As the name suggests, CBDC is the central bank-issued digital currency. It is an electronic form of sovereign currency that will appear as a liability on a central bank\u2019s balance sheet just like physical currency. Instead of printing money, the central bank, backed by the central government, issues electronic coins or money. CBDCs are not meant to replace cash but to coexist as additional payment methods. CBDCs should be exchangeable at par with cash. They are regulated by a country\u2019s monetary authority and are implemented using a database that the central bank or government controls.<\/p>\n
Why are Central Banks coming up with CBDCs?<\/strong><\/p>\n During the COVID-19 pandemic, countries have experienced a significant decrease in the use of physical currency, increased people\u2019s interest in cashless societies and digital and virtual currencies, and the evolution of cryptocurrency and blockchain technology. To meet the public\u2019s need for digital currencies and prevent the consequences of private currencies or cryptocurrencies, central banks began popularizing a more acceptable government-backed electronic form of money. Like paper notes issued by banks, CBDCs are also a digital means of payment; just like paper currency, each unit will be uniquely identifiable.<\/p>\n Difference between CBDC and Cryptocurrency:<\/strong><\/p>\n Though the idea of central bank digital currencies came from cryptocurrencies and blockchain technology, and both are virtually represented assets, CBDCs differ from cryptocurrencies.<\/p>\n Difference between CBDC and mobile money:<\/strong><\/p>\n Below is the list of potential advantages which CBDC will bring to the government:<\/strong><\/p>\n CDBC will benefit people in the following way:<\/strong><\/p>\n There are some challenges as well which need to be addressed while CBDC is being implemented:<\/strong><\/p>\n CBDCs are available in 2 forms:<\/strong><\/p>\n There are two types of CBDCs:<\/strong><\/p>\n The two types of CBDCs, wholesale and retail, are not mutually exclusive. It is possible to develop both and have them function in the same economy.<\/p>\n Implementation of CBDC:<\/strong><\/p>\n CBDCs use distributed ledger technology\u202f(DLT), where financial records, such as how much money a person has and what transactions they\u2019ve made, are stored in a ledger. Instead of one central database storing all the financial records of people, DLT is composed of several copies of this transaction history, each stored and managed by a separate financial entity and usually managed from the top by the country\u2019s central bank. These financial entities share DLT in a distributed manner. This is a permissioned blockchain because only a few entities can access and\/or alter the blockchain. In addition, central entities control who gets access to the blockchain and what they can do with it.<\/p>\n Governments are choosing DLT technology because they can still retain control of the money supply. Governments have a central bank in charge of the country\u2019s money supply. These powerful banks choose when to remove or add money to the supply to stimulate the economy in troubled times and set national interest rates.<\/p>\n\n
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There are two types of retail CBDCs. They differ in how individual users access and use their currency:\n<\/p>\n\n
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