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<h2 id="header-0">Central Bank Digital Currencies (CBDCs): Meaning, Purpose &amp; Difference from Crypto</h2>When was the last time you used cash?&#x1f914;Reinforced by the Covid-19 pandemic, people&#39;s intention to use digital money is only increasing. While blockchain technology is rapidly evolving and providing new opportunities for financial systems among others, banks are taking on a new challenge and ​​gradually beginning to embrace the new digital realities.On the agenda today — central bank digital currencies (CBDCs) — which is about to start adapting to the worldwide financial system (or not). Nevertheless, this could be the first step toward the acceptance of cryptocurrencies on a global financial scale!What is a central bank digital currency and how does it differ from the crypto we are familiar with?<h2 id="header-1">CBDCs Meaning: Basics to Know</h2>Central bank digital currencies or CBDCs in short are like fiat currency but in a digital form. CBDCs as well as fiat money are issued and maintained by the central bank.&#x1f4a1;​​CBDC is a legal and government-approved fiat currency alternative.As crypto and <a href="https://oneart.digital/en/blog/what-is-a-stablecoin" rel="noopener noreferrer nofollow">stablecoins</a> evolved, so did the banks&#39; desire to provide people with an alternative to paper money. That&#39;s how CBDCs came about. However, CBDCs have almost nothing in common with crypto, except that both imply &#34;digital&#34;.<img src="https://academy-public.coinmarketcap.com/optimized-uploads/5e356f3712ef463d9d1f9ead57bdaec4.png" />Curious fact: Central bank digital currencies are centralized to the core, while stablecoins are generally backed by open-source decentralized ecosystems.Today, there are two types of CBDCs: retail and wholesale. The former are designed for storage and exchange between individuals, the latter are oriented towards financial institutions.Before we look at the pros and cons of CBDCs, let&#39;s get to the bottom of why digital currencies are the focus of banks today.<h2 id="header-2">Why are banks increasingly interested in CBDCs?</h2>There are many reasons for this, but here are the key ones &#x1f447;1. Cash is no longer &#34; in vogue&#34;The significant reduction in the use of cash has prompted a rethinking of its role in the monetary system. The time has come for an alternative to fiat money.2. Central banks are losing their status as &#34;innovators&#34;CBDCs, precisely, can help banks regain their former role of &#34;financial system regulator&#34; and give people more opportunities than cash. For example, more people will be able to access the financial and payment system, while the cost of international transactions can be much more efficient in terms of fees.3. The emergence of crypto has &#34;shaken&#34; the stability of banksThe financial system, built on two basic pillars such as trust and stability, now confronts cryptocurrencies, which are gradually adapting among people. With the advent of blockchain and crypto (i.e., non-bank players), banks have begun to lose their role as the &#34;one-of-a-kind financial manager”.It turns out that the decentralization of blockchain has questioned the validity of centralized financial institutions&#39; collection and storage of confidential customer data. Therefore, central banks have come under pressure to create a &#34;next generation&#34; payment instrument. At the same time, it should combine universal acceptance and anonymity — features that users are accustomed to and value in paper money.<h2 id="header-3">CBDCs adoption overview</h2>According to McKinsey, about <a href="https://www.mckinsey.com/industries/financial-services/our-insights/central-bank-digital-currencies-an-active-role-for-commercial-banks" rel="noopener noreferrer nofollow">90% of the world&#39;s central banks</a> are considering CBDC adoption projects. Some are at the research stage, some are at the pilot stage, and some are already at the final straight line.For example:<ul><li><a href="https://blog.chainalysis.com/reports/central-bank-digital-currencies-cbdc/" rel="noopener noreferrer nofollow">More than 10 countries</a> have already initiated one or another form of CBDC, according to Reuters. Topping the list is the Bahamas, which <a href="https://www.reuters.com/article/us-cenbanks-digital-analysis/analysis-central-bankers-comb-for-crypto-clues-as-bahamas-launches-sand-dollar-idUSKBN28S0KT" rel="noopener noreferrer nofollow">launched the “Sand Dollar”</a> in October 2020 for local use. By the way, soft drinks were some of the first items bought with “Sand Dollar”.