Central bank digital currencies (CBDC) are a form of legal tender that is issued digitally by a country’s central bank.
Many central banks around the world are adopting or exploring CBDCs. This includes the U.S. Federal Reserve, Bank of Canada, Bank of England and the Bank of Jamaica.
Of the 114 countries exploring CBDCs, 11 have launched a CBDC, and 18 of the G20 countries are in the advanced development stage of a CBDC.
The goal of a CBDC is to promote financial inclusion, and streamline a country’s currency to a digital dollar.
However, a CBDC may conflict with cryptocurrency’s push for decentralization.
While the research and development stage for CBDCs is still early, there is a strong case that they’re here to stay.
Types of Central Bank Digital Currencies:
The two types of CBDCs are wholesale CBDCs and retail CBDCs. Financial institutions and retail investors will commonly use retail CBDCs, while government entities and central banks will use wholesale CBDCs.
Wholesale CBDCs
- Used by central banks and government entities.
- Used to settle cross-border and interbank transfers.
- Central banks use reserve requirements to control interest rates.
Retail CBDCs
- Used by consumers and businesses.
- Centralized based currency that is controlled by the central bank.
- Monetary policy will dictate the CBDCs interest rates and oversight.
List of Countries That Have Launched a CBDC (2023)
5 Pros and Cons of CBDCs
Pros:
- Promotes financial inclusion
- Can prevent cyber crimes like the Bitfinex hack
- Faster and more reliable cross border payment and interbank transfers
- Lower fees than traditional banks or money transfer corporations
- Can act as an insurance policy, if money is insured similar to FDIC protection
Cons:
- Centralization can promote increased governmental surveillance
- Cyberattacks of CBDCs can threaten financial stability
- Structural changes to the financial system foster undiscovered problems
- Increase competition to the banking sector, which could reduce the availability of credit
- Increased security risks of consumers and businesses identity and personal information
CBDC Vs. Cryptocurrency
Cryptocurrencies brought forth a new paradigm to the financial system. Their sole purpose was to allow consumers to make transactions without any intermediary or government entity.
Over the last decade, cryptocurrency adoption has exploded putting central bank backed dollars in the limelight.
CBDCs are very similar to cryptocurrency. Given that they are both digital money created for the sole purpose of financial inclusion.
Its similarities involve their ability to make quicker and safer transactions.
What separates a CBDC from a cryptocurrency is that it will be backed by a central bank. That will allow the digital currency to have increased trust and reduce volatility similar to a stable coin like Tether.
However, what separates a cryptocurrency from a CBDC is that it is not controlled or backed by any government entity.
When you think of a decentralization currency, Bitcoin first comes to mind. Therefore, a CBDC would be classified as a centralized currency.
Frequently Asked Questions (FAQs)
What are central bank digital currencies?
Central bank digital currencies are a form of legal tender that is issued digitally by a country’s central bank.
What is the purpose of a central bank digital currency?
The purpose of a central bank digital currency is to promote financial inclusion, transparency, reliability, and financial security. This also includes reducing cross border transaction costs.
Is a CBDC a cryptocurrency?
A CBDC is NOT a cryptocurrency, although its formation stems from cryptocurrencies.
What is the U.S. CBDC?
There is no U.S. CBDC. However, the Biden Administration and the Federal Reserve are exploring options for a U.S. CBDC.
Is Canada going to a digital currency?
There is no Canada CBDC. However, the Bank of Canada is in the research stage for adopting a CBDC.
