Digital currencies are on the rise in popularity these days. In 2020, only 35 countries planned to shift to Central Bank Digital Currencies (CBDCs). With governments and people starting to accept the new mode of making transactions, by March 2022, nearly 87 countries/territories are considering issuing digital currencies. Out of them, about nine countries have already launched their centrally governed digital currencies. With these digital currencies gaining huge demand, it is vital to know what CBDCs are and how they work. Let’s find out everything about CBDCs in this article.
In simple terms, Central Bank Digital Currency, or CBDC, is a virtual currency that a central bank backs and issues. Many governments are turning towards this type of currency to promote financial inclusion and simplify fiscal policy implementation.
We can divide these central digital currencies into two types depending on the purpose. One is wholesale CBDC, used primarily by financial institutions, and the other is retail CBDC, used by consumers and businesses.
Central and private banks can exchange and trade wholesale CBDCs between themselves. It helps streamline payments between these institutions, enabling faster cross-border transactions and reducing liquidity risks.
In simple words, retail CBDC is a digital currency that an everyday citizen will use, for e.g., to pay for groceries, etc. It is digital money for ordinary people to make daily transactions eliminating intermediary risks. We can further divide retail CBDCs into two types: Token-based and Account-based.
Most people confuse CBDCs with cryptocurrencies, but both are quite different. There are three main key differences.
Also read: Top Cryptocurrencies to Invest in April 2022
With the world drastically moving towards digitization, central bank digital currencies could change the way of making transactions and use of money as a whole. The future of CBDCs can benefit from making payments faster with low costs, welcoming more innovation.
CBDC stands for Central Bank Digital Currency. So CBDCs are not cryptocurrencies, as the Central Government regulates and manages them. Though built using blockchain, they defy the concept of decentralization, no censorship, and data privacy.
CBDCs or Central Bank Digital Currency work pretty much like fiat currency stored in bank accounts. That is why people also refer to them as digital fiat currency. Just like fiat currency, the government regulates and manages CBDCs.
Comparing CBDC and Bitcoin is like comparing apples and oranges. CBDCs are not a threat to Bitcoin. They are a centralized currency or digital fiat currency, which the government regulates and manages, unlike Bitcoin, which is a decentralized cryptocurrency, not controlled by one single person or authority.
No cryptos can be used to create CBDCs. Instead, they are built on private blockchains. Countries like the USA, China, India, and more are already in the process of making their respective CBDCs managed by the local government.
