What is cryptocurrency?
Digital currency is any currency available only in electronic form. The electronic version of the currency already dominates the financial system in most countries. The difference between digital money and electronic money that is already in your bank account is that digital money does not have a physical form.
You can now go to an ATM and easily exchange your e-money for physical dollars. However, the digital currency does not leave the computer network and is only exchanged for digital funds.
There are three main types of digital currencies. It is a central bank digital currency known as cryptocurrency, stablecoin, and CBDC. Blockchain technology, which is the basis of cryptocurrency, is the most used distributed ledger in digital currency. According to CoinMarketCap, more than 21,000 cryptocurrencies are available.
What is the Central Bank Digital Currency (CBDC)?
A central bank digital currency is a digital currency issued and supervised by a country's central bank. Think of it like Bitcoin, but if Bitcoin was managed by the Federal Reserve and had the full backing of the US government. More than 100 countries are exploring CBDCs at one level or another, according to the IMF.
But as of 2022, only a handful of countries and territories have or have concrete plans to issue CBDCs. Some places where CBDC is already available include the Central Bank of the Bahamas (Sand Dollar), the Central Bank of the Eastern Caribbean (D Cash), the Central Bank of Nigeria, and the Bank of Jamaica to name a few.
The Federal Reserve issued a report earlier this year that CBDC could fundamentally change the structure of the US financial system. The Boston Federal Reserve and the MIT Digital Currency Initiative are currently collaborating on CBDC research on the Hamilton Project.
They describe it as "a multi-year research project to explore the CBDC design space and gain a practical understanding of CBDC technical challenges and opportunities". Despite the joint venture, the Fed has still not indicated that it is in any rush to launch a CBDC. “The Fed is unlikely to launch a CBDC except with express authorization from Congress,” says Jonathan Dharmapalan, CEO and founder of e-Currency. "The law must support the existence of the digital dollar, just as the law supports the existence of the physical dollar."
How Would CBDC Work?
While the US CBDC may be a long way off, Jim, Executive Vice President, and Interim Chief Administration officer shared how CBDC or the digital dollar may work in the US. CBDC works like real money. If I were to give you CBDC, it would be like giving you physical money, like a hundred-dollar bill. This money is in your account and belongs to you.
I couldn't get it back, said Jim. This is the main difference from other electronic payments like ACH or PayPal wire transfers. “Sending money through PayPal is just a promise that money will come. There may be funds on the balance sheet, but the funds have not yet been transferred between the banks,” says Jim. As a result, the transaction is non-cancellable and can be canceled by the counterparty.
There is a 60-day period during which ACH transmissions can be canceled. With CBDC transfers, funds are transferred almost instantly and the other party cannot subsequently cancel them. Another major advantage of CBDCs is that they can be considered statutory tenders. This means that all economic entities must accept it for legitimate purposes.
You can pay taxes to them, and anyone who lent you money is legally obligated to accept it and repay it. Unlike other digital currencies that are not fiat in the United States. Only some merchants accept cryptocurrencies directly, so people may need to convert cryptocurrencies to US dollars before completing most transactions. Using cryptocurrency as a payment method also triggers a taxable event.
This means that you can pay capital gains tax whenever you buy something with Bitcoin or Luna tokens. This is in addition to sales tax. With CBDC, you only pay the corresponding sales tax, just like with real currency.
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