Central Bank Digital Currency (CBDC): An Emerging Trend

The interest in Central Bank Digital Currencies (CBDCs) has surged due to evolving payment methods, financial systems, and technological advancements, as well as the disruptions triggered by the Covid-19 pandemic. According to a 2021 BIS survey, 86% of central banks are actively investigating the potential of CBDCs, with 60% engaging in experiments with the technology, and 14% implementing pilot projects.

In essence, a CBDC represents a digital form of a banknote, functioning as an electronic version of a nation's currency. CBDCs can be employed in a retail capacity, allowing individuals to make payments to businesses, stores, or other individuals, or in a wholesale capacity, facilitating the settlement of trades between financial institutions in the financial markets.

Central banks are examining the potential of CBDCs to help achieve public good objectives, such as maintaining public confidence in currency, preserving price stability, and ensuring the safety and resiliency of payment systems and infrastructure. If successfully implemented, CBDCs could guarantee that, as economies transition to digital platforms, the general population retains access to the most secure form of money – a claim backed by a central bank.

The adoption of CBDCs could foster diversity in payment options, expedite and reduce the cost of cross-border transactions, enhance financial inclusion, and potentially enable more efficient fiscal transfers during times of economic crisis, such as a pandemic. By addressing these challenges, CBDCs hold the potential to reshape the future landscape of the global financial system.


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Central Bank Digital Currency (CBDC): A Comprehensive Overview

A Central Bank Digital Currency (CBDC) represents a digital form of a nation's fiat currency, issued and backed by the central bank. Functioning similarly to physical cash, CBDCs are accessible to both financial institutions and the public.

Recently, CBDCs have gained prominence as a potential solution to the growing demand for digital payments and the decreasing usage of physical cash. They hold the potential to enhance financial inclusion, boost payment system efficiency, and offer additional tools for monetary policy implementation.

A crucial distinction between CBDCs and conventional digital payment systems lies in the fact that CBDCs are issued and backed by central banks, whereas traditional digital payment systems are supported by private entities. Consequently, CBDCs possess the same legal tender status as physical cash and are subject to equivalent regulatory oversight.

CBDCs can be issued in two distinct forms: retail CBDCs, accessible to the public, and wholesale CBDCs, available exclusively to financial institutions. Retail CBDCs can promote financial inclusion by offering individuals and small businesses a secure and convenient means of accessing digital payments. Meanwhile, wholesale CBDCs can enhance the efficiency of interbank settlements and decrease dependency on correspondent banking.

Adopting CBDCs presents several potential benefits. By providing a means for individuals and small businesses to access digital payments, CBDCs can improve financial inclusion, particularly in areas with limited access to traditional financial services. Furthermore, they can enhance payment system efficiency by minimizing the need for intermediaries and accelerating settlements.

Additionally, CBDCs can offer central banks additional tools for monetary policy by enabling them to directly control the CBDC circulation and the interest rate on CBDC deposits. This added flexibility is beneficial in implementing monetary policy, especially during economic crises.

Nonetheless, potential risks and challenges accompany CBDC adoption. One such risk is the possible disruption of the traditional banking system and financial intermediaries, including commercial banks. CBDCs may also be utilized for illicit activities, such as money laundering and terrorist financing, if proper safeguards are not established.

In summary, CBDCs offer numerous potential benefits, including improved financial inclusion, increased payment system efficiency, and additional monetary policy tools. However, central banks must carefully weigh the associated risks and challenges, implementing appropriate measures to ensure the secure and effective adoption of CBDCs.