What is a CBDC?

A central bank digital currency (CBDC) is a digital version of fiat money issued by the government. A central bank issues this type of digital currency, which is linked to the country's national currency.

CBDCs are most similar to stablecoins, which are cryptocurrencies that are pegged to fiat currency and try to maintain the same value. The main distinction is that CBDCs are issued by governments around the world.

How is a CBDC different from existing electronic money in my bank account?

In response to a question on the difference between CBDC and existing digital money, the RBI stated, "A CBDC would differ from existing digital money available to the public because a CBDC would be a liability of the Reserve Bank and not of a commercial bank."

CBDC, the Central Bank's advantages

• A CBDC could result in transactions that are much faster, less expensive, and more secure, benefiting everyone involved.
• Consumers in countries that establish retail CBDCs can gain direct access to central bank funds. CBDCs could help solve the problem of large unbanked populations in many countries.
• Consumers would not have to take the risk of storing their money with a commercial bank that could fail. Their funds are safe as long as their country's central bank is stable.
• Money is much easier to track this way because all CBDC transactions are recorded on a digital ledger. This could aid authorities in detecting fraud and other illegal activities.

Wholesale vs. Retail CBDC

A wholesale CBDC is a type of CBDC for financial institutions that have reserve deposits with a central bank. It has the potential to improve payments and securities settlement efficiency while also lowering counterparty credit and liquidity risks.

A value-based wholesale CBDC would be a restricted-access digital token that would replace or supplement reserves at the central bank. A token would be a bearer asset, which means that the sender would transfer value to the receiver without the use of intermediaries during the transaction.

A retail CBDC is one that will be made available to the general public. Anonymity, traceability, availability 24 hours a day, 365 days a year, and the possibility of an interest rate application are all features of retail CBDC based on DLT.

The retail proposal is relatively popular among emerging-market central banks, owing to the desire to take a lead in the rapidly emerging fintech industry, to promote financial inclusion by hastening the transition to a cashless society, and to reduce cash printing and handling costs.

The Benefits and Risks of Retail CBDC

• CBDCs could make cross-border payments faster and more efficient. Because cross-border payments are more complicated than domestic payments, CBDCs would help to simplify international payments by providing cheaper, more transparent, and more resilient payment solutions.
• CBDCs may also improve payment infrastructure security, increase systemic efficiency, and provide enhanced protection against money-laundering processes.
• Separately, CBDCs may improve the channels through which monetary policy is implemented.
• CBDCs could improve the overnight market by allowing CBDCs to be lent or borrowed overnight, and they could boost quantitative easing by eliminating the need for commercial bank intermediation.
• Finally, CBDCs have the potential to promote financial inclusion. People who do not have regular bank accounts will be able to use CBDCs in domestic and cross-border transactions.

Potential risks of retail CBDCs

• The crowding-out or disintermediation effect of CBDCs is a negative side effect. That is, funds could potentially be transferred from conventional commercial bank deposits to CBDC deposits at central banks. This could result in a reduction in commercial banks' funding and, as a result, a reduction in the number of loans that banks can make, potentially harming the entire economy.
• Another potential risk of retail CBDCs is the inflated size of central banks' balance sheets following the adoption of CBDCs, which could have a negative impact on their risk exposures and profitability.
• The introduction of CDBCs may result in a concentration of power in central banks around the world that is inconsistent with their current roles of maintaining monetary and financial stability. It is also very likely that cyberattacks will become more common following the introduction of CBDCs, threatening the viability of the CBDC project.

How are different countries approaching CBDCs?

While a number of central banks will almost certainly issue CBDCs in the coming years, they will almost certainly not be identical. There are many design options available, depending on the national context such as:

The ongoing initiatives already differ in some ways. For example, in the Bahamas, the "Sand Dollar" project aims to improve residents' access to financial services in the aftermath of Hurricane Dorian's damage to the financial infrastructure. As a result, they allow the general public to use the CBDC wallet without requiring a bank account or user identification for small amounts.

China's goal is different. As part of their broader Belt and Road strategy, they have been working on the Digital Currency and Electronic Payment (DCEP) project since 2014 in order to compete with the dollar's dominance as the global reserve currency. There are ongoing pilots in four cities, with 20 private companies participating, including McDonald's and Starbucks. The Chinese CBDC does not appear to use blockchain.

Sweden has a unique economic position in that it is the world's least cash-dependent country, with only 1% of GDP in cash, compared to 11% for the eurozone. Cash usage has declined in recent years, prompting some merchants to refuse it as a form of payment because it is too expensive. They do not yet intend to launch live, but they are frequently referred to as one of the most advanced initiatives.

The Bank of England has not yet developed CBDC technology, but it has published a comprehensive discussion paper. They describe a potential architectural design based on a public-private platform model. The idea is that CBDC, as a store of value, would be recorded on a central bank's core ledger, which could be a private and permissioned blockchain.

How is a CBDC different from a cryptocurrency?