Decoding CBDCs: Advantages & Challenges in the Digital Monetary Landscape

Industry InsightsJanuary 17, 2024
New image

What does the acronym CBDC stand for, and why is it becoming the talk of the town? This article explores some of the benefits and downsides — especially when it comes to privacy — of this digital monetary alternative.

Central Bank Digital Currencies (CBDCs) are digital forms of a country’s national currency that are issued and regulated by the central bank. These digital representations of a country’s existing currency (like the US dollar or the Euro) are intended to be a digital alternative to physical cash.

As of June 2023, 11 countries have developed and adopted their own digital currency. The Bahamian Sand Dollar was one of the first projects to be deployed (in 2019), and one of the latest is the JAM-DEX, from Jamaica. China has also launched a pilot project for its own CBDC in some of its cities with a model where the money is issued by the People’s Bank of China but is managed by private national banks. According to this McKinsey & Company article, the idea is to span its use to the whole country and enable transactions and payments through widely used platforms like WeChat. If you want to know more about the e-CNY, check this article.

Statista states that the European Union, Canada, and other countries are also working on the creation of a central bank digital currency, and they’ve kickoff the planning stage this October, after a two-year-long research phase that included understanding the citizens’ response to such an implementation, as well as what tools were needed to do so. According to an article from the European Central Bank, the idea is to implement a “digital euro that would be widely accessible to citizens and businesses through distribution by supervised intermediaries, such as banks.” There are even studies for cross-country digital currencies — the mBridge project includes the banks of China, Thailand, Hong Kong, and the United Arab Emirates.

These central bank currencies have numerous benefits and are designed to ease transactions and take away the middlemen, which in most cases means private banks. Let’s explore some of the benefits of CBDCs implementation and use:

Regulation — Its issuing, management, and use are regulated by central banks, which also makes it easier to ok them from a legal standpoint.

Efficiency of payments and financial inclusion — Although these digital currencies are issued by a central bank, users don’t need to have a bank account. All they need is a cell phone and a digital wallet, with which they can then make payments of different sorts. Digital currencies foster financial inclusion because they allow people without access to traditional banking services to use other methods besides notes and coins. It also enables faster and cheaper transactions.

Tackling illegal economic activities — Although crypto has paved the way when it comes to cash independence, it also become an avenue for illegal activities. The fact that CBDCs are handled by central banks helps ensure the legality of related transactions.

Coin stability — CBDCs are supposed to be much more stable than any crypto coin because they rely on the stability of the central banks themselves and are managed according to official rates and changes.

Privacy and Centralization Issues

However, there are also downsides to the implementation of CBDCs, mostly related to privacy and centralization, but also cybercrime. Digital transactions can be tracked and monitored more easily than cash-based ones. Striking the right balance between privacy and regulatory needs is a challenge that policymakers must address. The crypto community has raised concerns about the fact that the issuance and management of CBDCs is controlled by a central authority, thereby undermining decentralization, one of the core principles of crypto. Like crypto, most central bank digital currencies are blockchain-based, but the big difference between both is that the first is decentralized and unregulated, and the latter is regulated and issued by a renowned entity, and its value is tied to its respective fiat.

Last month, the blockchain-based digital payment network, Ripple, published an extensive research paper that explores the benefits and obstacles of implementing digital money issued by central banks. Financial inclusion — of people who have no access to the banking system — monetary regulation, and sustainability are just some of the paper’s highlights. Ripple also raises some concerns regarding the widespread establishment of this model. They include a lack of an international regulatory system of access to physical cash, and the struggle to confirm digital identities. The latter is, in a way, something that Integritee can help with. Decentralized identities are becoming increasingly popular within the crypto space, and also for KYC purposes. If you want to know more about its potential, check our article on the subject. Ripple has been working with several central banks around the globe to help implement these CBDCs in a way that benefits both sides.

The adoption of CBDCs introduces new challenges related to cybersecurity and operational risks. Ensuring the security of digital transactions and protecting against potential cyber threats is a critical aspect of implementing CBDCs.

• • •

About Integritee

Integritee is the most scalable, privacy-enabling network with a Parachain on Kusama and Polkadot. Our SDK solution combines the security and trust of Polkadot, the scalability of second-layer Sidechains, and the confidentiality of Trusted Execution Environments (TEE), special-purpose hardware based on Intel Software Guard Extensions (SGX) technology inside which computations run securely, confidentially, and verifiably.

Community & Social Media:
Join Integritee on Discord | Telegram | Twitter Medium | Youtube LinkedIn | Website

L2 Sidechains | Trusted Off-chain Workers | Teeracle | Attesteer | Securitee | Incognitee

Integritee Network:
Governance | Explorer | Mainnet | Github

You Might Also Like

New image
Industry InsightsMarch 02, 2024

The Potential of Tokenizing Assets: From Houses to Private Equity & Whisky

New image
Industry InsightsFebruary 16, 2024

Embracing Unpredictability: The Role of Randomness in Blockchain

New image
Industry InsightsFebruary 01, 2024

Uncovering Blockchain Consensus Mechanisms: Proof-of-Stake, Proof-of-Work & Beyond

New image
Industry InsightsDecember 19, 2023

Unleashing Scalability and Speed: The Importance of Layer 2 Blockchain Solutions

New image
Industry InsightsNovember 24, 2023

Bear With Us: Blockchain Technology is Still Relevant, Even when Crypto Declines

New image
Industry InsightsNovember 14, 2023

The Imperative for Privacy in Blockchain: TEEs & Privacy-Preserving Software

New image
Industry InsightsOctober 25, 2023

How Blockchain is Benefiting Numerous Industries: From Sustainability to Brand Quality Control

New image
Industry InsightsOctober 17, 2023

KYC in Web3: How DiD is Saving the Day for Projects & Companies

New image
Industry InsightsSeptember 13, 2023

Blockchain in Aerospace: Reducing Costs & Enhancing Efficiency

New image
Industry InsightsAugust 15, 2023

DAOs: How Fair can Decision-Making be and Why is Private Voting Essential?

New image
Industry InsightsMay 11, 2023

Web3 Bounties: Rewarding Developers with Tokens

New image
Industry InsightsApril 27, 2023

Digital Twins: Increasing Efficiency Without Compromising Privacy

New image
Industry InsightsJanuary 31, 2023

AI and Blockchain: The Combo of the Future

New image
Industry InsightsDecember 15, 2022

L2 in Blockchain: TEE Sidechains vs ZK Rollups

New image
Industry InsightsAugust 16, 2022

Blockchain: Back to Basics

New image
Industry InsightsJuly 27, 2022

From Web 2.0 to Web3: A Step Forward

New image
Industry InsightsJuly 07, 2022

XCM Integration: What Is It and How Does It Work?

New image
Industry InsightsJune 20, 2022

Here’s What You Need to Know About XCM Integration on Polkadot

New image
Industry InsightsJune 15, 2022

How Can Integritee Help Prevent Fraud Schemes?

New image
Industry InsightsMay 16, 2022

How Integritee combines the benefits of Web2 and Web3 technologies