A Beginner’s Guide To CBDCs

• The term CBDC stands for Central Bank Digital Currency.
• Generally, discussions on CBDCs have been confined to a technical nature meant to be decoded by experts only.
• However, this article aims to demystify CBDCs and its concepts because it will be used by both experts and non-experts in the long run.

What are Central Bank Digital Currencies (CBDCs)?

Central Bank Digital currencies are simply a digital representation of a country’s currency issued by its central bank.

They are developed on centralized systems, which allow the government of the country to have full control of the network.

CBDCs were created to optimize existing financial systems by integrating with them.

The Bahamian Sand Dollar, which was released in October 2020, is the first CBDC.

How Do Central Bank Digital Currencies Work?

Central bank digital currencies, like cryptocurrencies, are built on blockchain technology.

However, this blockchain is established by the central bank and is private or permissioned.

They can only be accessed by the central bank and other parties that they choose, unlike most cryptocurrencies, which have public blockchains.

Pros of CBDCs

There are several beneficial reasons why a country might want to explore CBDCs. Some of these reasons are:

1. Promotion of financial inclusion by providing easy and safer access to money for both unbanked and underbanked populations
2. Creation of programmable money and improving transparency in money flows
3. Increased efficiency in payments and lowering transaction costs
4. Provision of seamless and easy flow of monetary and fiscal policy

Cons of CBDCs

The following are some of the disadvantages of central bank digital currencies:

1. Before CBDCs are adopted, complex regulatory framework including privacy, consumer protection, and anti-money laundering standards are needed
2. There is lack of opportunity for price appreciation
3. Cbdcs use will put the banking system at risk for collapse as individuals get direct access to the central banks and have no need for commercial banks

Types of CBDCs

There are two types of CBDCS.

• Wholesale CBDCs
• Retail CBDCs

Wholesale CBDCs

CBDCs of this type enable payment between central banks and commercial banks or entities with direct accounts with the central bank.

They are used for cross-border transactions and the plumbing of financial systems.

Retail CBDCs

These CBDCs concern individuals or the general public and are used to run businesses and provide opportunities for financial inclusion.

Cryptocurrencies Vs Central Bank Digital Currencies(CBDCs)

Earlier on, I compared cryptocurrencies to CBDCs using their blockchain structures. Interestingly, these currencies also share some other similarities and differences as well.

The major similarities are as follows:

1. They both employ the use of blockchain technology.
2. They are both digital or virtual products and
3. They both promote cashless society.

Their differences include the following:

1. Most Cryptocurrencies are built on decentralized blockchain technology while CBDCs are built on centralized systems.
2. CBDCs are designed to have high resistance to volatility unlike cryptocurrencies which are extremely volatile
3. There is provision of anonymity of individuals in cryptocurrency whereas CBDCs may be linked to its users.

Conclusion

So, having learned the general basics of CBDCs, including their types, pros, cons, and similarities with cryptocurrencies, what are your thoughts on it?

Do you think your country should give it a chance? Are you satisfied with its benefits?

Please share your thoughts in the comment section below.

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