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Central Bank Digital Currencies and Airdrops

Central Bank Digital Currencies (CBDC) could provide access to reaching the unbanked as well as providing wider financial services. CBDC airdrops are currently ongoing in China as the PBoC is actively testing its digital currency.

Introduction

Central Banks all over the world have taken different stances when it comes to cryptocurrencies. Several central banks have chosen to look into launching their digital currencies. One such country is China, which even started testing its central bank digital currency (CBDC). In February of 2021, the Beijing municipality became the next city to receive a digital yuan airdrop. The government announced that it will hand out a total of 10 million yuan ($1.55 million) to 50,000 people in the city. However, citizens have to register for the lottery giveaway using designated mobile phone apps. Recipients of the airdrop will be selected from a pool of participants. It will seem that the Central Bank of China has taken a positive stance towards CBDC, but what exactly are CBDCs?


What Exactly are Central Bank Digital Currencies 

Just like its name suggests, a Central bank digital (CBDC) is centralized and controlled by the monetary policies and authority of whatever country that issues it. It utilizes a centralized electronic ledger and is a digital token that represents the physical form of the respective fiat currency. Each unit of the CBDC issued will act as a digital equivalent of the fiat form and can be used similarly. It can be used as a store of value, mode of payment, and investment. Each unit will be marked with a unique identity or serial number to prevent imitation. The CBDC will solely be controlled by the Central Bank. It is classified with other forms of regulated money of a nation such as bills, notes, bonds, and coins. The CBDC aims to bridge the gap between traditional monetary systems and digital currencies. 

Several countries are beginning to take bold steps into launching their own CBDCs, including China, Ecuador, Senegal, Singapore, and Tunisia. Other countries are working toward launching their national cryptocurrencies including Estonia, Japan, Palestine, Russia, and Sweden. China seems to be leading the innovation, launching their own CBDCs and even carrying out airdrops. Many central banks have also launched pilot programs and research projects towards the use of CBDCs. The Bank of England (BOE) is a pioneer with the initiation of a CBDC proposal, however, most countries are still laid back and carrying research about the usability of a CBDC.


What Are CBDC Airdrops

Airdrops are familiar marking stunts that crypto firms pull off. Crypto companies will allocate a certain portion of cryptocurrency to promote their project and create awareness. Members of their community may be asked to carry out certain tasks to promote awareness such as retweeting a post. They will receive small amounts of the project's token in return. In the case of CBDC airdrops, they do bear similarities with crypto airdrops. The Chinese government utilizes “airdrops” to create awareness of its CBDC as well as getting its citizens to use the token. The People’s Bank of China is seeking a global audience to test its CBDC and seems to be working towards making it more appealing as an international digital payments instrument. In December, the PBoC gave away $7.5 million in the city of Suzhou in February 2021. 

The CBDC airdrop is a move to increase public use as well as test the demand for the currency. It has been officially called the Digital Currency Electronic Payment (DCEP). Rumors have it that there will be more lottery-styled airdrop in the future with Chengdu being the next location in which $8 million digital RMB will be distributed. Giving an update on the progress of the airdrop in October 2020, The People’s Bank of China’s (PBOC) deputy governor Fan YiFei revealed that the DCEP has been used in over 3.13 million transactions worth about 1.1 billion yuan ($162 million). The PBoC has discovered over 6,700 different use cases of the currency with the creation of over 113,300 million consumer wallets and 8,800 corporate wallets. 


A Case For and Against CBDCs

The Bank of America released a report detailing the benefits of CBDCs. The report titled “Digital Love: Central Bank Digital Currencies” explained that with CBDCs, governments could process faster domestic and international payment systems while reducing costs. The American Government has been distributing stimulus to its citizens due to the pandemic and the report illustrates how seamless the use of CBDCs would make this:

"CBDCs represent the next frontier for central bank stimulus, potentially acting as a potent conduit for policies such as stimulus checks, emergency lending programs, UBI (universal basic income), inducing a more powerful, directed 'money drop.' The evolution of central bank digital currencies is likely to increase inflation expectations, boosting the case for inflation assets in the 2020s."

Banks are working hard at not getting displaced by the disruption brought on by cryptocurrencies. CBDCs could provide access to reaching the unbanked as well as providing wider financial services. They will also eliminate all the unnecessary paperwork that accompanies governmental crediting systems and its accompanying third-party interference.  The report details the downsides of CBDC claiming that they can cause an increase in inflation expectations as well as phase-out banks and other stores of value. There is also the unending argument that since CBDCs are not decentralized, it is just another way for the government to have control of citizens’ data. 


Conclusion

CBDC airdrops are currently ongoing in China as the PBoC is actively testing its digital currency. The airdrop is carried out lottery-style as citizens are asked to register using certain mobile apps and winners are randomly selected. For the city of Beijing, a total of 10 million yuan ($1.55 million) will be distributed to 50,000 people in the city who register for the lottery. Giveaway participants must have a Chinese ID number or a residence permit from Hong Kong, Macao, or Taiwan. Each winner of the airdrop will get 200 yuan (about $30) in digital currency in the form of a red packet. The airdrop has been tested in Shenzhen and Suzhou using this same method. The PBoC has Six banks participating in the test: Bank of China,  Bank of Communications, Agricultural Bank of China, Industrial and Commercial Bank of China, China Construction Bank, and Postal Savings Bank of China. More governments will likely trend the part of China and we will be seeing more CBDC airdrops in the future. 

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