</li><li>The Reserve Bank of India <a href="https://www.forbes.com/advisor/in/investing/digital-rupee/" rel="noopener noreferrer nofollow">intends to launch</a> a pilot version of its central bank digital currency — the digital rupee.</li><li>The United Arab Emirates <a href="https://www.coindesk.com/policy/2023/03/24/uae-unveils-cbdc-strategy-first-phase-to-be-completed-by-mid-2024/" rel="noopener noreferrer nofollow">expects to complete</a> the initial phase of the CBDC implementation around mid-2024 by developing a wholesale and retail CBDC.</li><li>China&#39;s digital yuan (e-CNY) is already widely used, having reached over <a href="https://www.americanbanker.com/payments/list/cbdc-projects-pick-up-the-pace-as-2023-kicks-off" rel="noopener noreferrer nofollow">100 billion transactions</a> to date.</li><li>Sweden and a number of other countries <a href="https://blog.chainalysis.com/reports/central-bank-digital-currencies-cbdc/" rel="noopener noreferrer nofollow">have also completed pilot projects</a> on retail CBDCs, although there is no widespread use yet.</li><li>Central banks in France, Japan, Spain, South Africa, and Brazil, among others, have been testing options for using wholesale CBDCs.</li><li>By the end of 2022, Singapore <a href="https://www.coindesk.com/policy/2022/10/31/monetary-authority-of-singapore-completes-phase-1-of-cbdc-project-with-more-trials-to-come/" rel="noopener noreferrer nofollow">had completed</a> the first phase of CBDC testing.</li><li>England <a href="https://www.bankofengland.co.uk/paper/2023/the-digital-pound-consultation-paper" rel="noopener noreferrer nofollow">is exploring</a> the digital pound.</li><li>The European Central Bank earlier this year <a href="https://www.consilium.europa.eu/en/press/press-releases/2023/01/16/eurogroup-statement-on-the-digital-euro-project-16-january-2023/" rel="noopener noreferrer nofollow">stated</a> the digital euro project.</li><li><a href="https://www.federalreserve.gov/central-bank-digital-currency.htm" rel="noopener noreferrer nofollow">The Federal Reserve</a> is in the process of examining the potential benefits and risks of CBDC.</li></ul><img src="https://academy-public.coinmarketcap.com/optimized-uploads/66b0c91bb65f44e3ac0c9db69d45061a.png" />Image source: <a href="https://www.statista.com/chart/24571/central-bank-digital-currencies-around-the-world/" rel="noopener noreferrer nofollow">Statista</a>Speaking of risks: along with the potential benefits, CBDCs also give cause for concern. What is &#34;right&#34; and what is &#34;wrong&#34; with them?<h2 id="header-4">CBDCs: pros and cons</h2>A well-executed digital money system backed by central banks can lead to the following benefits of CBDCs:<ul><li>Transaction speed</li></ul>Blockchain-powered transactions can be completed in fractions of a second and with minimal fees, positively impacting the efficiency of e-payments worldwide.<ul><li>Accessibility and global reach</li></ul>Combined with mobile apps and digital identity tools, CBDCs can foster greater inclusion and potentially increase accessibility to the financial system for those without a bank account, for example.What’s more, with CBDC, cross-border payments can be made more quickly, less expensively, and more easily by reducing or eliminating intermediaries.<ul><li>Money laundering control</li></ul>There are considerable controversies over the extent to which <a href="https://oneart.digital/en/blog/crypto-regulation-does-crypto-have-a-chance-to-remain-out-of-government-oversight" rel="noopener noreferrer nofollow">governments can regulate crypto transactions</a>. However, it is worth noting that the centralized nature of CBDC can make it easier to prevent suspicious transactions and reduce fraud.<img src="https://academy-public.coinmarketcap.com/optimized-uploads/56ef94a67082414b8fc8f939107ad5ad.png" />At the same time, CBDCs can also involve potential risks, for example:<ul><li>Changes in the financial structure can significantly destabilize the monetary system.</li><li>Because CBDC is controlled by a single centralized authority, privacy and protection of user data in the digital world remains an unresolved issue.</li><li>Since CBDC still has a precarious tech foundation, considerable efforts need to be put into preventing system intrusion and information theft.