Many countries are developing CBDCs, and some have even implemented them. The Russian government, recently announced that it’ll launch its digital currency (ruble) in 2024.
Nigeria, Jamaica, the Bahamas, and the Eastern Caribbean are among the nations of the world that already have their own CBDCs. These countries created these digital currencies as an alternative to cryptocurrencies.
In this post, we’ll understand what the Central Bank Digital Currency (CBDC) is all about.
What is a Central Bank Digital Currency (CBDC)?
Central bank digital currencies are digital tokens, similar to cryptocurrency, issued by a central bank. They are pegged to the value of that country’s fiat currency.
A CBDC is a high-security digital instrument; like banknotes, it is a means of payment, a unit of account, and a store of value. And like paper currency, each unit is uniquely identifiable to prevent counterfeiting.
In this case, digital fiat currency is part of the base money supply, together with other forms of the currency.
10 Things to Know About CBDCs
1. CBDCs are fiat currencies issued by the central bank of a nation digitally.
2. It is considered a form of legal tender that can be used to exchange goods and services.
3. Some of the central banks that have launched their CBDCs include the Central Bank of the Bahamas (Sand Dollar) and the Central Bank of Nigeria (eNaira). Others include the bank of Jamaica (JamDex), and the Eastern Caribbean Central Bank (DCash).
4. CBDCs are seen as less risky alternatives to cryptocurrencies which are highly volatile. Some nations of the world have restricted crypto activities for this reason.
5. CBDCs are different from cryptocurrencies as they are not run on blockchain technology, however, they are both digital currencies.
6. There are two types of Central bank digital currencies. They are the wholesale and the retail CBDCs.
7. The wholesale CBDCs work like holding reserves in a central bank. In this case, the central bank grants an institution an account to deposit funds or use to settle interbank transfers.
8. Retail CBDCs are used by consumers and businesses, much like physical forms of currency. The retail CBDCs are of two types; the token-based retail CBDCs and account-based retail CBDCs.
9. One of the benefits of CBDCs is financial safety as they limit the practice of fractional reserve banking and potentially render deposit guarantee schemes less needed.
10. A major disadvantage is that the controllers of the issuance of CBDCs can add or remove money from anyone’s account with a flip of a switch. This cannot be done when it comes to cryptocurrency as it is decentralized.
A CBDC is issued and regulated by a nation’s monetary authority or central bank. It is the digital form of a country’s national currency. It is created by the Central bank of nations as an alternative to the highly volatile cryptocurrencies.
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