Central Bank Digital Currency (CBDC)

Central Bank Digital Currencies (CBDC for short) are digital currencies which are issued by a central bank or government directly to the general public. In the same way that paper currency is used in the form of banknotes, CBDC can be used in the form of digital banknotes.

How do CBDCs work?

CBDCs can be thought of as a new form of digital cash. They will be integrated into the existing financial system and work with existing infrastructure. CBDCs can be used as a substitute for physical banknotes and coins, and will eventually replace traditional national currency entirely. They work in much the same way as physical banknotes but in the digital space, as a medium of exchange and a store of value. In this way, CBDCs can be used to purchase goods and services, as well as being a way to pay for transactions.

What are the benefits of CBDCs?

CBDCs may have benefits compared to physical cash. Firstly, they enable traceability, allowing the central bank to track the movement of money and conduct monetary policy. Secondly, they can be used in a crisis, to restore confidence and maintain the value of the currency. Thirdly, they can enable increased efficiency and reduced costs in the financial system.

What are the risks of CBDCs?

CBDCs could be a threat to financial privacy. The central bank will be able to track the movement of money and this could lead to more stringent regulation and monitoring of the financial system. Some people may also not trust a central bank with their money, and may feel that a private cryptocurrency is a more secure option.

Are CBDCs cryptocurrency?

Unlike cryptocurrencies such as Bitcoin, central bank digital currencies are not decentralised and do not rely on a blockchain. They are not mined and they do not rely on a distributed network of computers to operate. Instead, CBDCs are issued and operated directly by a central bank. Users of CBDCs will have a digital wallet, which will be linked to an account with the central bank, just like a conventional bank account. CBDCs will be considered legal tender, like physical cash.

Are CBDCs a threat to Bitcoin?

CBDCs are often seen as a threat to cryptocurrencies such as Bitcoin, however, they are not. CBDCs exist alongside decentralized cryptocurrencies, and the two will likely coexist for a long time. CBDCs are not a substitute for cryptocurrencies like Bitcoin as they are not owned by the public but rather centrally controlled and able to be printed at will. By contrast, Bitcoin is fully decentralized and deflationary by nature, meaning that there are a limited amount of bitcoin that can ever exist. This key difference in monetary policy is one of the main reasons why CBDCs are unlikely to successfully compete with cryptocurrencies like Bitcoin.

When will CBDC be available?

CBDCs are in the early stages of development. However, there have been a number of proposals put forward in recent years which could provide a blueprint for their future use. Countries such as Canada, China, France, India, Sweden, the United Kingdom, and the United States are considering proposals to introduce their own CBDCs.