What is CBDC? – There exists thousands of private cryptocurrencies, namely, Bitcoin, Ether, Solano, Binance, Cardano, and Dogecoin, among others. The inevitable introduction of Central Bank Digital Currencies (CBDCs) would bring in paradigm shift to global financial system since Bretton Woods. Each country will have its own CBDC as every economy is different, financial stability and privacy is paramount, and adopting a balanced approach between developments on the policy front and on the design front. CBDC is virtual money backed by sovereign guarantee of the country issuing it. With the popularity of cryptocurrencies on rise, it is time for world's Central Banks to provide an alternative. While the launch of digital money would mean - money entering a new chapter, yet countries are contemplating to preserve key aspects of conventional monetary and financial systems.
CBDC launch status - According to a latest research report published by Atlantic Council Research, Bank of International Settlements, and International Monetary Fund - 9 countries have already launched CBDCs, 15 countries were in pilot stage, 16 were under development stage and 40 counties were exploring the option, carrying out research. The smaller countries, namely, Antigua & Barbuda (Dcash), Bahama (Sand dollar), Dominica (Dcash), Grenada (Dcash), Montserrat (Dcash), St Kitts & Nevis (Dcash), St Lucia (Dcash), and Nigeria (e-Naira) are the ones launching CBDC for domestic use. Among bigger countries, China is in advance stage of pilot launch, whereas Bank of England, Bank of Japan, European Central Bank, and the US Federal Reserve are in the exploratory stage. Reserve Bank of India is contemplating launch of its digital currency in early 2023.
Digital Currency Infrastructure - Though the CBDC distributed ledger technology (DLT) might resemble private counterparts, the permissioned access makes former different. CBDCs permissioned approach allows multiple financial entities (indirect approach) to maintain financial records under the overall control of the central Bank. The Central Bank would control the access to the blockchain having financial records, but these would also be accessible by permissioned entities.
Benefits outweighing challenges - The key areas under evaluation phase by the Central Banks' include, scope of retail and wholesale payments; direct vs indirect; adoption of blockchain technology, centralized ledger or distributed ledger technology; validation mechanism to be token-based or account-based; besides distribution architecture between Central Bank issuance and indirect one. The launch of CBDCs would lead to reduction in transaction costs owing to its centralized and regulatory framework. The payment and settlement mechanism would undergo radical change as DLTs would provide complete record of the transactions. CBDC is likely to provide an impetus to the financial inclusion, enhanced transparency, and restrict illegitimate activities. CBDC would also protect private cryptocurrency investors from the volatility risk prevalent in the market.
Please keep watching this space for latest updates on virtual currencies.
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