The world turns digital, and there is nothing we can do about it. Everything around us is digital, and the trend has reached financial markets.
As of late, central banks in developed economies study the benefits of issuing their own digital currency. The best example comes from the European Central Bank (ECB) that already filed the paperwork to protect the “digital euro” trademark. It said it is just in preparation for the time when it needs to use it, should such time come.
The ECB is not the only one investing resources in the digital central banks’ currency space. Other peer banks followed, and now research is underway.
What is the technology to base such projects on? The name is blockchain, and it is as famous as Bitcoin, as it was first known as the technology that supports Bitcoin transactions.
Fintech, DLT and Blockchain
The rise of fintech led to massive investments in the area from commercial banks. Also, the newly born fintech corporations base everything on the Distributed Ledger Technology (DLT) so understanding basic DLT concepts is key to any investment in the fintech space.
Put it simply, DLT is nothing but a shared database. The comparison makes sense because, just like using Google Docs, with DLT, many users can contribute to the same project. It records the changes and promises a more transparent way of managing information and shared recordkeeping, among others.
Blockchain, as the name suggests, is a chain of linked data blocks that use cryptography. It derives from DLT because it is a pure public DLT.
Central banks like blockchain-based developments for the simplicity of how transactions work on blockchain. First, blockchain assigns encryption to the transaction, then it verifies it and creates a block. Next, the block is added to the blockchain, and the transaction is completed as the ledger is updated with the information.
Transparency and trust are the two attributes central banks value on blockchain, and the two sit at the base of the new research for central banks’ digital currencies implementation. As always, there is no smoke without fire, at least when it comes to major central banks.
Therefore, expect new developments in the area and changes in regulation to speed up the adoption process of the central banks’ digital currencies. The race to digital just started.