18 November, 2022 |


CBDC: The future of Money?

More snappy than anyone could have prognosticated, people and businesses conform to digital forms of financial relations. What are the main design principles and motivators for central bank digital currencies, and which are the digital performances of central bank currency? What effect does this have on marketable banks? There is no particular solution, but it is clear that the development of CBDCs will impact the whole financial system.

Overview A CBDC is a type of central bank money that may be used electronically by retailers(individuals), corporations(including wholesalers), and other institutions to store value and make payments. It is central bank digital money in the form of legal tender with the central bank's obligation, much like physical money that is in use today (for example, the US dollar).

Introduction A central bank will issue currency notes in the form of digital currency, or "Central Bank Digital Currency" (CBDC). Central banks of many nations are working towards the issuance of CBDC.

In America's bank, Bank of America, their digital currency resembles cryptocurrencies, and they exist in the form of digital tokens.
Nowadays, CBDCs are getting widespread, and numerous countries are trying to put them into use. So, CBDC is gaining popularity and understanding that what it actually is very important at individual and national levels.

Goals associated with Central Bank Digital Currencies There are various facilities we get from CBDC and from which some basic features include privacy, security, transferability, and dynamic accessibility for businesses as we as consumers.

Countries usually face cross-border transactions, which are resolved by the use of digital currencies. It also offers people different ways of transferring money at the individual level.

As we all know, the value of cryptocurrencies fluctuates and is very volatile, but it's not the case for CBDC. Thus, it facilitates stability and secures digital currency exchange because the central bank governs it.

Benefits of digital currencies The possibility of a more effective payment system in regions with expensive currency management. CBDC can potentially broaden financial inclusion because it does not need users to have a bank account. The CBDC may ensure that individuals can easily access legal tender if a currency is unavailable for whatever reason. If CBDC and cash were issued as legal tender, they would be accepted as acceptable forms of payment.

Types of digital currencies proposed in India General purpose or retail (CBDC-R) and wholesale (CBDC) are the two categories into which the Central Bank Digital Currency can be divided (CBDC-W). Everyone, including the private sector, non-financial customers, and businesses, can use retail CBDC. Wholesale CBDC can improve the security and efficiency of financial transaction settlement systems, while the retail one will provide safe and secure payments.

Difference between digital currency and cryptocurrency A cryptocurrency is a type of digital money that serves as an alternative payment method with its own set of encryption algorithms. A central bank digital currency is the digital version of a nation's fiat currency. The main distinction between digital money and cryptocurrency is who controls the coin's monetary worth.

Cryptocurrency outperforms digital money in terms of encryption. This is because cryptocurrencies are basically stored in wallets which offer high cybersecurity.

Conclusion It will significantly strengthen India's digital economy. Using digital currency will also result in a more effective and affordable currency management system. CBDC should coexist peacefully with other cryptocurrencies to fully capitalise on Blockchain technology.

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Picture Credits - Business Times

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