As taps and texts continue to overtake cash and checks, they’re “increasingly digital, too,” the Chainalysis team adds while noting that thanks to the blockchain or distributed ledger tech (DLT) networks, currencies now have “traits we’ve never seen before, like decentralization, immutability, and pseudonymity.”
The Chainalysis team also notes that these innovations have “shown that global finance is ripe for change, and governments are beginning to take note.” In fact, many reserve banks have “already begun the difficult task of rethinking the financial system for the digital age,” the company shared in a blog post.
While commenting on what a CBDC is, the Chainalysis researchers explained that it’s “a virtual form of fiat currency.” Just like physical cash, it is issued by a reserve bank and is supposed to be “backed by the full faith and credit of the government.” However, a CBDC is “never printed, meaning that new systems must be put in place to create and exchange money,” the Chainalysis team clarified.
They went on to ask whether this system could “resemble the blockchain—the distributed ledger technology that underpins most cryptocurrencies?”
As noted by the blockchain firm, forthcoming CBDCs are “similar to and distinct from existing cryptocurrencies.” They are paperless, “like bitcoin and backed, like stablecoins. But unlike bitcoin, they’re centralized; and unlike stablecoins, they’re government-issued.”
Chainalysis further noted in a blog post that most nations aiming to issue a CBDC will use blockchain tech “to do so, but these blockchains will be different from the ones that have come before.”
The central banks of Sweden and France, for instance, have “moved forward with CBDC pilots that use permissioned blockchains—a centralized variation on the technology used by bitcoin and ether.”
A permissioned blockchain is “a distributed ledger with an additional layer of access control,” Chainalysis noted. The blockchain analysis firm added that this means that “certain actions—like issuing tokens, validating transactions, or viewing senders, receivers, and amounts—can be performed only by certain participants in the network.”
In the case of a CBDC, this might be “a central bank, commercial banks, payment service providers, or others,” the Chainalysis team wrote in their blog post.
They added that this centralized layer is “appealing to bankers that want both the permissioning of traditional payment networks and the cryptographic security and reconciliation approach of the blockchain.”
There are many reasons “to embrace CBDCs, but plenty of pitfalls, too,” according to Chainalysis.
The Benefits of CBDCs
Compared to existing systems, “a well-implemented CBDC” could be more:
- Economical. Since CBDCs “are digital, the cost of managing physical cash could be reduced substantially.” Furthermore, blockchain-based technological frameworks “could potentially reduce both transaction times and transaction costs to fractions of a second and fractions of a penny, respectively.”
- Financially inclusive. In countries with large unbanked populations, CBDCs “could provide secure access to savings and credit.” Paired with mobile applications and digital identification tools, CBDCs “could facilitate more participation in the financial system than ever before.”
- Global. With CBDCs, cross-border payments could be “made faster, cheaper, and more accessible by reducing the number of intermediaries needed to complete a transaction.” However, this depends on “a degree of interoperability between CBDCs—international coordination is needed to achieve this effect.”
- Programmable. A CBDC could “provide a direct channel through which central bankers could take actions like distributing stimulus payments or modifying interest rates.”
- Effective against money laundering. “Thanks to the centralized nature of a CBDC, central bankers could detect and block suspicious transactions, possibly seizing and removing illicit funds from circulation entirely.”
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