As financial institutions have become more and more intertwined with one another, so has their potential security risk. Banks and other financial institutions must continuously develop their approaches to prevent cybercrime and fraud from affecting their customers. One of the latest approaches to tackling both of these issues is through central bank digital currencies or CBDCs.
What Are CBDCs?
CBDCs are types of digital currencies. The main difference between CBDCs and cryptocurrencies is that CBDCs are tokens issued by a central bank, which generally gives them more financial stability than private cryptocurrencies currently have.
Many countries are currently researching and/or developing their own CBDCs. Crypto for banks, however, looks slightly different than other cryptocurrencies like Bitcoin. Banks will have their own digital tokens and use an established blockchain system like XRP Ledger technology. They will then be able to integrate CBDC into their existing system, select authorized accounts and distribute this digital currency to their customers.
Customers would then be able to redeem these tokens for fiat currency at any time. Each transaction can take less than 3 seconds, even with cross-border transactions. In order to maintain control over the supply of tokens, banks will also be able to destroy currency in order to prevent inflation and have other checks in place.
What Is Fiat Currency?
Fiat currency is the central physical currency a country uses. It is the legal tender used in that nation and is recognized internationally. Not all fiat currencies are valued the same, of course, and as a result, CBDCs are also not valued equally. Technically fiat currency needs to be backed by a physical commodity like gold or silver, though countries like the United States have long since abandoned the gold standard. This standard, in which the fiat currency was backed by gold, was nullified back in the 1930s. Today, there isn’t a single country that uses the gold standard.
How Is CBDC Different from Bitcoin?
Bitcoin is a private cryptocurrency that has no banking or governmental oversight, while public CBDCs are digital tokens that are fully sanctioned by the governments that release them. Both Bitcoin and CBDCs allow for faster transactions in real time, help speed up cross-border transactions and secure payments through blockchain technology.
The Rise of Digital Payments
Cashless payments were already becoming popularized before the coronavirus pandemic. Since then, they have become the go-to form of payment, even for in-person purchases. This trend is one of the key reasons why so many banks and countries have turned to the concept of digital currencies.