As the world is progressively becoming more digital, so is our money. Unlike bitcoin and other decentralized cryptocurrencies, the Central Bank Digital Currencies (CBDCs) are the digital forms of central bank-issued money. These currencies are liabilities of the central bank and can be used to settle payments or as a store of value. If stored electronically, it can also be a central bank-issued e-money, central bank deposit, or cash.
Most CBDCs are developed via distributed ledger technology (DLT), a shared database where several participants maintain a copy of the data. Every copy of such data remains stable through electronic consensus mechanisms instead of a third party. Being a digital currency issued by the country’s central bank and tied to the country’s national currency, CBDC has the federal government’s backing, and every CBDCs is a digital representation of a country’s existing fiat currency.
They have two distinct primary forms:
- The Retail CBDCs
- The Wholesale CBDCs
Retail Central Bank Digital Currencies
The retail CBDCs are issued to the public and directly held by individuals as digital cash. Consumers can own a CBDC in an account or a digital wallet and use it for payments. Retail CBDC serves as a community digital banking option that anyone can use.
Wholesale Central Bank Digital Currencies
The wholesale CBDCs are used by financial institutions that possess central bank accounts to conduct financial settlement and interbank transactions. Wholesale CBDC is valid for cross-border payments, transfer funds, and settling transactions more quickly. Additionally, they improve efficiency for domestic payments and prevent banking fraud.
In closing, CBDC can offer many benefits for citizens, such as preserving monetary sovereignty, providing a risk-free means of payment, and strengthening the transmission of monetary policy. It can as well serve as a legal tender for transactions.
