Why is the central bank actively promoting digital currency (CBDC)?
Central Bank Digital Currency (CBDC) is a legal tender issued by central banks around the world, serving as a digital form of paper money and coins. Amid the global wave of the digital economy, central banks are actively exploring and promoting the issuance of CBDCs, primarily based on the following key considerations:
- Reducing Costs and Improving Efficiency: The issuance and circulation of physical cash involve high costs for printing, transportation, storage, counting, and anti-counterfeiting measures. CBDC can significantly reduce these operational expenses. At the same time, it can optimize digital payment systems—particularly cross-border payments—by reducing intermediaries, lowering transaction fees, and shortening settlement times, thereby greatly improving payment efficiency.
- Strengthening Regulation and Combating Illegal Activities: CBDCs typically feature “controlled anonymity,” meaning that while users’ basic privacy is protected, central banks can trace the flow of funds. This helps effectively combat illegal financial activities such as money laundering, terrorist financing, and tax evasion.Furthermore, governments can gain a more precise understanding of capital flows, thereby formulating more effective monetary policies and improving the efficiency of capital allocation.
- Safeguarding Financial Stability and Monetary Sovereignty: Faced with the growing influence of private cryptocurrencies and global stablecoins, central banks are concerned about the potential challenges these pose to national financial security and the independence of monetary policy. Issuing CBDCs helps consolidate central banks’ authority to issue currency and uphold normal domestic financial order and monetary policy transmission mechanisms.
- Promoting Financial Inclusion and Innovation: CBDCs can lower the barriers to financial services, enabling people without traditional bank accounts to access basic financial services through digital wallets, particularly in remote areas and developing countries. They provide a new type of retail payment infrastructure for the digital economy that is secure, inclusive, and adapted to the demands of the times, and may also drive the internationalization of the national currency.
- Aligning with Global Trends: As of July 2023, a report by the Bank for International Settlements (BIS) indicated that over 90% of central banks worldwide are actively researching or developing digital currencies. Countries are actively positioning themselves to seize the early opportunities of the digital currency era.For example, the “Sand Dollar” in the Bahamas (October 2020) and the “e-Naira” in Nigeria (October 2021) are already fully operational, while People's Bank of China (PBOC) has been continuously advancing the research, development, and piloting of the Digital Yuan (DC/EP) since 2014.
The Fundamental Differences Between Central Bank Digital Currency and Bitcoin
Although central bank digital currencies and Bitcoin are both forms of digital currency, they differ fundamentally in their design philosophy, operational mechanisms, and functional positioning:
- Issuing Authority and Credit Backing:
- Central Bank Digital Currency (CBDC): Issued and managed by the national central bank, backed by the credit of the state, a digital form of legal tender, equivalent to paper currency, and legally enforceable.
- Bitcoin: Issued by an anonymous creator (or team), it is a decentralized cryptocurrency that is not controlled by any central authority and lacks the backing of national credit.
- Centralization vs. Decentralization:
- Central Bank Digital Currency (CBDC): Operates under a centralized management model, with the central bank responsible for transaction verification and record-keeping, and exercising full control over the network.
- Bitcoin: Based on blockchain technology, it uses a decentralized approach for transaction verification and record-keeping, maintained collectively by tens of thousands of independent nodes, ensuring that no single party can block or reverse a transaction.
- Value Stability:
- Central Bank Digital Currency (CBDC): Its value is pegged to the country’s legal tender, making it relatively stable, though it is influenced by national policies and economic factors.
- Bitcoin: Its value is influenced by factors such as market supply and demand and investor sentiment; prices fluctuate sharply, making it difficult to serve as a qualified general equivalent.
- Anonymity and Traceability:
- Central Bank Digital Currency (CBDC): Features “controlled anonymity,” allowing both parties to a transaction to remain anonymous, while the central bank can trace the flow of funds to meet regulatory requirements.
- Bitcoin: Emphasizes pseudonymity; Bitcoin addresses are not tied to real identities, but all transaction records are publicly available on the blockchain.
- Supply:
- Central Bank Digital Currency (CBDC): The supply is determined by the central bank based on monetary policy, with no fixed upper limit.
- Bitcoin: The total supply is limited to a hard cap of 21 million coins, which are generated through “mining.”
- Purpose and Positioning:
- Central Bank Digital Currency (CBDC): Primarily used to replace cash in circulation; it serves as a digital extension of payment and settlement systems, does not accrue interest, and is not intended for investment or speculation.
- Bitcoin: Viewed as a virtual commodity or asset, it is better suited as collateral and a store of value; however, its high price volatility makes it difficult to serve as a long-term medium of exchange.
In summary, central bank digital currency (CBDC) is an extension of a nation’s sovereign credit, designed to enhance the efficiency and security of the traditional financial system; Bitcoin, on the other hand, is a decentralized digital asset that represents a disruptive innovation to the traditional financial system.
