Central Bank Digital Currency (CBDC)

A central bank digital currency (or CBDC) is a digital currency which is created and controlled by a central bank. It is a fiat currency in that it’s only claim to value is legal tender status granted to it by a government or central bank.

As a technology, a CBDC is a cryptocurrency. It runs on blockchain and uses much of the same systems. However, unlike any decentralized cryptocurrency, a CBDC is centrally controlled and managed. It can be inflated, just like any fiat currency. A CBDC can operate with the speed of crypto (since it is, indeed a cryptocurrency), but it is subject to all the problems and control of a government currency.

To date, there is no official CBDC in use. There are numerous proposals by various governments and central banks to create their own CBDC. There is little doubt that, eventually, there will be numerous CBDC’s in use. They will be crypto versions of the government currency (like a crypto-dollar).

There are, of course, real-world advantages to a CBDC. It will be much faster, for one.

On the flip side, it also introduces numerous privacy problems since it would make every transaction you make trackable by the government. It also introduces the rather dangerous prospect of behavioral economics driven by monetary policy, giving the government the ability to control societal behavior using monetary policy and even… delete your ability to participate in the economy if you fall out of favor with the government.

In all likelihood, CBDC’s are an inevitability. However, I believe it only makes the usefulness of truly decentralized cryptocurrencies (which are not controlled by a government) much stronger.