What precisely is Central Bank Digital Currency _CBDC_?

In this article, we will look at CBDC’s role in digital economies,nations that are experimenting with them, and the path to widespread acceptance.


[TL; DR]
1. What is Central Bank Digital Currency ( CBDC)
2. Why should a government create a CBDC when there is fiat currency?
3. What are the different types of CBDCs?
4. CBDCs raise privacy issues
5. What is the future of CBDCs?

A central bank digital currency is a digital version of a country's fiat currency that also functions as a claim on the central bank. Instead of producing money, the central bank issues electronic coins or accounts guaranteed by the government's complete confidence and credit.

Why should a government create a CBDC when there is fiat currency?

When a country issues a CBDC, the government treats it as legal tender, just like fiat currencies. Both CBDC and real money are legally recognized as a mode of payment and serve as a claim on the central bank or government.
The use of a central bank's digital currency improves the security and efficiency of both wholesale and retail payment systems. A central bank digital currency supports the speedy settlement of retail payments at the wholesale level. CBDC has the potential to improve the effectiveness of payments made at the point of sale or between two parties (p2p).

Individuals in a digital society do not have access to real coins or notes, and all money is transacted digitally. If a country wants to transition to a cashless society, a digital currency backed by the government or central bank is a viable option. Governments are under growing pressure to create a CBDC as the market for private e-money increases. Beneficiaries will be at a disadvantage if it becomes widespread since e-money providers seek to maximize their revenues rather than the broader public's. The issuing of a CBDC would provide governments a competitive advantage over private e-money players.

What are the different types of CBDCs?

• Digital Currency from a Retail Central Bank

Retail CBDC is traceable, anonymous, and available 24 hours a day, seven days a week. It also provides opportunities for interest rate applications. Because of these benefits, a retail central bank digital currency focuses on assisting the common population. It also helps to reduce the cost of cash printing and encourages financial inclusion.

• Central Bank Wholesale Digital Currency

Wholesale CBDC improves payment and security settlement efficiency while addressing liquidity and counterparty risk. It's ideal for financial firms with reserves held at a central bank. With the capacity to increase the speed and security of wholesale financial systems, even central banks believe wholesale central bank digital currency to be a preferred option to present systems today.

Why should CBDC be chosen over bank accounts?


The key reason why consumers prefer CBDC over a bank account is that CBDC is not at danger when banks collapse. Individuals and the economy alike would benefit from the elimination of that risk.

Furthermore, money transfers between banks and across national borders become considerably easier. To allow such payments, different bank systems would not need to interface with one another. All that is necessary is an update to the central bank's record. This ease of use expedites and reduces the cost of the procedure.

These are additional advantages:

• Money laundering could be easier to detect.
• Financial inclusion has a higher probability
• Innovative payment methods and financial services have the potential to flourish.

CBDCs solve these difficulties while utilising the same underlying distributed ledger technology as cryptocurrencies. CBDCs are recognized by governments as legal money in the territory of the issuing central bank, which means that anybody can use them for payments and every shop must accept them.

CBDCs raise privacy issues

The main worry with a government-issued digital dollar is privacy, especially when it comes to the establishment of Federal Reserve accounts. According to Peebles, the US government could track all citizens' transactions using an e-wallet, providing the Fed an account of everything we do and removing room for unsurveilled monetary interaction.

One potential stumbling block may be people utilizing their Fed accounts to buy illegal products like cannabis. While states around the country have legalized cannabis for both medical and recreational purposes, marijuana remains illegal on the federal level. If someone bought the narcotic from a dispensary using digital currency, the authorities might conceivably elect to prosecute the transaction.

What is the future of CBDCs?

Given the significant efforts and attention that central banks are devoting to central bank digital currencies, they will become a reality in the near future. The introduction of CBDCs into the market will assist enhance crypto adoption by providing consumers with access to platforms for converting cryptocurrency into legal cash. Furthermore, it will aid in the financial inclusion of the unbanked people.

CBDCs will have far-reaching consequences for the future of finance, including the purchase and sale of digital assets and securities. The world will gradually accept digital currency as a standard.


Author : Joy A., Gate.io Researcher

This article represents only the views of the researcher and does not constitute any investment suggestions.
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