Central Bank Digital Currency (CBDC) has emerged as a hot topic in the financial world. 

A central bank digital currency (CBDC) is a type of digital currency issued and regulated by a country's central bank. It is a digital representation of a nation's official currency, such as the US dollar, euro, or yen, that is intended to function as a secure and efficient medium of exchange. CBDCs are similar to physical currency, but they exist only in digital form and can be used for online and offline transactions.


Unlike decentralized cryptocurrencies like Bitcoin or Ethereum, which operate independently of any central authority, CBDCs are centralized and controlled by a country's central bank. CBDCs are typically designed to have the same value and stability as traditional fiat currencies and can be used for various transactions, including payments, savings, and investments.

The implementation and features of CBDCs can vary across countries.


The Future of CBCDs:

Digital money bring more efficiency to monetary and payment systems. It is also expected to expand financial inclusion and strengthen the nation’s economy. However, CBDC is not seen as a replacement for the current currency system. Instead, it is expected to complement the system with a digital alternative.

Here are a few reasons why CBDC’s impact is expected to be positive:


  1. Central bank-backed: CBDCs are issued and guaranteed by the central bank, making them a legal tender.
  2. Digital form: CBDCs exist solely in electronic or digital form, allowing for easy and instantaneous transactions using digital payment systems.
  3. Centralized control: The central bank maintains control over the issuance, distribution, and regulation of CBDCs.
  4. Accessibility: CBDCs are designed to be accessible to the general public and can be held and used by individuals and businesses.
  5. Security and privacy: CBDCs employ advanced cryptographic techniques to ensure security, and privacy features may be incorporated to protect user information.
  6. Preventing illicit activity: A CBDC makes it feasible for a central bank to keep track of the exact location of every unit of the currency (assuming the more probable centralized, database form).
  7. Cannot be physically damaged: CBDC will eliminate the costs of phasing out soiled and torn notes, their transportation, insurance costs, and logistics involved.




Type of CBDC to be issued

CBDC can be classified into two broad types viz. general purpose or retail (CBDC-R) and wholesale (CBDC-W).

  • Retail CBDC would be potentially available for use by all viz. private sector, non-financial consumers and businesses while wholesale CBDC is designed for restricted access to select financial institutions.
  • While Wholesale CBDC is intended for the settlement of interbank transfers and related wholesale transactions, Retail CBDC is an electronic version of cash primarily meant for retail transactions.


Forms of CBDC

CBDC can be structured as ‘token-based’ or ‘account-based’.

  • A token-based CBDC is a bearer-instrument like banknotes, meaning whosoever holds the tokens at a given point in time would be presumed to own them.
  • In contrast, an account-based system would require maintenance of record of balances and transactions of all holders of the CBDC and indicate the ownership of the monetary balances.
  • Also, in a token-based CBDC, the person receiving a token will verify that his ownership of the token is genuine,
  • whereas in an account-based CBDC, an intermediary verifies the identity of an account holder.
  • a token-based CBDC is viewed as a preferred mode for CBDC-R as it would be closer to physical cash,
  • while account-based CBDC may be considered for CBDC-W.



CBDCs vs. Cryptocurrencies


Though the idea for central bank digital currencies stems from cryptocurrencies and blockchain technology, CBDCs aren't cryptocurrencies.


The cryptocurrency ecosystems provide a glimpse of an alternative currency system in which cumbersome regulations don't dictate the terms of each transaction. They are hard to duplicate or counterfeit and are secured by consensus mechanisms that prevent tampering.


CBDCs are designed to be similar to cryptocurrencies, but they may not require blockchain technology or consensus mechanisms.


Additionally, cryptocurrencies are unregulated and decentralized. Their value is dictated by investor sentiments, usage, and user interest. They are volatile assets more suited for speculation, which makes them unlikely candidates for use in a financial system that requires stability. CBDCs mirror the value of fiat currency and are designed for stability and safety.


CBDCs at a Glance

According to the pilot program and research project; in March 2023, there were 11 countries and territories with CBDCs. They are the Bahamas, Antigua and Barbuda, St. Kitts and Nevis, Monserrat, Dominica, Saint Lucia, St. Vincent and the Grenadines, Grenada, and Nigeria. Eighteen countries now have a pilot program, including seven of the G20 economies, and 32 countries have a program in development. A CBDC's main goal is to provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security.