CBDCs are similar to cryptocurrencies because they are digital tokens that use blockchain technology to record transactions. However, they differ from cryptocurrencies because they are issued and regulated by central banks rather than decentralized and governed by a network of users.
The Rise of CBDCs
Fiat money, not backed by a physical commodity like gold or silver, serves as a legal tender to exchange goods and services. Historically, fiat money has been issued in the form of coins and banknotes. However, with the advancement of technology, governments, and financial institutions have begun to supplement fiat money with a credit-based model, where balances and transactions are digitally recorded.
The use of physical currency, a traditional payment mode, has significantly declined in recent years, particularly after the Coronavirus pandemic. In addition, the emergence of cryptocurrency and blockchain technology has also led to a preference for cashless societies and digital currencies.
As a result, governments and central banks worldwide are exploring using government-backed digital currencies. If implemented, these CBDCs will be fully supported by the issuing government and the monetary authority, providing people with a traditional means of exchanging virtual currency.
Types of CBDC
CBDCs can be classified into two types: wholesale and retail. Wholesale CBDCs are mainly used by financial institutions such as banks. Retail CBDCs, on the other hand, are used by consumers and businesses, similar to traditional money.
Benefits of CBDCs
CBDCs can address the risks associated with digital currencies in their current form. Cryptocurrencies are known for their volatility, as their value can fluctuate significantly. There are concerns that the volatility in the crypto market could lead to significant financial losses for individuals and ultimately impact the overall economy. CBDCs, on the other hand, are backed by the issuing government and the monetary authority, providing people with a more stable means of exchanging virtual currency.
In addition to addressing the volatility issue, CBDCs also have the potential to increase financial inclusion, especially for individuals and businesses that are currently unbanked or underbanked. CBDCs can be accessed through a mobile phone or other digital devices, making it easier for people to access and use digital currencies.
CBDCs have the potential to revolutionize the way we think about money and make digital payments more accessible and convenient. While there are still many challenges and uncertainties surrounding the implementation and use of CBDCs, they offer an exciting new possibility for the future of digital currency.