CBDCs are digital currencies issued by a central bank whose status as legal tender depends on government regulation or law.
Central bank digital currencies (CBDCs) are fiat currencies that exist in a digital form and are issued by central banks.
As of March 2022, there are only a few numbers of publicly-available CBDCs, such as in The Bahamas, followed by Nigeria and the Eastern Caribbean Union. Mostly, they only exist in the form of proof-of-concept projects, like the digital currency/electronic payments (DCEP) of the People’s Bank of China, or the Uruguayan e-peso.
CBDCs do, however, offer several advantages over fiat money, such as the ability to send them directly to other parties without having to rely on third-party payment processors. CBDCs also offer more control by the government over its circulation, resulting in a more efficient implementation of monetary policy.
The Federal Reserve also published a paper highlighting the benefits of a CBDC. One of the benefits highlighted the potential of CBDCs to replace the existing cross-border payments systems, as it is a significantly cheaper and faster alternative. However, to achieve so, a high level of global cooperation would be required. The paper also stated that CBDCs can help decrease the use of paper money that is free of credit and liquidity risk.
CBDCs are issued by a competent monetary authority of a country and are regulated by the same. This form of currency is not the same as cryptocurrencies.
Account-based and token-based CBDCs are the two frequently-used design formats. Central banks from all around the world have to keep certain features of the CBDCs in mind, including access, privacy and the method of distribution. This is because CBDCs are still completely within the orbit of traditional currencies which is why they must be easily accessible by all the users and should not be too complex as it could make it quite difficult for the users to transact.
As the name suggests, account-based CBDCs rely on the identity of the bank account holders. This is why account-based CBDCs require digital identification to access an account. This is a method that is not used as often due to the fact that it still relies on a constant relationship with a bank. When a transaction is carried out, each payment is processed separately by banks by debiting the sender's CBDC account and crediting the receiver’s account. The bank accounts help in verifying the identities of both parties in a transaction which requires advanced systems to uniquely verify each user on the payment system.
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