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What is CBDC and What Does It Do?

Recently, apart from cryptocurrencies, the term CBDC has become a common term in crypto markets. However, the term has become so complex that for some it is considered a cryptocurrency, while for others it is seen as a competitor to crypto assets.

In this content, we will try to clarify the curious topics such as what CBDC is and what it does.

What is CBDC?

CBDC is token units created by central banks and digitally representing the legal currencies of countries.

To put it more clearly; CBDC occurs as a result of the digital transfer of a country’s currency by the central bank of that country on the basis of Distributed Ledger Technology (DLT).

If you ask what CBDC means, CBDC is actually an abbreviation. The CBDC abbreviation consists of the first letters of the English words “Central Bank Digital Currency”.

Although many countries are currently working on CBDC, a project that has emerged since February 2021, the term CBDC has become a frequently heard term, mostly as a result of the digitization studies carried out by China on the national currency Yuan.

Is CBDC a Cryptocurrency?

Because of their digital nature, CBDCs are understood by many as cryptocurrencies.

Generally speaking, if there is a digital currency in the middle, it can be thought that it should be crypto money, and this is not a bad idea. As a result, all cryptocurrencies can be considered as digital money or assets.

However, if a more detailed examination is made, it can be understood that CBDCs are not and cannot be a cryptocurrency. Because there are some structural differences between cryptocurrencies and CBDCs.

Therefore, we can briefly answer “No” to the question “Is CBDC a Cryptocurrency”.

What is the Difference Between CBDC and Cryptocurrency?

We all know that the crypto currency frenzy, which started with Bitcoin since 2009, has reached today. While cryptocurrencies were not fully understood in their early years, many people now know what cryptocurrency means, good or bad.

As it is known, all cryptocurrencies, especially Bitcoin, have an infrastructure called Blockchain.

Blockchain, in general terms, is a database. However, there are some features that distinguish these blockchains from other databases. Although they have many prominent features such as being a distributed system, agglutinative, and non-interference, the most basic and outstanding feature of blockchains is that anyone who wants to can access and record data on blockchains.

Another important feature that makes blockchains stand out is that they are completely decentralized. In other words, blockchains are not created by any person or institution, nor can they be controlled or interfered with by any person or institution.

With these prominent features, blockchains can be briefly described as decentralized, non-regulated, non-interfering and transparent, so the cryptocurrencies connected to these blockchains have the same characteristics. This is where the differences between cryptocurrencies and CBDCs emerge.

As we mentioned in the definition above, CBDCs are developed and controlled by the central banks of the countries. Although they seem to have blockchain technology in terms of technology, CBDC infrastructures are not decentralized and can only be accessed and managed by people who are given access and management permission by central banks. That is, in the case of CBDCs, any transaction or account can be restricted, modified or cancelled.

While it is clear that it cannot be a cryptocurrency with this difference alone, there are other differences that distinguish CBDCs from cryptocurrencies. Another of these differences is that CBDCs are integrated into the national currency of the countries they are affiliated with.

Each country carries out many financial and political transactions, especially reserve creation, in order to protect and increase the value of its national currency. Therefore, since the value of the national currency of the relevant country can be controlled and intervened, CBDCs are also affected by this situation and show that they are decentralized once again.

Are CBDCs Traditional Currency?

In the title above, we explained that CBDCs are not and cannot be cryptocurrencies, together with the reasons why. In this case, you can rightly ask whether CBDCs are one of the traditional currencies.

Although many countries have started studies on CBDC for a long or short time, unfortunately it has not yet been included in a classification. In other words, no one has yet been able to answer the questions of whether CBDC is a currency or CBDC is a commodity, investment vehicle, fund, stock or security. The only clear answer that can be given is that, as we mentioned above, CBDCs are not cryptocurrencies.

However, to make a guess, CBDCs will have the same value as these national currencies, as they are developed by the central banks of the countries and will also represent the national currencies of the respective countries. Therefore, CBDCs can be classified as a currency just like national currencies and considered as digital versions of national currencies.

What Does a CBDC Do?

Although the traditional financial system dominates the whole world, CBDCs have emerged to integrate the traditional financial system with today’s technology and speed, since it is quite inadequate in today’s conditions.

Today, almost everyone has an income or amount of assets. Even if this income or asset is small, it should be noted that the income or asset we have now preserves its value digitally.

In other words, we can no longer store our incomes, assets, money, in wallets, bags, safes, under pillows, etc. We keep it in our bank accounts. This may be an exception for small-scale assets, but the safest and easiest way to protect and manage assets above a certain value is now to preserve and manage them digitally.

In fact, the CBDC logic is already in use right now, but we are still dependent on traditional finance at the management or compensation stage, and this stands out as a serious inadequacy.

For example, if we want to transfer money from our country to our relative in another country, even though the amount we want to send is a digital amount, the transfer time and transfer fee act according to the traditional financial system. In other words, it may be necessary to wait for days while paying exorbitant transfer fees for international transfers.

Likewise, money laundering situations can be overlooked by intermediary financial institutions in the traditional financial system. There may be many more examples such as these, and CBDCs were created to update and repair the aging and inadequate parts of this traditional financial system.

When CBDCs are fully involved in our lives, the most palpable feature will be in money transfers. Money transfer from one country to another country will be realized in a few minutes, just like a crypto money transfer.

Problems arising from brokerage houses, exorbitant transfer fees or additional fees can also be resolved through CBDCs. In other words, it will be possible to transfer money transfers, especially internationally, with very small numbers.

Finally, although CBDCs will become fast and technological, just like cryptocurrencies, they can be controlled by central banks, so at the point where money laundering or fraudulent activities are detected, transaction restrictions and cancellations can be made, as well as these assets can be seized when necessary.

Which Countries Have CBDCs?

Many countries have started studies for CBDCs, which are still at a project stage and whose classification has not yet been clarified.

If we talk about Europe, the European Central Bank (ECB) has made some statements about CBDC studies several times in 2021, but no concrete steps have been taken yet and it is considering taking a clear step towards the end of 2021.

Venezuela is one of the first countries to initiate CBDC studies and has launched a CBDC unit called the Petro for its national unit, the Venezuelan Bolivar. Although the Petro is not very popular, it is one of the first steps for CBDCs.

Another country is China, which is one of the countries that has never fallen from the crypto news agenda. While China entered into a serious struggle with cryptocurrencies, crypto mining, or in short, the crypto world, it also started a CBDC study for its own national currency, the Yuan. This CBDC study, called the Digital Yuan, is still under development and testing.

After China, Russia is also a country that welcomes CBDC studies, but Russia, like Europe and Turkey, plans to make a clear decision towards the end of 2021.

Apart from these countries, many countries have been the subject of some news and developments on CBDC, but it is not possible to talk about concrete steps or developments yet. The only thing that is known is that the whole world will definitely take part and be included in the CBDC project.

In the light of all this information, you now know exactly what CBDC is and what it does. So you must have understood that CBDC is not a cryptocurrency like CBDC Coin and even CBDC and cryptocurrency are not the same thing. Because according to statistics in our country, what is CBDC Coin, CBDC Coin price, CBDC Coin link and CBDC how many dollars searches are among the most frequent researches about CBDC.

Aslıhan Yüksel

Aslihan Yuksel, who works as a manager inleading brands and companies in the business world; As a result of his interest in the crypto world and its markets, he has been interested in cryptocurrencies, markets and developments for a long time and transfers all his knowledge within Binansal.