3 min read

December 12, 2022

What is a Central Bank Digital Currency (CBDC)?

Currently, there are two types of money most commonly used by businesses and customers: physical cash issued by the central banks and commercial bank money, which takes an electronic form as people’s bank deposits. Central banks also produce digital money: these are the reserves held with them by the regulated financial institutions. However, up until recently, this hasn’t been available to the larger public and is still the case in most countries. But CBDCs are bringing about a change.  

CBDCs are an electronic form of central bank money that is available to the general public and to non-financial businesses for making payments and storing value. But unlike cryptocurrencies, CBDCs are issued and fully backed by the central banks, so it carries the same value and stability as the fiat currency in their country of origin. Instead of cash, they are digital tokens. CBDCs could essentially shape the online payment methods for future eCommerce transactions. 

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Table of Contents

How is Stablecoin Different from a CBDC?

Stablecoins and CBDCs are somewhat similar but the major difference is that stablecoins are issued by private entities and not backed by central party. Whereas CBDCs are issued and backed by central banks. It has the same risk-free characteristics as central bank reserves or cash. A CBDC model has control of underlying technology and the ability of creating and destroying tokens that reside with the central bank, mostly on the basis of a clear regulatory and legal framework. 

Another difference is the way in which they hold their value. CBDCs are the tokenized version of the fiat currency of their country of origin. Like cash, they are backed fully by the issuing central bank, which is mandated typically for maintaining the value of that fiat currency and is accountable for its activities in the public. 

Meanwhile, private stablecoins seek to overcome the price fluctuations that are associated with the crypto assets by pegging their value to another asset, mostly to a national fiat currency. Stablecoin issuers have assets in place to back them so that the users can redeem any coins they have in fiat currency when they need to. 

What are the Types of CBDC and its Use Cases? 

CBDCs provide its country’s unit of account - fiat currency - ensuring final settlement of payments between its financial institutions, and overseeing the smooth work and integrity of the payment system of its country. As part of this central bank framework, it is predicted that different types of CBDC would be used for different circumstances. There are two types of CBDCs: wholesale CBDCs and retail CBDCs. 


  • Wholesale CBDC

Wholesale CBDCs are used to settle interbank transfers and other wholesale transactions between regulated financial institutions, potentially across borders. They operate similarly to financial institutions’ existing reserve accounts with the central banks. However, they may also enable new conditions such as the final settlement of a payment or transaction depending on the delivery of a separate payment. They could also improve the efficiency, speed and safety of the wholesale payments.


  • Retail CBDC

Retail CBDCs are a digital form of fiat currency, that are intended to be used by people and non-financial businesses for making and receiving payments. As the online payment methods diversify, retail CBDC could be a part of it. They could be structured in two ways, offering either token-based, anonymous access to the users or account-based access that is rooted in verifying the identity of a user through some form of digital ID. They also offer the potential for person-to-person, person-to-business, and even government-to-person transactions. 


The Future of CBDCs

It’s paramount to remember that CBDCs are mostly still in development - or are in early infancy, where they already exist. It will take some time to know before we know what CBDCs will shine in the wider spectrum of digital money that emerges around the world, and whether they will be a mainstream online method of payment and also store value for consumers. 

There are some fundamental questions that are to be answered such as how the user privacy should be balanced with the ability to track illicit activity and how traditional banking models and reserve currencies could be impacted. Also, can CBDCs interoperate with existing payment systems. However, in the broader sense of things, it is a question of how many countries launch their own CBDCs. 

Countries Foraying into CBDCs

As per the Atlantic Council’s Central Bank Digital Currency Tracker, more than 100 countries are exploring CBDCs. Ten countries have launched their own digital currency, including Nigeria in Africa and Jamaica in the Caribbean. The Bahamas in the West Indies was the first ever country in the world to have their national central bank digital currency, called the Sand Dollar. Moreover, nineteen countries are exploring the central bank digital currencies including Russia, India, South Korea and Japan. The US and UK are researching CBDCs and may introduce them in the future. Thus, CBDCs have a long way to go and have the potential to impact the future of payments. 

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