ABC vs. CBDC

Readers of this page had better read China Meets Digital Currency: E-CNY and Its Implications for Businesses beforehand.

1. CBDC

Central Bank Digital Currency(CBDC) is M0 currency to replace some or all of current paper currency. Both are fiat currencies, of which value is backed by the government, not by real assets such as gold and silver.

Technically, the most advanced nation is China.

CBDC has all kinds of merits and demerits of current paper money as proven by the past 100 years' usage worldwide..

• Easy to use.

• Easy to issue.

• Easy to manipulate its value via fiscal and monetary policies.

• Easy to be devalued, that is to say, prone to inflation.

1. Fiat Currencies

All the currencies issued by governments or central banks are fiat currencies. Normally, the value of a fiat currency is backed by the national wealth of the issuing nation. For example, KRW(₩) issued by the Korean Central Bank(한국은행) is backed by the wealth of South Korea. That is, anyone who has some KRW can request the ownership of any product sold in SK as much as the amount of the KRW he has. If the economy of SK grows faster than the increase of KRWs, the value of KRW also increases. If not, it decreases.

One exception is Russian ruble(₽) of which value is backed by gold. So, its value is fixed to the value of gold, not the amount of rubles issued. This kind of currency is called ABC(Asset Based Currency).

2. Key Currencies

US dollar($) is a key currency which is used in international trades. That is, if a company of a nation buy something from another company of another nation, it normally pays the price in USD($). Some other currencies such as British pounds, EU euro, and Japanese yen also do such roles.

Why do nations use key currencies rather than their own currencies? Because they don't trust each other. If a nation newly issues a large amount of its fiat currency, the value of them decreases as much as the increase of the currency. If you want to pay your own currency to someone of another nation, you must be able to confirm that one that your nation will not newly issue your currency. How can I trust another nation not to increase its fiat currency?

Most nations trust that USD will maintain its value regardless of whether US will newly issue USD and that US is able to do that.

The basis of key currencies is the fiat currency system. If nations are not using fiat currencies, they need not key currencies like USD because the value of the currencies of those nations are fixed to that of real assets such as gold of which value they can trust.

3. Global Inflation

As of September, 2022, the world is floating on the high wave of inflation. Inflation is bad because it reduces the real income of ordinary people who can't pass the bomb given to them to others. Normally, they are weak classes of a nation.

The cause of the current global inflation is that the nations of which currencies are used as key currencies have printed too much paper money. It's the genetic defect of the fiat currency system.

2. The Characteristics of Chinese CBDC

As told above, CBDC has all the merits and demerits of current fiat currencies. So, the problems related to key currencies are all the same in CBDC. The Chinese CBDC is not exception.

1. Legal Tender

When a nation issues CBDC, no seller in the nation can reject to receive its CBDC as it's a sovereign currency of which value and usage is enforced by the issuing nation.

2. International Settlements

No, no country has yet accredited Chinese CBDC as payments of her trades with China. There surely will be, but, improbable in near future, because it needs so many problems to solve before using it as an international payment system like SWIFT.

3. A two-layer system

The Chinese central bank(PBOC, People's Bank of China) uses commercial banks as the distributors of its CBDC. The former is the wholesaler, and the latter is retailers.

4. Managed anonymity

Sellers don't know the identities of their buyers, but the central bank know.

5. Prohibition on cryptocurrencies

Different from most nations, China prohibits all cryptocurrencies or virtual assets.

6. Bank Deposits and Digital Wallets

Like paper money, CBDC can be deposited in bank accounts, transferred to another bank account, and withdrawn to the digital wallet of account owners. The only difference between CBDC and paper money is that digital wallets replace ATMs.

3. ABC

As its name denotes, ABC is NOT a fiat currency. So, it's not a kind of CBDC. Different from a CBDC, the value and usages of ABC is not limited to a specific nation as the value of gold isn't limited to any specific nation. It may be regarded as a meta currency of all CBDCs issued by numerous nations, because ABC can be used any nation by transforming it into the legal tender of the nation.

Let's compare ABC with CBDC, especially Chinese one.

1. Legal Tender? No, and YES.

ABC is NOT a legal tender because it is not issued by a central bank of a nation, different from any fiat currency or CBDC. But, ABC is converted into any legal tender in any nation in real time. For example, in Chine, it is transformed into Chinese paper RMB or CBDC, and in Korea, Japan, US and so on.

2. International Settlements

YES. ABC is originally designed to be a substitute for SWIFT. As said, ABC may be seen as a meta currency of CBDCs, which can be converted into any CBDC or fiat currency in anywhere anytime.

3. A two-layer system? No. One-layer system.

ABC itself is a commercial bank. So, there is no need of other commercial banks to distribute ABC.

4. Managed anonymity? Yes

All nations can, had better or must know the transactions in their territories and among their citizens. ABC is a government-friendly currency, and, in addition, it provides systems to automates all governmental duties.

5. Prohibition on cryptocurrencies

Another design goal of ABC is to remove cryptocurrencies, not by law, but by technologies. Anyway, Chinese CBDC and ABC share the same goal.

6. Bank Deposits and Digital Wallets

ABC itself is a bank deposit. You can not differentiate ABC from ABC Bank.