[Wise Crypto Life] 06. CBDC
Digital Currency Created by Central Banks
Concepts of CBDC
Recently, the word “CBDC” is heard often in cryptocurrency and blockchain news. The acronym CBDC stands for Central Bank Digital Currency, which means digital currency issued directly by a country's central bank.
This word can be found widely nowadays because there is an active movement to study CBDC around the world. China is already piloting the digital yuan, and the United States has been collaborating with MIT and various international organizations for several years now.
The Bank of Korea, the nation's central bank, said it will start simulating CBDC this coming August and is currently conducting open bids to select operators. Big tech companies Naver and Kakao are showing interest in this business, so it is critical to keep an eye out for which company will be selected as the operator.
Reason for issuing CBDC
CBDC is the same as existing paper money in that it is a legal currency issued by the central bank with guaranteed value, but it is a digital currency in that it exists only in digital rather than in a paper form. It also has some characteristics of cryptocurrency in that it utilizes blockchain technology. It's a currency that has both the advantages of 'public credibility and stability' of paper currency and the 'transparency and security' of cryptocurrency.
The reason for issuing CBDC is simple. These days, the use of card or mobile payment systems have become common so paper currency is considered impractical, but the cost of production, issuance, management, and disposal is still high. In 2019, a whopping 90 billion won was spent on discarding and reissuing damaged currency. Using CBDC will undoubtedly lower the costs of currency maintenance.
Furthermore,CBDC will make money laundering or crime much easier to track since it allows transparency of the source and movement of funds. In addition, although there are not many financially underprivileged classes in Korea, countries with low access to financial services will have experience ‘financial inclusion’.
Impact of CBDC
CBDC issued by a central bank that guarantees its value can compensate for the lack of a substance that is pointed out as a weakness in cryptocurrency. Therefore, experts have a positive view that it will be easier to accept other cryptocurrencies through CBDC.
Of course, there are still many challenges to overcome including the issuance and commercialization of CBDCs, but it is exciting to see what the future currency market will transform into.