Central banks around the world are looking to explore the concept of virtual currency, Often referred to as central bank digital currencies, or CBDCs, this form of money poses its own set of challenges to overcome.
As society gravitates toward more modern technologies, products, and services, the financial industry will need to follow suit. For years, that industry has seen stagnation in terms of technological upgrades, but that situation is slowly coming to an end. As most financial transactions already take place in digital form, exploring the concept of central bank digital currencies makes a lot of sense.
The Benefits of CBDCs
On paper, there are a lot of benefits to central bank digital currencies, or CBDCs. First of all, they allow for easier monitoring on the monetary system in a specific region. In terms of preventing illicit money streams a transparent and auditable system is the best option to explore.
Lingering Questions Remain
While CBDCs offer strategic advantages, there are drawbacks that cannot be ignored either. When dealing with a CBDC, the country’s central bank is in full control of the nation’s financial system. That is not always a good thing, as it removes any sense of competition or freedom of choice.
Secondly, CBDCs can only work if the issued currency retains a stable value at all times. A peg to an existing fiat currency is one option to explore. However, without the adequate system and infrastructure to enforce such a level of stability, anything can happen.
Decentralized Stablecoins are a Competitor
Whereas central banks and governments may think that CBDCs will remove competition from the equation, that is not necessarily the case. Decentralized stablecoins – which retain a fixed value through their own infrastructure – will always attract attention. There is serious competition brewing among blockchain and cryptocurrency projects exploring decentralized stablecoins.
Ethereum for example, is the blockchain that many projects have begun building on. It has a native infrastructure suited for stablecoins and digital finance. Its decentralized finance, or DeFi, industry is also thriving, as more and more people try to steer away from using traditional finance for these specific purposes. Bitcoin also has its own approach to stablecoins with RSK, a smart contract platform that enables DeFi on top of Bitcoin´s network with projects such as MoneyOnChain & RIF Dollar.
The Dollar on Chain Example
One recently launched project goes by the name of Dollar on Chain, developed by the Money on Chain team. It does everything CBDCs aim to achieve and more, as it retains a completely decentralized nature. The stable token is pegged to the US Dollar, at a 1:1 ratio, making it perfect for individuals who do not want to deal with volatile cryptocurrencies.
To make this situation even more interesting, Dollar on Chain also caters to cryptocurrency users. The BPRO token ensures that Bitcoin holders will automatically absorb the risks of price fluctuations. Unlike a stablecoin or CBDC, Bitcoin has no stable value, as its price is constantly shifting in either direction.
Holders of the Money on Chain MOC token will receive a discount when paying fees for using any platform supporting this token. Secondly, they will be able to vote or veto platform updates, putting the end users in full control of the future of this project. Last but not least, the MOC token is an incentive to those who run a network node and contribute to the ecosystem through that method.
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