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Central Bank Digital Currency (CBDC) Explained

By DigiFinex | DigiFinex | 18 Feb 2021

Traditional banking regulatory authorities worldwide have struggled over the years to regulate the increasing impact of common cryptocurrencies such as bitcoin and ethereum running on a blockchain network.

Crypto, A Challenge to Conventional Banking

Thanks to their decentralized and regulation-free existence, cryptocurrencies have gained enormous popularity. They have become a challenge to the present-day conventional banking structure that functions under the supervision and influence of a country’s regulatory body central bank.

Many leading central banks worldwide are working on or considering introducing their implementations of cryptocurrencies, as they cannot monitor the volatility of such cryptocurrencies. These regulated cryptocurrencies are referred to as central bank digital currencies (CBDC) and will be run by a specific country’s respective monetary authorities or central banks.

How CBDC Works

A CBDC uses a blockchain-based token to signify the digital version of a specific nation’s fiat currency (or region). A CBDC is centralized; it is issued by the country’s competent monetary authority and controlled by it.

To back up the valuations of cryptocurrencies, there is little clarification about reasonable reserve management. Besides, the recent introduction of new cryptocurrencies has also sparked questions about the potential for scams and robbery. CBDC, also referred to as digital fiat currencies or digital base money, will act as a digital version of a country’s fiat currency and be backed by an adequate sum of monetary reserves such as gold or foreign currency reserves.

Just Like Your Dollar Bill

Each unit of the CBDC can act as a protected digital instrument similar to a paper bill used as a payment method, a value store, and an official account unit. Each CBDC unit would also be distinguishable to avoid imitation, much like a paper-based currency note that carries a specific serial number. We have covered news on countries exploring CBDCs, such as China and the Phillipines.

Operating alongside other regulated currency sources, such as coins and bills, CBDCs will be a part of the money supply governed by the central bank. CBDCs seek to bring the ease and stability of cryptocurrencies and the limited, reserved-backed money distribution of the conventional banking system into the best of both worlds.

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