The central bank digital currency (CBDC) is like a digital version of the government-backed fiat currency. Such a currency is often introduced by the central bank of a nation. CBDCs are like stablecoins, the crypto assets that have their pegging done to fiat money and always maintain the same value. Stablecoins are less prone to market fluctuations, hence the name. The only difference between CBDCs and stablecoins is that CBDCs are issued by government authorities while stablecoins belong to private blockchain protocols.
Many countries have been developing their own digital coins. China is one of the first nations to have implemented the same. India is also trying to develop its own digital currency. Every CBDC is a digital representation of the fiat money of the nation and works just like it. These digital assets are backed by the federal government which is then used as a legal tender for transactions across the nation for buying goods, paying employees, or purchasing services.
Although CBDCs sound similar to online bank transfers, during such transactions, the amount has to move through multiple banks and sometimes requires days to reflect in the recipient’s account. However, CBDC will act like any other crypto and transaction is almost instantaneous. Customers wouldn’t need a commercial bank to transfer their funds. CBDCs also comes as a solution for those who are unbanked and are looking for a way to transfer their money digitally. CBDCs are also of two types, retail as well as wholesale. While retail CBDCs are used by the general public, wholesale CBDCs are used solely by financial institutions.