Central Bank Digital Currency
Central Bank Digital Currencies (CBDC) have gained immense traction in recent years. Till 2020, over 80% of the banks were researching the latent qualities of CBDC. But now, over 90% of countries are on the CBDC trail.
There have been a number of questions on Central Bank Digital Currencies (CBDC) since its introduction and its comparison with then used digital tokens, cryptocurrencies.
This article tries to answer some of the questions around it such as…..what is CBDC?.. What are different models of CBDC?.. how it is different from cryptocurrency or stable coins?
What is CBDC?
A central bank digital currency (CBDC) is a digital form of fiat currency. A CBDC is issued and regulated by a nation’s monetary authority or central Bank. CBDC is basically traditional money in electronic form.
The present concept of CBDCs was inspired by Bitcoin and similar blockchain-based cryptocurrencies, but differs from such a virtual currency and cryptocurrency in that a CBDC is or would be issued by a state.
CBDCs are viewed as a viable solution to address the increased demand for digital currencies while safeguarding consumers against the risks of cryptocurrencies. CBDCs also offer opportunities to central banks to further modernize and strengthen the financial system.
CBDC Models
CBDC models are highly versatile and customizable but they can be broadly categorized into two categories, wholesale and retail.
Wholesale CBDC Model
Wholesale CBDCs would be used by financial institutions. Banks and other financial institutions could use a central bank’s CBDC to transfer funds and settle transactions more quickly. While this type of CBDC would improve efficiency for domestic payments, it could also be very useful for cross-border payments.
Retail CBDC Model
Retail CBDCs are issued to the general public. Under this model, consumers are able to own a CBDC in a wallet or account and use it for payments. This type of CBDC would serve as a public digital banking option that anyone can use. It could be especially helpful for consumers who can’t access traditional banking services.
How is it different from Cryptocurrency?
Coming to the differences between CBDC and Cryptocurrency, as mentioned earlier, CBDCs are issued by a central bank and issued legal tender by the government. You could think of a CBDC like banknotes — it’s a unit of account, a means of payment, and a store of value. Whereas cryptocurrencies are quite different. They aren’t issued by a government and don’t really concern themselves with national borders.
Another difference is as CBDC is backed by fiat currency they are more stable than volatile cryptocurrencies. Hence can be characterized as secure than cryptocurrency in terms of stability.
CBDC and Stablecoin
Before going to the difference between between CBDC and stable coin lets see what is a stablecoin…
Stablecoins are cryptocurrencies where the price is designed to be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities.
That does sound similar to CBDC but under the hood, there is a difference. The issuance of stablecoins is typically handled by a private entity and they’re basically a representation of fiat money or some other asset. They can be redeemed for the value they represent, but they aren’t fiat money. CBDCs, on the other hand, are issued by the government as fiat money.
Conclusion
In conclusion, A central bank digital currency is the digital form of a country’s fiat currency and it is quite different than stablecoin or cryptocurrency and not a replacement. It is like central bank’s armor against the increased public interest in independent cryptocurrencies.
References
- https://www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/central-bank-digital-currency/
- https://currency.com/cbdc-vs-cryptocurrency#:~:text=CBDCs%20are%20more%20stable%20than,louder%20in%20the%20years%20ahead.
- https://medium.com/m2p-yap-fintech/central-bank-digital-currency-cbdc-101-a-p-d6f9a2759c84
