CBDC stands for Central Bank Digital Currency which refers to the virtual form of a fiat currency which will be issued and regulated by an economy’s central bank or the monetary authority.
They are backed by the full faith and credit of the issuing government which, similar to paper currency will appear in their balance sheet as a liability. CBDCs can simplify the implementation of monetary and fiscal policies and promote financial inclusion in an economy by bringing the unbanked into the financial system.
It is a virtual currency that cannot be compared with the cryptocurrency which has mushroomed over the last decade as the latter doesn’t have an intrinsic value.
CBDC has lucid advantages over the existent digital payments systems as they will be final and reduce the possibility of settlement risk as it will be equivalent to handing over the cash. It will enable more real-time and economic globalization of payment gateways.
Moreover, it will seek to meet the public’s demand and need for unregulated private virtual currencies (cryptocurrencies) and thereby, avoid them from their damaging consequences.
Lastly, this will make the issuance of currency efficient and quick using cryptography and a public ledger as authorities will no longer depend on the paper/polymer and ink, further reducing the possibility of circulation of counterfeit notes or using the currency for illicit activity and illegal transactions.
Although they aren’t formally being used, many countries are exploring the possibility of the introduction and use of CBDCs.
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