- CBDC is a digital currency issued by the government that supports financial services.
- It provides businesses and consumers with privacy and transferability and financial security.
- CBDC is vulnerable to cyber attacks, data loss, invasion of privacy, and the like.
What is CBDC?
A Central Bank Digital Currency (CBDC) is a digital currency that is endowed and backed by the central bank of various countries. These are designed to function like conventional currencies in a virtual form with the help of blockchain and distributed ledger.
It represents the third form of central bank money. They already co-exist with two other conditions: banknotes and bank reserves.
Types of CBDCs
CBDC can be categorized into three main types: retail CBDC, wholesale CBCD, and cross-border CBCD.
- Wholesale CBDCs
These are similar to holding reserves in the central bank. Central banks can use their monetary policy tools like reserve requirements and interest on reserve balances.
- Retails CBDCs
These are government-backed currencies that can be used by individuals and businesses. It eliminates intermediary risk.
Also, there are two different types of Retail CBDC: token-based retail that are accessible with a private key and public key or can have both. The validation allies the users to execute transitions.
Account-based retail CBDC requires digital identification to access an account.
Challenges faced by CBDC
Legal and regulatory aspects are one of the key potential issues faced with CBDC issuance. And current legislation in some jurisdictions that maybe prevent the issuance of CBDCs.
If it is not designed correctly, the issuance of it might have major problems in terms of financial stability given that it may result in bank disintermediation and can lead to serious implications for the bank.
The other major challenge is related to CBDCs’ technical infrastructure and application whereas many technical possibilities can arise at the technical level.
The financial literacy of the public is a serious challenge, especially for the central banks. And their primary objective behind issuing financial inclusion.
Risks to the society of CBDC
Economic risk is inflation. Although CBCD can be created at the press of a button and distributed widely and can also inflate the money supply without any change in the GDP.
Whereas this risk can be transferred by issuing to the users and businesses in return for bank collateral paid for bank deposits.
There is a risk of a decentralized in its system sufferings outages and cyber-attacks. Financial risks contain exchange rate risk, maximum lending cost, and operational risks.
Are CBDCs cryptocurrency?
Although the ideology for the central bank’s digital currency roots in cryptocurrency and blockchain technology, CBDC is not a cryptocurrency. Central banks control CBDCs, whereas cryptocurrencies are almost decentralized.
Is CBDC based on blockchain?
They can be based on blockchain but there is no need for it. The federal reserve bank of Boston and the Massachusetts Institute of Technology (MIT)’s digital currency initiative found in their research that distributed the ledger that could hinder the efficiency of a CBDC .
