Central Bank Digital Currency
Tags: cbdc, cryptocurrency
Published: 2023-06-23 10:22:15

Central bank digital currencies are the digital currencies that are backed by central banks. CBDCs are designed to possess the same value as that of the physical cash of the country, hence they can be used in place of the cash. There are around 114 countries that are in some stage of development of CBDCs. CBDCs are supposed to possess various benefits like improved transparency, reduce risk of fraud, improve financial inclusion, and enhanced monetary policy.  Cryptocurrency, completely decentralized digital currencies, have become very popular in recent years and come with issues like high volatility which makes them extremely risky for the common man to invest moreover it is difficult to use them as a currency. CBDCs will address these issues, as they will possess the same value as the currency of the country plus it is regulated by the central banks, making them safer.

## How CBDC differs from traditional currency
CBDCs are a digital currency, they only exist in the digital form and operate within a centralized system, with the central bank overseeing the issuance, distribution, and regulation of the digital currency,  hence completely regulated by the central authority, moreover, they can be programmed with certain features such as limiting how much to spend, who can use, etc. On the other hand, traditional currencies are issued as physical cash by central agencies, although you can [do payments, and can be transferred and maintained online](https://www.abzer.com/payment-links/), but they do possess issues like money theft, counterfeit currencies, higher settlement time in cross-border transactions, etc, and the CBDCs are expected to address these issues.

## Potential Benefits of CBDCs
CBDCs offer the potential to increase payment efficiency by allowing for real-time transactions and lowering transaction costs. CBDCs can also help with cross-border payments by streamlining and expediting the process, removing intermediaries, and lowering transaction fees. Furthermore, CBDCs can serve as a regulated alternative to cryptocurrencies, providing the advantages of digital currencies while preserving monetary stability and consumer safety. CBDCs can also have the potential to prevent illegal activity since transaction tracing can assist minimize money laundering and circulation of counterfeit currencies and improve financial transaction transparency. Apart from these CBDCs also have the potential to improve financial inclusion, they can give unbanked and underbanked people access to financial services, enabling those who previously had little or no access to traditional banking systems

## Major Countries Developing CBDCs
There are multiple countries exploring the possibilities of CBDCs, some are at the final stage and some are in the initial phase. Some of the major ones are as
China: China has been testing its digital yuan also called e-CNY since 2009. People's Bank of China has issued their digital currency e-CNY, which can be used in place of their normal currency for inline and mobile payments.
India: Digital version of the Indian rupee eINR also called as e-Rupee, was launched by the reserve bank of India. The e-Rupee pilot has been launched in November 2022.
United States: Federal Reserve, the central bank of the United States is exploring all the possibilities of digital currencies since 2020.
Nigeria: First digital currency in Africa, eNaira was launched by the Central Bank of Nigeria on October 25, 2021.
Brazil: The Central Bank of Brazil is working on its digital currency called digital real.

## IMF Working on Global Central Bank Digital Currency Platform
[IMF is working on a global central bank digital currency platform](https://www.reuters.com/markets/imf-working-global-central-bank-digital-currency-platform-2023-06-19/) to facilitate transactions between countries. IMF Managing Director Kristalina Georgieva said, "CBDCs should not be fragmented national propositions... To have more efficient and fairer transactions we need systems that connect countries: we need interoperability. For this reason at the IMF, we are working on the concept of a global CBDC platform". For facilitating transactions between countries, there needs to have a common regulatory framework. Failure of the same could create a space, which will be filled by the decentralized cryptocurrencies.

## Is CBDC a Cryptocurrency?
CBDCs and cryptocurrencies share some similarities but have some major differences too. CBDCs are digital fiat currency issued and regulated by central banks and they function inside a centralized framework, allowing central banks to maintain control over monetary policy and the financial system. As CBDCs are issued and regulated by central banks, they are supposed to provide stability, trust, and compliance with regulatory frameworks. Whereas the cryptocurrencies are decentralized digital currency that operates on blockchain technology. They are not issued and regulated by any central agencies, and their value is determined by market forces.