CBDC

Central Bank Digital Currency (CBDC)

Central Bank Digital Currency, often abbreviated as CBDC, is a type of virtual money. It is issued and regulated by the central banks of a country, making it a legal tender, unlike other types of cryptocurrencies such as Bitcoin that operate independently and without regulation from financial institutions.

Types of Central Bank Digital Currency (CBDC)

There are generally two types of CBDC:

  • Retail CBDCs – These are digital currencies available to the general public for daily transactions and payments, much like physical cash.
  • Wholesale CBDCs – These are restricted digital currencies used by banks and other financial institutions for large-scale transactions, such as interbank payments and securities settlement.

How Does CBDC Work?

CBDC operates on a digital platform, using technology known as blockchain. A blockchain is a chain of digital 'blocks' that contain records of transactions. Each block is connected to all the blocks before and after it, making the system highly secure because it's difficult to alter any single record without changing all subsequent records in the chain.

When a CBDC transaction takes place, it's added to the blockchain's ledger, which provides a transparent, verifiable, and permanent record of every transaction. This has advantages for anti-money laundering and combating the financing of terrorism (AML/CFT), as well as ensuring transaction integrity.

Advantages and Disadvantages of CBDC

Like any digital system, CBDC comes with a host of benefits and drawbacks, some of which are highlighted below:

Advantages

  • Transparency – Due to the blockchain system, transactions are transparent and traceable, which can help reduce financial crimes.
  • Accessibility – It can provide access to digital money to people without access to traditional banking system.
  • Lower costs – It could reduce the costs associated with handling physical money and conducting financial transactions.

Disadvantages

  • Security risks – Like any digital system, it's susceptible to hacking and cyber-attacks.
  • Privacy concerns – The transparent nature of blockchain could lead to privacy concerns.
  • Implementation complexity – Designing and implementing CBDC systems could be a complex and costly process.