Central Bank Digital Currency (CBDC)

Beginner

A Central Bank Digital Currency (CBDC) is an officially sanctioned digital tender issued by a sovereign central bank. Nations worldwide are at varying stages of CBDC development and implementation, with some already operational. While Central Bank Digital Currencies are similar to cryptocurrencies, their value is fixed by the central bank and is equivalent to the country’s fiat currency.

The primary goal of CBDCs is to provide businesses and consumers with greater privacy, transferability, accessibility, financial security, and convenience. CBDCs could decrease the cost of maintaining complicated financial systems, reduce costs associated with cross-border transactions, and provide users with alternative money transfer methods with low-cost options.

There are two types of CBDCs: wholesale CBDCs and retail CBDCs. Financial institutions utilize wholesale CBDCs, akin to holding reserves at a central bank, to manage liquidity and facilitate interbank settlements. These institutions can engage with central bank monetary policy tools, which help regulate lending rates and influence interest rates.

Retail CBDCs cater to businesses and consumers, offering a stable, government-guaranteed medium of exchange that circumvents intermediary risks, such as those associated with private digital currency issuers' potential insolvency. Retail CBDCs exist in two variants: token-based, which operates similarly to physical cash, and account-based, which requires verifying the identity of the transaction participants.

CBDCs address several issues, such as third-party risk of events like bank runs. They also reduce cross-border transaction costs and remove the cost of implementing a financial structure within a country to bring financial access to the unbanked.

Learn more: Central Bank Digital Currencies (CBDC) Explained

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