Simar Marwaha
    Simar Marwaha
    Published on November 7, 2022 5:31 PM

    Updated on January 25, 2023 6:44 PM

    CBDCs can increase access to the financial system by allowing users to transmit money online without a bank account.
    Source: Passionate In Marketing (PIM)

    A central bank digital currency (CBDC) is a national money in digital form. They are linked to the value of the fiat money used in a specific nation. Although CBDCs are technically similar to fiat money, none of them are really in widespread usage right now.

    Governments and organizations all around the globe have started researching, developing, and conducting limited tests on CBDCs. A few nations, notably China and Russia as well as smaller ones like South Africa, Switzerland, Thailand, and others, are exploring or starting to deploy CBDCs.

    The basic objective of CBDCs is to offer financial security, privacy, transferability, simplicity, and accessibility to companies and consumers. Since cryptocurrencies are extremely volatile and continually fluctuate in value, central bank digital currencies would also lessen the dangers associated with utilizing them.

    CBDCs may also minimize the cost of cross-border transactions, lessen the expense of maintaining a complicated financial system, and offer more affordable choices to those who now move money via other ways.

    CBDCs would offer people and companies a secure way to exchange digital money since they are guaranteed by the government and regulated by a central bank.

    Types of CBDCs

    CBDCs often fall into one of two categories: wholesale or retail. Let's learn a little bit about them:

    1. Wholesale CBDC: Financial firms that maintain reserve deposits with a central bank are referred to as wholesale CBDC. An institution receives a bank account from the central bank to deposit money into or utilize to complete interbank transactions. Then, central banks can control lending and set interest rates through instruments of monetary policy like bank reserves or interest on reserve balances. It makes it easier to reduce counterparty credit and liquidity concerns and increase the efficiency of payments and securities settlement.
    2. Retail CBDC: In contrast to a wholesale CBDC, a retail CBDC is a form of CBDC that has been distributed to the general population. Retail CBDCs minimize intermediary risk or the possibility that private digital currency issuers could go out of business and forfeit the assets of their clients.
      Token-based and Account-based retail CBDCs are the two different categories of retail CBDCs. With private and public keys, one may access token-based retail CBDCs. Users can carry out transactions anonymously thanks to this validation technique. In account-based retail CBDCs, accessing an account requires a digital ID.

    Digital Disruption: The Inevitable Rise of CBDC, SUERF Policy Notes .:.  SUERF - The European Money and Finance Forum

    Source: SUERF

    Pros & Cons of CBDCs


    1. Government protection: The governments that create CBDCs provide complete protection and support for them.
    2. Backed by blockchain technologies: Blockchain technology is used to safeguard CBDCs, and it is widely thought to be secure for financial transactions.
    3. Promotes direct transfers: Direct money transfers are possible because of CBDC, which eliminates the need for a middleman like a bank.


    1. Compatible digital wallet needed: You need a digital wallet that is compatible with that CBDC in order to send or receive a CBDC. Money is kept separate from fiat money in your digital wallet.
    2. Centralized control: CBDC blockchains might be seen as less secure than other blockchains since they are governed by a single centralized authority, which centralizes power over the blockchain network. Governments could be attacked or prone to corruption.
    3. Lack of potential for value increase: The hope that digital currencies would appreciate in value over time attracts many investors to them. CBDCs are not as well-positioned to increase in value as traditional money since they are merely digital versions of it.

    What is the purpose of issuing a CBDC?

    A digital currency issued by a central bank i.e the CBDC improves the security and effectiveness of both wholesale and retail payment systems. On the wholesale side, speedy settlement of retail payments is made possible by a central bank's digital currency. It could increase the effectiveness of payments between parties or at the point of sale.

    In other words, if a nation issues a CBDC, its government will regard it as legal tender, just like fiat currencies; both a CBDC and actual currency would be legally recognized as a means of payment and would serve as a claim against the central bank or government.

    Since the market for individual e-money is expanding, there is significant pressure on governments to implement a CBDC. Beneficiaries would be at a disadvantage if it gained widespread acceptance since e-money suppliers prioritize their own profits over those of the broader population. Governments would have an advantage over private e-money competitors by issuing a CBDC.

    In a digital society, there are no actual coins or paper notes available to people; all transactions involve digital currency. A digital currency backed by the government or central bank is a respectable option if a nation plans to transition to a paperless society.

    What Sets Cryptocurrency Apart From CBDC?

    The world has recently become interested in both cryptocurrencies and Central Bank Digital Currency (CBDC), as both are growing quickly.

    CBDC Vs Cryptocurrency: Major Difference 4 Gov. Accept - Wjsnews

    Source: Wjsnews

    Cryptocurrency: On a decentralized blockchain network, which is where cryptocurrencies like Bitcoin and others are kept, transactions may be carried out, verified, and added to the public ledger without the interference of a third party. Any form of digital or virtual money that employs encryption to protect transactions is considered such. Cryptocurrencies rely on a decentralized mechanism to track transactions and create new units rather than a central body to issue or regulate them.

    CBDC: CBDC, on the other hand, is a widely accepted digital currency issued by the central bank. They are based on the value of a nation's fiat currency. There are several countries developing CBDCs. Simply said, CBDC assets will be created and maintained in a more centralized manner. Additionally, as they are not cryptocurrencies, they are not necessitated to be connected to the crypto world.

    In some aspects, cryptocurrency and CBDC are consequently completely different from one another. Before making any investment decisions, you should thoroughly investigate and understand both of them. In order to own any of them, you will unquestionably need to complete a few procedures and confirm that your country has legalized them or is contemplating doing so.

    CBDC: Progress so far

    According to statistics obtained from a number of sources, 105 nations comprising more than 95% of the global GDP are considering a CBDC. Before a nation starts a CBDC, it must carefully evaluate a multitude of challenges, which is why many of them are currently analyzing and researching the matter. Let's discuss a few of CBDC's recent advancements in a few countries. 

    1. The Bahamas
      In October 2020, the Bahamas' Central Bank began issuing the Sand Dollar. It was the first national CBDC ever established.
    2. China
      In April 2020, China became the first significant economy in the world to experiment with a digital currency. The e-CNY, or digital yuan, is expected to be widely used domestically by 2022, according to the People's Bank of China.
    3. Ukraine
      Since 2016, the National Bank of Ukraine has been investigating the prospect of launching a national digital currency. The nation is currently getting ready for a pilot test of its own CBDC.
    4. USA
      On March 9, President Joe Biden issued an executive order mandating that the US Treasury Department, the Commerce Department, and other significant organizations create studies on "the future of money" with the possibility of introducing a digital dollar as a possible outcome.
    5. India
      The government of India has declared plans to introduce a state-backed digital currency by the end of the following year. By the end of March 2023, the "digital rupee," which would be based on blockchain technology, is anticipated to be operational. The Reserve Bank of India will provide backing.

    Future prospects of CBDC

    Since CBDCs are still in their development, it is unclear how quickly or how far they will advance. However, it is believed to succeed because they desire to have a constructive influence on society. CBDCs may be able to provide better resilience, higher safety, greater availability, and lower prices than private forms of digital money if they are wisely structured. 

    When compared to unsourced crypto assets, which are by nature volatile, that is unquestionably the case. Approximately 100 nations are looking into CBDCs in some capacity overall. A handful is already selling CBDC to the general public while others are conducting research and testing.

    Can CBDC take the role of cryptocurrencies?
    CBDCs will probably have an influence on the cryptocurrency business, however, it is unlikely to replace them, given that they serve distinct goals. Additionally, CBDCs do not threaten cryptocurrencies and would assist convince skeptics of the validity of the underlying blockchain technology.