</li><li>There are also economic risks associated with the development of CBDCs, such as the crowding out of commercial banks, interoperability issues at the global level, and the potential “weakening” of the dollar&#39;s global influence.</li></ul><img src="https://academy-public.coinmarketcap.com/optimized-uploads/2a0a9172370143ce81bde7c11ddf8d82.png" /><h2 id="header-5">CBDCs vs crypto: key differences</h2>#1 The issue of centralizationFirstly, the main difference between CBDC and cryptocurrency is that the former is issued by the state, which completely undermines the meaning of decentralization of cryptocurrency in general.Secondly, it is more likely that CBDCs will be created using permissioned blockchains.<blockquote>Note: Permissioned blockchains have an access control layer that allows only &#34;authorized&#34; members to enter the network and perform certain actions (issuing tokens, checking blocks, viewing transaction history, etc.). Public access is out of the question here. Consequently, access to the network can only be granted to representatives of the bank or the state, for example.</blockquote>&#x1f449;Learn <a href="https://oneart.digital/en/blog/what-is-a-blockchain-how-does-it-work" rel="noopener noreferrer nofollow">more about the blockchain technology</a> or <a href="https://oneart.digital/en/blog/blockchain-privacy-is-it-all-so-anonymous" rel="noopener noreferrer nofollow">blockchain privacy</a>.In contrast, the tech backbone of cryptocurrency based on traditional blockchain is publicly available. It means that anyone can join and participate in the basic operations within the public blockchain network. This helps the public blockchain retain its “self-governing nature”, not controlled by just a few authorized individuals.This distinction is precisely what causes the following CBDC drawback…#2 Anonymity and data сonfidentialityCryptocurrencies provide anonymity, whereas CBDCs allow central banks to keep track of what is happening on the network. In essence, it&#39;s no different than paying by card: banks can track where, by whom, and when a transaction was made. With CBDCs, only the technical basis changes. Accordingly, there is the issue of confidentiality. Compared to cryptocurrencies, CBDCs will be less concerned about data and privacy. While crypto users are more responsible for their data and can control the level of its availability, CBDC transactions will be automatically tracked by banks.<h2 id="header-6">Final Thoughts</h2>On the one hand, this control can help prevent speculation and theft of digital money. It provides more security for your savings, which is what banks always strive for.On the other hand, to avoid the risk of crypto theft, a digital crypto user needs to make some effort to ensure the maximum security of assets on his/her part. Therefore, if you want to know more about how and where to store your assets securely, our <a href="https://oneart.digital/en/blog/tag/security" rel="noopener noreferrer nofollow">security guides</a> will help you become more informed on the subject.<blockquote><a href="https://www.youtube.com/watch?v&#61;M5nuAJh63zs" rel="noopener noreferrer nofollow">https://www.youtube.com/watch?v&#61;M5nuAJh63zs</a></blockquote>A gentle reminder: It is better to store crypto in non-custodial wallets such as the OneArt wallet and/or <a href="https://oneart.digital/en/blog/hot-vs-cold-crypto-wallets-choose-best-for-max-security-and-convenience-in-2023" rel="noopener noreferrer nofollow">cold ones</a>. In any case, please remember that you alone are responsible for your crypto assets. So, keep your &#34;seed phrase&#34; confidential! Follow official OneArt channels to find the latest info and updates:<ul><li><a href="https://twitter.com/art_wallet" rel="noopener noreferrer nofollow">Twitter</a></li><li><a href="https://t.me/art_wallet" rel="noopener noreferrer nofollow">Telegram Group</a></li><li><a href="https://t.me/artwallet_official" rel="noopener noreferrer nofollow">Telegram Announcements</a></li><li><a href="https://www.linkedin.com/company/oneart/" rel="noopener noreferrer nofollow">LinkedIn</a></li><li><a href="https://www.youtube.com/&#64;oneart5089" rel="noopener noreferrer nofollow">YouTube</a> </li></ul>

Central Bank Digital Currency (CBDC) Explained

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Central Bank Digital Currency (CBDC) Explained

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OneArt

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