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Monday, 15 February 2021

What the hell is an e-currency?

Central bank digital currencies (aka e-currency). There have been a handful of countries announcing over the past couple of years that they are either considering or actively working towards issuing a digital currency — including Egypt, with the central bank saying back in 2018 that it’s working on feasibility studies on the potential cryptocurrency. China is working on the second trial of its digital yuan in Shenzhen after completing the first trial last September. Sweden also tested its e-krona last year and is working on a feasibility study that will be complete in 2022.

The Bahamas became the first country in the world to roll out a central bank digital currency, known as the Sand USD, last October.

So what is it? A central bank digital currency (CBDC) is a digital token or instrument that can be used for payments or a stable asset and is part of central bank-controlled money supply — which includes regular paper notes, coins, and bonds. Just like paper banknotes have serial numbers to make them trackable and confirm their authenticity, each CBDC unit has a distinguishing feature for the same purpose.

It’s not BTC, but many CBDCs are largely based on the same principles and blockchain technology as is BTC, distributed ledger technology (DLT). DLT is a way to keep track of financial records: “Instead of one central database storing all the financial records of people, DLT is composed of several copies of this transaction history, each stored and managed by a separate financial entity, and usually managed from the top by the country’s central bank. These financial entities share DLT together in a distributed manner,” explains Coindesk.

An important difference between CBDCs and BTC is the fact that there’s no “central authority” in charge of Bitcoin or other similar cryptocurrencies, which (naturally) doesn’t sit well with a traditional central bank. BTC and other cryptocurrencies use a blockchain that is “permissionless,” meaning anybody can access the system and participate in making transactions. CBDCs use a “permissioned” blockchain that assigns certain levels of permissions and controls to each entity that is allowed to access the blockchain, making it more tightly regulated.

In essence, CBDCs bring the best of traditional banking and cryptocurrencies: Crypto enjoys a level of convenience and security because of its digital form that cash does not. But cryptocurrencies like Bitcoin operate without central regulation, which — among other things — makes the currency price susceptible to major price fluctuations.

The upsides: A significant perk of using CBDC is the move away from cash, which is difficult to track and regulate, therefore making it the tool of choice for criminal activity and laundering. Relying less on cash could also cut back on costs to produce paper banknotes and coins for central authorities, and would also fund transfers less costly for users. “The idea is that with a CBDC, financial entities are more connected, making a smoother way to move money around than the disjointed financial system that’s in place today.”

The downsides: Swedish bankers, for one, are concerned that the introduction of the e-currency will create “an identity crisis” for traditional banks by allowing people to bypass commercial banks and potentially drying up the banking system’s main source of income. But the Swedish central bank’s Deputy Governor Cecilia Skingsley has previously said that “people can already exit the banking system by buying treasury bills,” and the introduction of a CBDC would not “fundamentally change” the situation for the worse.

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