Understanding Central Bank Digital Currencies (CBDC)
Central bank digital currencies (CBDCs) are digital fiat currencies issued by central banks.
Unlike cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH), CBDCs operate within the traditional financial system.
They are backed by trust in the issuing central bank and the sovereign government behind it.
The Global Adoption of Central Bank Digital Currencies (CBDC)
As of 2023, only a few CBDCs are publicly available, primarily in The Bahamas, Nigeria, and the Eastern Caribbean Union.
Most CBDCs exist as proof-of-concept projects, such as China’s digital currency/electronic payments (DCEP) and the Uruguayan e-peso.
However, with the growing popularity of cryptocurrencies and stablecoins, governments worldwide have recognized the need for alternatives.
Here is the status list of CBDCs:
| Status | Country/Area |
|---|---|
| Launched | The Bahamas |
| Nigeria | |
| Eastern Caribbean Currency Union | |
| Testing in Pilot Projects | Sweden |
| China | |
| Jamaica | |
| Ukraine | |
| In Development | India |
| Eurozone | |
| The US |
CBDCs and Fiat Currencies
While CBDCs may or may not use distributed databases like blockchain technology, they differ from true cryptocurrencies as they are not decentralized. Central banks retain complete control over the production and distribution of CBDCs, and their value is backed by trust in the issuing authority.
Despite this, CBDCs offer advantages over traditional fiat money, including direct peer-to-peer transactions without intermediaries and greater government control over circulation for more efficient monetary policy implementation.
The Federal Reserve has also recognized the benefits of CBDCs, including their potential to replace existing cross-border payment systems with a faster and cheaper alternative and reduce reliance on physical cash.
Design of Central Bank Digital Currencies (CBDCs)
CBDCs are designed in two main formats:
- Token-based CBDCs provide universal access but require more robust law enforcement measures. They utilize distributed ledger technology to validate transactions, similar to blockchain but may pose a higher risk of users losing keys or tokens held in non-custodial wallets.
- Account-based CBDCs, on the other hand, rely on the identity of bank account holders and require digital identification for access. Banks process Transactions in account-based CBDCs individually, debiting the sender’s account and crediting the receiver’s account. This format requires advanced systems to verify users’ identities in the payment system.
CBDCs are regulated and operated by the country’s central bank or monetary authority.
They differ from decentralized cryptocurrencies like Bitcoin and are used as official mediums of exchange alongside traditional currencies.