The cryptocurrency market is expected to develop at a quicker rate than ever before. Today, the crypto world has made notable innovations and developments such as smart contracts, Bitcoin ATMs, blockchain, and national cryptocurrencies. National cryptocurrencies are issued by some countries now believing that utilising them will improve their state’s bookkeeping and save them a significant amount of money on printing.

In 2015, Ecuador became the first country to launch its national cryptocurrency called Auroracoin. As years go by, it has been followed by more countries that have started resorting to launching their national cryptocurrencies or plan to go in that direction—and this is what our today’s article will show us later on.

Understanding national cryptocurrencies

A national cryptocurrency is otherwise known as a central bank digital currency (CBDC), which is a digital representation of a country's official currency. Rather than issuing paper banknotes or minting coins, the central bank creates electronic tokens guaranteed by the government's complete confidence and credit.

However, a CBDC would be controlled and regulated by a country's monetary authority, unlike the well-known decentralised cryptocurrency initiatives such as Bitcoin. Each CBDC unit will function as a secure digital asset that may be used as a payment method, a commodity, and an official unit of account, similar to a paper bill. Each CBDC unit will also be identifiable, just as a paper-based currency note with a unique serial number, to avoid forgery.

What could be the opportunities and risks of national cryptocurrencies or CBDC?

Local and international transfers are practically fast using CBDCs, and there are far fewer costs compared with the traditional method. Because CBDCs are genuine fiat currency in digital form, it will substantially reduce the work of validating money or risk-monitoring in any financial platform. In terms of protection from any illicit activities, CBDCs add more barriers against them than the physical currency. Yet, this method, while appearing to be safer, has some worrying implications.

Being centralised in nature, a CBDC would be a potentially disturbing intrusion on consumer privacy and protection, especially if given at the retail level or by a less-than-benevolent government. Additionally, closed-loop systems or faux blockchains would likely be used in a CBDC issued and maintained by a central authority, replicating the exact cyber and other possible manipulation flaws decentralised systems were meant to address.

How are CBDCs different from Bitcoin and other cryptocurrencies?

While one nation’s move to centralised cryptocurrency may affect the usage of Bitcoin, it might take time for citizens in more forward-thinking countries to forego Bitcoin’s appeal in favour of a national cryptocurrency. Up to this day, many countries have already recognised Bitcoin as a legal tender (recently, El Salvador became the first to adopt Bitcoin.) But to further talk about CBDC’s impact on Bitcoin, there is still little evidence that news from nations testing national digital currencies will influence Bitcoin's value or the cryptocurrency market.

Moreover, Bitcoin is not simply virtual money; it is also a gold-filled investment. National cryptocurrencies are unlikely to provide purchasers with a comparable opportunity, given their centralised nature operates much like paper money, with the value regulated by the individual central banks.

Which countries are testing national cryptocurrencies in 2021?

China was the first country to declare that it will be launching a CBDC, called e-CNY, in March of this year. While other central banks across the world were considering creating a national government-backed cryptocurrency, China was the first to take the steps toward putting the notion to the test. Other countries have begun to make the call to action since China revealed the pilot program for testing a CBDC.

As part of the experimental program initiated in March 2020, Banque de France successfully performed a Central Bank Digital Currency (CBDC) experiment with SEBA Bank on June 18, 2021.

Since 2017, Japan has been considering a government-backed cryptocurrency. As it is known, J-Coin will be a complement to the yen (JPY) and will be tied to the yen at a 1:1 ratio, allowing citizens to purchase goods and services.

After the country's central bank said it was working on a digital lira, Turkey is scheduled to begin testing a new digital currency this year.

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