Everything about central bank digital currency.

We hear more and more about Central Bank Digital Currency, also known as CBDC, but what exactly is it and what types are there? Digital money is on the rise. We have known about cryptocurrencies for some time now, and there are more and more variants in that world too. CBDCs are digital forms of fiat money and are issued and managed by central banks. What exactly are they, what are the pros and cons and what does the future of these digital currencies look like? We would like to give you more insight.
 

CBDC, what is that?

A Central Bank Digital Currency (CBDC) is a digital form of a national currency, issued by a country's central bank. Unlike cryptocurrencies, such as Bitcoin, a CBDC is managed by a central authority and has the same value as physical currency. The purpose of a CBDC is to improve the efficiency of payment transactions, promote financial inclusion and better implement monetary policy. CBDCs can reduce the cost of cash, improve fraud prevention and increase payment security. 
 

Types of Central Bank Digital Currency

There are different types of Central Bank Digital Currency, or CBDCs. First, there is the Wholesale CBDC. This is aimed at financial institutions and designed to simplify wholesale payments and interbank transactions. The aim is to improve the efficiency of interbank payments and reduce liquidity risks.  
 
The Retail CBDC is aimed at the general public, including consumers and businesses. This version can be used for daily transactions and acts as a digital replacement for cash. Retail CBDCs can be further divided into Account-based CBDC and Token-based CBDC. In Account-based CBDC, users have an account for their digital currency with the central bank. In Token-based CBDC, the digital currency acts as a digital equivalent of cash without requiring an account. 
 

The pros and cons of a CBDC

CBDCs offer both advantages and disadvantages. CBDCs can give central banks more control over money supply and interest rates, allowing them to respond more effectively to economic changes. They can provide access to financial services for people without bank accounts, especially in developing countries. By reducing the need for physical money production and distribution, the cost of cash can be reduced. Another important benefit is that digital currencies can be better monitored and tracked, thus better preventing tax evasion and money laundering. 
 
CBDCs also bring disadvantages. There may be concerns about user privacy, as central banks may gain insight into transaction data. The introduction of CBDCs may lead to destabilisation of commercial banks by allowing consumers to hold directly with the central bank instead of commercial banks. Setting up a CBDC infrastructure can be expensive and complex, which is also a major drawback. 
 

Examples of CBDC implementations

Several countries are experimenting with CBDCs or have already implemented them. China's central bank has introduced the digital ‘yuan’, which is currently being tested in several cities. The aim is to improve the efficiency of payments and provide an alternative to existing payment systems.  
 
The Bahamas has introduced the ‘Sand Dollar’, a digital version of the Bahamian dollar. The aim is to promote financial inclusion, especially on remote islands. Sweden's Riksbank is testing the ‘e-krona’ in response to the decline in the use of cash in the country. The aim is to provide a safe and efficient payment option. The European Central Bank (Eurozone) is exploring the possibility of a digital euro. 
 

Is CBDC the future?

CBDCs have the potential to significantly change the financial world internationally. They can improve the efficiency and security of payments, promote financial inclusion and give central banks more control over monetary policy. Whether CBCD is the future is another question. With the rise of CBCDs, there is a loss of privacy and anonymity that could fall away. The pros and cons are still under further investigation.