossible to achieve a scene similar to a real face-to-face cash handover between A and B through the Internet. The vision of CBDC is to completely change the traditional financial model by creating a centralized blockchain network backed by the government, allowing anyone to complete fast and cheap fund transfers over the Internet.

Unlike Bitcoin, Ethereum, or many other blockchains, the blockchain on which CBDCs are based is a centralized, government-controlled blockchain network. This means that if there is a hack, fraud, or other unforeseen circumstances, the government has the potential to roll back transactions. They also have absolute control over digital currencies, such as being able to print money at their discretion like paper fiat currencies.

The first country to successfully implement a CBDC is the island nation of the Bahamas. Their digital Sand Dollar is available through a state-licensed custom mobile app and allows anyone in the Bahamas to transact with the currency. KYC is not required for those who only hold a small amount of Sand Dollars, but is required for higher amounts. Unfortunately, the digital Sand Dollar is limited to use in the Bahamas.

Nearly a year after its launch, the implementation and development of the digital Sand Dollar has been a great success and will be fully commercially rolled out in the coming months. An interesting fact about the digital Sand Dollar is that it is actually pegged to the US dollar and can essentially be seen as a pilot project for the US CBDC. If all goes well with the Bahamian digital Sand Dollar project, there is a good chance that the US will replicate the system on a large scale.

While CBDCs offer many benefits to consumers and governments, they also have drawbacks. One of the biggest benefits is the creation of a purely cashless society, where anyone can send money to anyone else at any time, without having to worry about price fluctuations, high transfer fees, or long transaction times. Although stablecoins on networks such as Ethereum and Stellar are currently up to the task, for many consumers, state trust is more important. These stablecoins backed by private or non-state parties cannot guarantee that they will always exist. The sense of security provided by a government-backed digital currency will make many people more comfortable entering the cashless blockchain ecosystem.

One of the biggest concerns of some people at present is also what the government is most happy to see: there is no possibility of anonymity, that is, every transaction will be completely public. When a transaction occurs in the form of cash, it is likely to circumvent government supervision and therefore cannot be effectively taxed. However, when every transaction is recorded in a ledger, along with the social security numbers of the people involved and the amounts involved, taxation will become extremely easy. This new taxation system may allow governments around the world to increase their tax revenue by a huge amount. In addition to taxes, governments will also be able to identify and block suspicious or illegal transactions at a very low cost, thereby gaining greater control over their citizens.

Obviously, this will have a huge negative impact on ordinary people. Not many people want the government to know every transaction they make, big or small, and to pay taxes for it. Therefore, CBDC will greatly infringe on user privacy, and users can either accept this price - as the cost of greatly improved financial efficiency, or they can only stick to traditional payment methods and defend their privacy.

As more central banks begin to study CBDC, it will eventually be promoted as a new financial instrument. A more efficient financial system and convenience in citizens' lives will follow, but at the cost of losing privacy and more tax bills. Even if CBDC is not entirely a good thing for society as a whole, the existence of CBDC will make people more aware of alternative forms of currency and payment, such as Bitcoin and other cryptocurrencies, which will have a positive and far-reaching impact on the entire blockchain ecosystem.