Understanding Central Bank Digital Currencies (CBDC)

Central Bank Digital Currencies

Central bank digital currencies have the potential to transform the financial ecosystem with wide-ranging benefits. Learn more about CBDCs right here now!

Money is one of the significant aspects of the global economic ecosystem. Presently, it seems impossible to run an economy without money, doesn’t it? Over the course of time, money has gone through evolutionary changes with the earliest forms such as bartering, followed by commodity-based money and then coins and paper-based money. However, the demand for e-money has constantly been increasing in recent times, with an increased focus on digitalization.

Furthermore, recent developments in the field of retail payments, announcement of Facebook’s cryptocurrency, Libra, and the radical decline in cash usage have turned attention towards the need for central bank digital currency. Let’s find out what central bank digital currencies bring to the modern financial landscape.

Why Central Bank Digital Currencies?

At the same time, cryptocurrencies have also had their share of notable setbacks. Some of the common pitfalls observed in the case of cryptocurrencies include decentralized control over cryptocurrencies, higher volatility, and unpredictability.

However, new digital currency models such as stablecoins can provide better price stability for cryptocurrencies by pegging against fiat money. Therefore, central banks must look for central bank digital currency options to sustain their competitive advantage in this constantly evolving market. Since central banks are the primary authority for money, central banks should also evaluate and explore possible opportunities and risks with new digital currency alternatives.

So, what exactly is a central bank digital currency?

  1. Has the liability of a central bank
  2. Serves as a medium of exchange
  3. Serves as a store of value
  4. It is available in denominations of an existing unit of account

Therefore, central bank digital currencies are basically electronic forms of central bank money, which businesses and individuals can use for making payments and storing value.

Variants of CBDCs

Wholesale CBDC is suitable for financial institutions holding reserve deposits with the concerned central bank. On the contrary, retail central bank digital currencies are tailored for corporations, individuals, and households. The objective of introducing CBDCs is a formidable factor in determining the type of CBDCs that you should use.

A wholesale CBDC would be suitable for improving cross-border payment efficiency or the wholesale settlement system. Such types of CBDCs will not be available to the general public, and they would not accrue interest. On the other hand, retail central bank digital currency is suitable for improving financial inclusion. Retail CBDCs will have availability for the general public alongside providing anonymity with possibilities for accruing interest.

Existing Applications for CBDCs

Sweden

China

USA

Advantages of Central Bank Digital Currencies

CBDCs designed on a Distributed Ledger Technology (DLT) foundation can offer a trustworthy alternative to cash. Consumers don’t have to worry about any technological disruptions, attacks, or tampering with CBDCs.

CBDCs provide an alternative programmable currency that can support the integration of specific transactions like automatic dividend payments to stakeholders.

The role of central bank digital currency in promoting cross-border payments alongside financial inclusion also contributes to their popularity. CBDCs can enable flexible public access to government-supported payment systems, even without bank accounts. In addition, CBDCs can support digitalization of identity alongside digitization of money to support efficient cross-border payments.

Conclusion

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