A Beginner’s Guide To Central Bank Digital Currency (CBDC)

Introduction

CBDC (Central Bank Digital Currencies) are a new form of digital currency emerging, gaining fame and acceptance across the world. The financial landscape of cryptocurrency is changing rapidly and reshaping people’s perspectives on the financial system.   CBDC is the product of the digitalization of the financial system and came into existence after the creation of cryptocurrency.

We are known for decentralized finance (DeFi) since the launch of Bitcoin (BTC) back in 2008. DeFi changed the people’s perspective about finance by giving them liberty over the digital assets which they own directly with the interference of the intermediary central banks. It caused troubles in some aspects as they were not controlled by the central banks.

There comes the agenda of Central Bank Digital Currency (CBDC) which is issued, regulated and maintained by the central banks of the countries. Many countries started pilot testing of CBDS to be in the digital world and to manage national digital finance. This article gives complete guidelines about the issuance, regulation and role of CBDCs in the crypto space.

Understanding the Concept of CBDC

Central Bank Digital Currency (CBDC) is an electronic or digital form of currency which is directly issued and regulated by the central bank of the country. CBDCs can also be regarded as the digital fiat currency as it is pegged by the national fiat currency.

CBDC can be used for household purposes, business purposes, payment solutions and trading purposes at the national or international level. CBDC isn’t meant to replace the fiat currency or cash but it is a digital step to coexist the value and bring people toward the digital world.

Also Read: Everything You Need To Know About BlackRock’s Bitcoin ETF

So, we can call CBDC a digital form of the fiat currency which is directly issued and regulated by the central bank of the country just like the traditional currency. CBDCs are regulated by monetary authorities of the state and implemented through the central bank’s database registered with the government. Many countries like China, France, Ghana, UAE, Canada and a few others are conducting pilot tests to regulate CBDCs.

How CBDC is Different from Cryptocurrency?

CBDC is neither a type of cryptocurrency nor related to it if we look into the regulation of both digital assets. Cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP) are decentralized aren’t regulated by any central authorities and are under the regulation and ownership of whoever owns it or buys it.

On the other hand, CBDCs come under centralized finance which means one can use it for online purposes but that is reported as it is properly issued and regulated by the monetary authorities and the central bank of the respective country. CBDCs are issued by the bank but the cryptocurrencies are not issued or regulated by any central banks and hence are mined and decentralized.

Types of CBDC

CBDCs should be categorized according to their use instead of the nature of the assets. It can be used for under specific circumstances and hence it falls into two categories;

• Retail CBDC

Retail Central Bank Digital Currency is used in the same way as we use bank notes for individuals to individual and for business purposes. Such CBDC transactions can be carried out by traditional online transactions, credit cards and banknotes. User can have retail CBDC in the form of digital tokens or deposited in their accounts.

• Wholesale CBDC

Wholesale CBDC is used by institutional clients for business dealings through their central bank accounts. As per the Bank of International Settlements (BIS), wholesale CBDCs boost the development of the capital markets and enhance security. Moreover, it improves securities settlement and trading.

Pros and Cons of CBDC

• Pros of CBDCs

CBDCs are now widely used and appreciated by the financial community because of their unique features as CBDC offers;

• Enhanced financial inclusion
• Reduced transaction costs
• Improved payment efficiencies
• Enhanced monetary policy tools
• Financial stability
• Cons of CBDC
• Privacy Concerns are of prime importance in regulating CBDC
• Reduces the role and profitability of commercial banks
• Has cross-border regulatory issues
• Depends on the technology and policies given by central banks
• Centralization risks are also of prime concerns

Conclusion

As we look ahead, CBDCs will undoubtedly shape the future of finance, transforming how digital assets and securities are bought and sold. The key question now is not whether CBDCs will become a reality, but when. The answer hinges on the establishment of a robust legal framework that ensures transparency, widespread distribution, and responsible issuance of digital currencies by governments worldwide.