What is Central Bank Digital Currency?
Central Bank Digital Currency or CBDC is a special form of digital currency like cryptocurrencies, which a country’s central bank issues. CBDC’s values are on par with the country’s fiat currency, which is set by that country’s central bank. Currently, many countries around the world are thinking to develop their transition into a digital currency system through CBDC or have even implemented it.
CBDC is almost like cryptocurrency, except CBDC is issued and regulated by a nation’s chief monetary authority or its central bank.
What are the different types of CBDC?
When we talk about CBDC, we get to know that there are two different types of them:
Wholesale CBDCs
A wholesale CBDC is somewhat similar to holding reserves in the central bank and in this scenario, the central bank plays the role of granting an institution an account. This granted account can be either used to deposit funds or settle an interbank transfer.
Retail CBDCs
Retail CBDCs are ideally government-backed CBDCs created to be used by consumers and businesses The retail CBDCs hold a peculiar quality that mitigates the intermediary risk of being bankrupt or losing assets by private digital currency issuers.
There are two different ways in which users can access their retail CBDCs
- Account-based Retail CBDCs require a user to get through digital identification, so that account can be accessed to make a transaction.
- Token-based Retail CBDCs are those currencies that can be accessed by individuals with private or public keys. Token-based validation lets users remain anonymous while executing a transaction.
How the CBDC works?
Throughout the line of history, we have heard that there used to be physical commodity-based currencies, especially bullion-based currencies. The present fiat-based government-issued currency traces its origin from banknotes, while governments and financial institutions have utilized the technology to supplement physical fiat money with a credit-based model.
No doubt, people around the world are still widely using physical currencies, but certain countries have reported a significant drop in their usage since the recent pandemic. With this recent drop in the use of physical currencies and the emergence of blockchain development, cryptocurrencies have stirred interest in cashless and cross-border transactions. Due to all these recent developments, governments and central banks around the globe have mooted the possibility of developing a government-backed digital currency.
Providing consumers and businesses with convenience, accessibility, privacy and financial security are the prime goals of CBDC. Apart from this CBDCs can make cross-border payments more hassle-free and there can be a reduction in the maintenance of the current complex financial system.
Conclusion
CBDCs of different countries are interoperable and for making a cross-border payment it will be a legal tender-based payment mechanism. CBDCs being backed by the government if launched would gain the full faith of people and also the issue of the high volatility of cryptocurrencies can be taken care of.
A senior blockchain developer at Rejolut says that the introduction of CBDC would lead to the entry of new Fintech companies, and CBDCs come as a means of expanding safe payment mechanisms, but not replacing the paper-based cash.
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