Wednesday, September 28, 2022

What is Central Bank Digital Currency (CBDC)?

Predicting the future, central banks are putting their hands on their hips to learn about digital money, preparing for the future by increasing their ability to harness new technologies. Central Bank Digital Currency (CBDC), which is a digital form of a country’s fiat money may be used to store value and make electronic payments, and it is becoming increasingly popular.

Just like fiat notes, CBDCs are digital currencies issued by central banks. It is issued in place of paper currency, electronic coins, or accounts. It is envisaged that CBDCs if properly organized, can provide greater resilience and safety than private digital money, as well as greater availability and cheaper fees than private digital monies.

The CBDC network employs technology that is comparable to those used by Bitcoin. The manner the tokens are distributed, on the other hand, is unique. While Bitcoin has no central authority that manages it, CBDCs will be solely hinged on Central Bank’s control.

The monetary system, as well as the means of issuing CBDCs, is governed by central banks. CBDCs are poised to employ Distributed Ledger Technology (DLT) to store immutable, decentralized transaction records. 

Why are CBDCs Created?

Central Bank Digital Currencies hold a lot of promise because they increase efficiency while also making the financial system more accessible to everyone. Banks are continually looking for new and innovative ways to make banking easier and more flexible for their customers, and CBDCs comes off as the answer to this quest.

There’s a great focus in exploring CBDCs because central banks now realize that it provides an essential opportunity to pull knowledge and resources as well as build systems that complement each other and help make many cross-border payments faster, more transparent, and cheaper, while also allowing central banks to compete with one another to provide lower rates due to reduced operational costs.

The likely option of CBDCs imposition of negative interest rates on bank deposits as an alternative ensures that central banks will be able to exert greater control over the money supply. The apex money managers can set a floor price for assets through the use of CBDCs, which allows them to better manage asset prices. 

Countries Developing CBDC

There is spurring interest in the CBDC schemes. According to Kristalina Georgieva, the Managing Director of the International Monetary Fund (IMF), as many as 110 countries are actively exploring the option of launching a CBDC. While some have advanced in their push, a number of others are still largely at the preliminary stages. Here are some countries with notable strides in relation to their CBDC pursuit.

Bahamas

The Sand Dollar, the Bahamas digital currency, was officially launched by the Central Bank of the Bahamas (CBB) on December 27, 2019. 

Obviously, given the islands’ remote location, payment options such as digital or physical cash would be difficult to come by. As the world’s first nationwide CBDC, the Bahamas’ introduction of the Sand Dollar serves as one of the most secure methods of payment in the country at this time.

The advent of the Sand Dollar also comes with additional goals including increasing financial inclusion, decreasing service delivery costs, and improving transactional efficiency through technology.

China Advance Testing Stage of CBDC

The Chinese government’s Central Bank Digital Currency dubbed the e-CNY or Digital Yuan started gaining massive traction in 2019 and advanced into the testing phases afterward. The debut of the digital yuan at the Beijing Olympics earlier this year remains one of the over-aching trial exercises of the e-CNY conducted by the People’s Bank of China (PBoC).

Hong Kong

The Hong Kong Monetary Authority (HKMA) has been exploring DLT in CBDC architecture since 2017. In 2019, the authority’s wholesale CBDC Proof-of-Concept evaluated Distributed Ledger Technologies features in cross-border transactions and FX settlements. The study built a common platform for Peer-to-Peer real-time cross-border fund transfers. 

Others

The Bank of Japan (BoJ) and the European Central Bank (ECB) launched Project Stella. The project examines the application of DLT in financial markets and payments to improve system security and efficiency. The project began in December 2016 and involves four distinct parts. 

The Ubin CBDC project in Singapore is one of the most comprehensive studies on DLT in retail and wholesale settings. The project is divided into five parts, each covering a different aspect of DLT in financial markets. 

The project established a two-tier CBDC that can handle P2P transactions using Singapore dollars tokenized. The exercise also tested the design’s compatibility with the current financial system. 

The Federal Reserve Bank of the United States, The Bank of England and HM Treasury, and the Reserve Bank of India are amongst the top apex banks with a prominent push to dig deep into CBDCs.

Is CBDC the way to go? 

CBDCs’ imminent entry into the market raises a number of questions. A good illustration is how a worldwide set of laws would affect Bitcoin (BTC) regulation in different countries. What will happen and how will it be fixed if a software bug affects international transactions? If CBDCs are a success, will this inspire world governments to take action against private cryptocurrencies like Bitcoin?

While CBDCs are good news for the Central Banks as it aligns with financial trends, their chances to foster co-existence with existing digital currencies will force initial drag amongst millennials and Gen-Z.

With CBDCs, the residents of a country will be shielded from the flaws of their fiat currency, but still not get the kinds of privacy made possible through Bitcoin and other blockchain-hinged digital currencies.

Ayo Alabi
Ayo Alabi is an experienced writer and Fintech enthusiast, passionate about educating people and helping businesses that want to see their Google search rankings surge. Her articles have appeared in a number of e-zine sites, with focus on balancing informative with SEO needs–but never at the expense of providing an entertaining read.

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