What is CBDC
CBDC (Central Bank Digital Currency) refers to a digital form of fiat currency issued by a country’s central bank. In the United States, in layman’s terms, it would be a digital representation of the US dollar, allowing for faster and more efficient transactions.
It would function similarly to physical cash but in digital form. This is similar in a way to digital modes present today in the market like payment apps, cards, etc. It would be backed by the central bank and would hold the same value as fiat currency. The main difference is that CBDC would exist solely in digital form, accessible through digital wallets and other electronic means.
In the US, it would provide individuals and businesses with a secure and convenient way to make payments, reducing the reliance on physical cash and the need for intermediaries like banks. It could potentially streamline financial transactions and make them more accessible to all.
How does CBDC work
As of the present day, physical currency i.e. Federal Reserve notes is the only official central bank money available to the general public.
Commercial bank money is the digital form of money, which is the most common mode of payment used by the public.
It would operate on a distributed ledger technology, such as blockchain. The primary purpose of using this technology is to ensure transparency and security of transactions.
When a user wants to acquire CBDC, they would need to open a digital wallet provided by the central bank. The wallet would be linked to their identity and would require authentication to access and transact.
Once the wallet is set up, users can receive payments, make purchases, and transfer funds digitally. These transactions would be recorded on the blockchain, providing a transparent and auditable history of all transactions.
The central bank would have control over the issuance, redemption, and destruction of digital currency, ensuring the stability of the currency and preventing fraudulent activities.
Technology behind CBDC
The technology, such as blockchain, plays a crucial role in ensuring the security and efficiency of transactions.
Blockchain is a decentralized and distributed ledger that records all transactions in a transparent and tamper-proof manner. It eliminates the need for intermediaries and provides a secure environment for digital transactions.
As per The Federal Reserve report titled “Money and Payments: The U.S.Dollar in the Age of Digital Transformation” in Jan’22, the US Federal Reserve has been focusing on below key parameters:
: Privacy – protected
: Intermediated
: Transferable
: Identity-verified
Advantages of CBDCs
CBDCs offer several advantages over traditional forms of payment:
– Efficiency: Enables instant and low-cost transactions, eliminating the need for intermediaries and reducing transaction fees.
– Ease in Cross-border payments: Eases out cross-border payments thereby facilitating more trade across the nations
– Transparency: The use of blockchain technology ensures transparency and traceability of transactions, reducing the risk of fraud and corruption.
– Security: Incorporates advanced security features, such as encryption and biometrics, making them more secure than physical cash.
– Monetary Policy: Give central banks more control over the money supply and allow for easier implementation of monetary policies.
– Support for Dollar’s International Role: Help in preserving the dominant international role of the US Dollar in the global economy
These advantages make it an attractive option for governments and central banks looking to modernize their financial systems.
Will CBDC replace Cash / Credit cards / Cryptocurrency
While CBDC has the potential to transform the financial landscape, it is unlikely to completely replace cash, credit cards, or cryptocurrencies in the US.
Cash continues to be widely used for everyday transactions, and many people prefer the tangibility and anonymity it provides.
Credit cards offer convenience and rewards programs while preserving liquidity, that may not be replicated by CBDC.
Cryptocurrencies, such as Bitcoin, provide an alternative form of digital currency but operate independently of central banks. This becomes the main differentiator between CBDC and Cryptocurrencies.
However, CBDC can coexist and complement these existing forms of payment. It can provide a secure and regulated digital alternative to cash, while credit cards and cryptocurrencies continue to serve specific purposes and user preferences.
Global Adoption of CBDCs
The adoption is a global trend, with several countries exploring the implementation of their digital currencies.
China, for example, is at the forefront of CBDC development with the digital yuan. Other countries, including Sweden, Japan, and the Bahamas, are also actively researching and piloting their projects.
Developing nations like India have recently launched and gone live in 2022.
The motivations for adopting it may vary, but common factors include improving financial inclusion, enhancing payment systems, and combating illicit activities.
Global adoption could reshape the international financial landscape, potentially leading to increased cross-border transactions and trade facilitation. It could also impact the role of traditional banking and reshape the global monetary system.
The future of CBDCs holds exciting possibilities, and it will be interesting to see how they shape the future of finance and the global economy.