CBDC

Central Bank Digital Currency (CBDC) is a digital currency issued by a central bank, typically denominated in the national currency. Being digital, a CBDC can be used as a digital asset instead of traditional paper money or coins.

This currency functions similarly to Bitcoin and its derivative altcoins, which are obtained using blockchain technology, but it operates within a completely centralized system. As is known, Bitcoin was proposed as a decentralized payment system as an alternative to the traditional financial system following the major crisis it experienced in 2008. 

The apparent purpose behind the emergence of CBDCs is based on various factors, such as managing digital payments and financial transactions more effectively, financial inclusion, modernizing payment systems, and serving as a tool in the transition to a cashless society. Since a CBDC is under the direct control of the central bank, it is assumed that it may have the potential to provide greater reliability and stability in the current financial system. 

There are basically two different types of CBDCs. These are retail CBDC and wholesale CBDC. Retail CBDC is a form that can be used directly by individuals and businesses. It can be distributed by a central bank through digital wallets or payment applications. Wholesale CBDC, on the other hand, is used for large-scale money transfers between financial institutions.

On the other hand, ironically, in contrast to the decentralized structure of the Bitcoin blockchain system—which proposes a payment system where there is no banking system and parties do not need to trust each other—it introduces a system under central bank control that still uses blockchain technology. The first country to test this system was, of course, China. The Chinese state, which keeps its billions of citizens under constant surveillance through technological tools such as social media, cameras, and facial recognition systems, can develop a credit system for its citizens to determine which social opportunities they can benefit from and to what extent, how far they can travel, when they can go on vacation, etc. It can restrict the credits of those who engage in undesirable behaviors and punish them. 

There are differing views regarding the implementation and effects of CBDCs. While some believe it could speed up payments in the financial system and reduce costs, others express concerns about issues such as privacy, cybersecurity risks, and the stability of the existing banking system.

To elaborate on these concerns a bit further, we can say the following:

Privacy Concerns: With the use of CBDCs, the ability of central banks or the state to monitor, limit, and direct individuals' financial transactions may increase. This situation may lead to concerns regarding the privacy of individuals' private financial information and their freedom of spending. For example, when you receive your salary, you might only be able to purchase products or services that are suitable for your profile and permitted, rather than anything you want with it. 

Cybersecurity Risks: Digital currencies carry the risk of being exposed to cyberattacks. Concerns about the security of CBDCs include the risk of users' accounts being hacked or being exposed to other malicious activities. Those who prefer not to make monetary transactions in digital environments or who have difficulty doing so may make erroneous transactions or be deceived by methods such as phishing. 

Transformation of the Banking System: The use of CBDCs could cause significant changes in the traditional banking system. Uncertainties may arise regarding issues such as the current role of banks and their funding sources. This could affect financial stability. For example, it could affect the deposit base of banks or change their lending habits. I believe such a system would push the existing banking system into a very narrow scope. 

Technological Infrastructure Challenges: Technical difficulties may be encountered in establishing and managing the infrastructure of CBDCs. These challenges include adopting new technologies, ensuring updates, and maintaining the security of the systems. 

Recently, many countries, including our own, have been conducting research and development studies on the potential of CBDCs. This means that the probability of CBDCs being used more widely globally in the future is very high.