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Understanding Central Bank Digital Currency (CBDC) -


>>> Central Bank Digital Currency (CBDC)


Investopedia

By SHOBHIT SETH

Apr 6, 2021


https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp


What Is a Central Bank Digital Currency (CBDC)?

A central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region). A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country.

KEY TAKEAWAYS

A central bank digital currency (CBDC) utilizes technology to represent a country's official currency in digital form.

Unlike decentralized cryptocurrency projects like Bitcoin, a CBDC would be centralized and regulated by a country's monetary authority.

While several governments are looking into the viability of creating and issuing CBDCs, no country has officially launched such money.


Understanding Central Bank Digital Currencies

Over the years, there has been growing interest in cryptocurrencies like Bitcoin and Ethereum, which work on a distributed ledger technology known as the blockchain network. Such virtual currencies have gained immense popularity, owing to their decentralized and regulation-free nature; with some seeing their rise as a possible threat to the traditional banking system that operates under the purview and control of a country’s regulatory authority, such as a central bank.

There is no clarity about any suitable reserve maintenance to back up the valuations of cryptocurrencies. Additionally, the continued launch of new cryptocurrencies has also raised concerns about the possibility of scams, thefts, and hacks.

Unable to control the growth and influence of such cryptocurrencies, many leading central banks across the globe are working on or contemplating launching their own versions of cryptocurrencies. These regulated cryptocurrencies are called central bank digital currencies and will be operated by the respective monetary authorities or central banks of a particular country.

Also called digital fiat currencies or digital base money, CBDC will act as a digital representation of a country’s fiat currency, and will be backed by a suitable amount of monetary reserves like gold or foreign currency reserves.

Each CBDC unit will act as a secure digital instrument equivalent to a paper bill and can be used as a mode of payment, a store of value, and an official unit of account. Like a paper-based currency note that carries a unique serial number, each CBDC unit will also be distinguishable to prevent imitation. Since it will be a part of the money supply controlled by the central bank, it will work alongside other forms of regulated money, like coins, bills, notes, and bonds.

CBDC aims to bring in the best of both worlds—the convenience and security of digital form like cryptocurrencies, and the regulated, reserved-backed money circulation of the traditional banking system. The particular central bank or other competent monetary authority of the country will be solely liable for its operations.

Examples of CBDCs

To date, no country has officially launched a central bank-backed digital currency. Many central banks, however, have launched pilot programs and research projects aimed at determining a CBDC's viability and usability.

The Bank of England (BOE) was the pioneer to initiate the CBDC proposal. Following that, central banks of other nations, like China’s People’s Bank of China (PBoC), Bank of Canada (BoC), and central banks of Uruguay, Thailand, Venezuela, Sweden, and Singapore, among others, are looking into the possibility of introducing a central bank-issued digital currency.

Russia has been moving forward with its creation of the "crypto-ruble," announced by Vladimir Putin in 2017. It is speculated that one of the main reasons for Putin's interest in blockchain is that transactions are encrypted, and thus easier to discreetly send money without worrying about sanctions placed on the country by the international community. This theory gained traction after the Financial Times reported in Jan. 2018 that one of Putin's economic advisors, Sergei Glazyev, said during a government meeting that "This instrument (i.e., the CryptoRuble) suits us very well for sensitive activity on behalf of the state. We can settle accounts with our counterparties all over the world with no regard for sanctions."

Glazyev himself was placed under sanctions by President Obama that prevented him from trading in or traveling to America in 2014.

Venezuela has been purported to be working on a CBDC called the "petro" since 2017, which would be backed by physical stocks of crude oil. The Venezuelan government also announced "petro gold" in 2018, allegedly pegged to the value of oil, gold, and other precious metal.

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