A central bank digital currency (CBDC) is a virtual version of a fiat currency. It happens to be a record of a nation’s official currency, issued and regulated by the nation’s monetary authority or central bank. They are backed by the full faith and credit of the government issuing them. CBDCs can simplify the implementation of monetary and fiscal policies as well as promote financial inclusion in an economy by bringing the unbanked into the financial system. CBDCs are in various stages of development around the world, but they are a centralized currency and may erode the privacy of citizens.
How CBDC differs from Bitcoin?
With the emergence of the cryptocurrency industry, Bitcoin and CBDCs have both captured the attention of mainstream audiences. However, despite their similar status as digital assets, they are issued and controlled in vastly different ways. Bitcoin is a cryptocurrency, whereas CBDCs are not. A cryptocurrency like Bitcoin is stored on a decentralized blockchain network, whereas CBDC assets will be issued and stored using a more centralized system.
In this way, Bitcoin remains decentralized in nature and cannot be regulated by a single authority. On the other hand, a CBDC asset can be regulated and controlled by the issuing authority, such as a bank or federal reserve. The privacy and anonymity of each asset are important factors to be considered. While using Bitcoin, you utilise an anonymous address, meaning you can send bitcoin to anyone without sharing any personal information. This aspect is amiss in CBDC.
How does CBDC Work?
A fiat currency is issued by a government and comes in the form of banknotes and coins. It is considered legal tender and can be used for the sale and purchase of goods and services. Digital currencies issued by central banks are virtual forms of fiat money. As a result, they have the trust and backing of the government issuing them, just like fiat money.
The goal of a CBDC is to provide users with both the convenience and security of digital money as well as the regulated and reserve-backed circulation of the traditional banking system. CBDCs are designed to function as a unit of account, store of value, and medium of exchange for daily transactions. CBDCs are backed by the full faith of the government issuing them.
CBDCs for A Digital Economy & Government:
Although CBDC is a concept still in development, it has attracted immense attention from institutions and governments alike; with initiatives being undertaken in the US (Digital Dollar), China (Digital Yuan), Sweden, New Zealand and elsewhere. In addition to providing efficient retail payments, CBDCs can help governments fight money laundering and terrorist financing (assuming the central bank tracks payments).
Digital currencies shall also enable quick transfer of public funds and emergency grants in a crisis (similar to the COVID-19 pandemic). Payments made using CBDCs will reduce the risk associated with settlement on the financial system. A clincher in terms of CBDC adoption is its seamless integration with existing banking and payment systems. Governments will also save a great deal on operating and technological maintenance costs, thanks to the simplified regulatory requirements of the digital system.
