As more and more countries introduce their central bank digital currency projects, it is worth rejecting the common misconception that CBDC and cryptocurrency are the same thing.

What is CBDC?

The CBDC central bank digital currency is an electronic form of state currency created on a blockchain. The Central Bank is the issuer of CBDC, it also holds the reserves in accounts and manages all transactions for this type of currency.

Now there are already electronic forms of money. For example, of the $20 trillion in circulation, only $2 trillion is cash. The rest of the money is only issued electronically and is a number on an account. The distinguishing feature is that there is no need for CBDC to maintain financial intermediaries such as private banks in traditional financial turnover. The management of the digital currency would be wholly owned by the CB, and it would be digitally available to all citizens, not just a limited number of individuals.

Why issue CBDCs?

It is worth remembering and understanding that CBDC is not equal to cryptocurrency, despite some similarities. Central banks of all countries try to visually compare the two concepts, giving a false impression of the security and management of this asset. However, despite the common creation based on the distribution system or blockchain, these are completely different things.

In fact - CBDC is an artificially derived digital surrogate for cryptocurrencies, the purpose of which is to manage and drag the financial flow of citizens from the crypto market to the digital management market.

Central bank digital currencies are not Bitcoin. The main and key difference is the degree of centralization. More precisely, CBDCs are not centralized at all, while Bitcoin is completely decentralized.

CBDC will also not be a form of state-owned stabelcoin, a currency tied in a fixed form to a fiat asset. It will be fiat itself, with all its attendant layers of regulation and tracking.

Why issue CBDCs?

Recent years have shown that cryptocurrencies are a serious competitor to fiat. The capitalization of this type of asset in the general economy, is still small, but their share is growing every day. The state is worried about the elusive flow of finances, unmanageable, unaccountable, and difficult to track. That's why central bank digital currencies were created. In theory, they should provide their users with the same positive aspects of cryptocurrencies, such as the speed and cheapness of transfers, but the price for these transfers would be the loss of anonymity and freedom to move their funds.

The clearest example of CBDC is the digital yuan. China is now the most advanced in the research of this phenomenon, so it is an example for many countries, and a benchmark for how much this type of cryptocurrency will be useful. With the digital yuan, China has created the most effective surveillance system. Recently, most of the digital circulation from citizens went through Alipay and WeChat. That means it was controlled by private representations. The centralized government of the Celestial Empire could not allow further development in this area, and forcibly-trusted the digital yuan. In fact, the same fast cheap transfers, only through government accounting of funds.

CBDC's digital currencies problems.

CBDC has other problems besides a lack of privacy. One of the most serious is the destabilization of the existing financial order, which is based on a very specific relationship between central banks and commercial banks. For this reason, central banks are cautious about CBDCs.

In China, for example, where the PBoC is piloting the digital yuan in various cities, the government is trying to involve financial intermediaries, including banks and technology companies with large payment operations, such as WeChat, which acted as initial competitors, to ensure a smooth transition. The European CBDC pilot between Switzerland and France has been similarly cautious-it focuses on the wholesale lending market and is designed to test the concept and test the technology.

CBDCs can also have unintended consequences for currency markets. China's CBDC, for example, is designed in part to challenge the dollar's dominance - if the digital yuan becomes the main payment instrument in China, foreign companies will have to use it to do business, which could affect the dollar's role.

But the main problem is the privacy issue, which is completely absent in the CBDC-blockchain-digital-currency scheme.