What is CBDC?
Central Bank Digital Currency (CBDC) is a new kind of virtual national money that has emerged after the success of Bitcoin and other cryptocurrencies. However, unlike decentralized cryptocurrencies, CBDCs will be completely controlled by central banks.
The introduction of CBDC can bring many benefits to the country’s economy. For example, this will help banks reduce the costs of transfers, including cross-border ones. In addition, CBDC can be a great alternative to compete with rapidly growing crypto companies.
One of the main advantages of CBDC is the possibility of more precise control over monetary policy. The transition to a digital currency will allow central banks to more accurately respond to changes in the economy. This will increase stability and security within the systеm.
Thus, the transition to CBDC, despite some restrictions on ownership control, may become a new stage in the development of the financial systеm of many countries.
CBDC: Categories and Features
Central Bank Digital Currency (CBDC) are divided into two main categories by architecture: wholesale and retail. Wholesale CBDCs are intended for professional market participants such as banks and other financial institutions. They can be used for interbank transactions, international trade transactions or for clearing. However, you will not be able to pay with wholesale CBDC in the store.
A wholesale CBDC can be useful for facilitating cross-border payments and transfers between banks. It can also help central banks conduct any monetary policy and keep track of all currency transactions. In the future, the use of wholesale CBDC may become an additional tool to improve the efficiency of the banking systеm.
On the other hand, retail CBDC is designed for a wide range of people and can be used as an addition to traditional money or as a replacement. Such a currency can become a substitute for cash and help fight the problem of their falsification. In addition, it can be useful for facilitating payments and improving the usability of digital money.
Most CBDC projects assume that the value of a digital currency should be pegged to the price of a fiat currency. For example, the rate of the digital yuan should not differ from the rate of the paper yuan. This will help maintain confidence in the currency and prevent it from fluctuating in the market.
Differences between CBDC and cryptocurrencies:
The differences between CBDC and cryptocurrencies are mainly related to centralization and the ability of the state to control certain aspects of the digital currency. CBDC is a state-owned digital currency that uses distributed ledger technology, but access to it is restricted to certain financial institutions. Unlike cryptocurrencies, the state retains control over the issuance of currency and its emissions. The idea of a CBDC based on Bitcoin and other cryptocurrencies seems ironic since they were created as an alternative to a regulated financial systеm.
Which countries have already started developing CBDC
In recent years, CBDCs have become hot topics for many countries. China shows that it is in the foreground by actively developing its digital currency in 2019. In the course of experiments with its creation in several cities in China, various operations were carried out. The Agricultural Bank of China has tested the e-CNY to fiat exchange functionality at conventional ATMs in Shenzhen. 140 million people have already used e-CNY wallets, and among the holders of CBDC are the largest financial institutions in China.
Japan announced the creation of a CBDC development committee, where the prospects for creating a digital currency will be discussed with business and authorities. The pilot program for CBDC in the Land of the Rising Sun has already begun work in April.
The Bahamas gained respect in this area by launching their CBDC called the Sand Dollar in the fall of 2020. This digital currency is linked to the Bahamian dollar and was available to all residents of the country without requiring much effort from them.
Having changed its approach to cash, Sweden began to actively explore the prospects for creating a CBDC. Several banks have already been involved in the project, including the state central bank.
In April 2021, the Eastern Caribbean Central Bank announced the launch of DCash, its CBDC pilot program for the economic and monetary uniоn of Antigua and Barbuda, Grenada, Dominica, Saint Vincent and the Grenadines, Saint Kitts and Nevis, Saint Lucia, Anguilla, and also Montserrat.
Several countries continue to actively explore the prospects for CBDC in their economies: Norway, Singapore, France, UK, Canada, Russia and many others. Thus, in the future, the development of CBDC may be one of the vectors for the development of the global economy.
