What is CBDC?

The rise of cryptocurrencies in the financial world has influenced central banks to consider developing their own CBDCs, or Central Bank Digital Currencies. Essentially, CBDCs would serve as digital currencies that central banks control. The main motivation for a CBDC to gain traction is financial inclusion. The benefits of using a CBDC include lower transaction costs, improved transparency, and programmable money. Furthermore, the emergence of blockchain technology has led to a debate over the validity and security of digital currencies.

The Benefits of CBDC

The benefits of CBDC are many, but the main one is that it gives central banks direct control over the money supply. It simplifies the distribution of government benefits, enhances tax controls, and streamlines interbank payment settlement. CBDC payments settle instantly between counterparties, minimizing overnight batch processing. They also help mitigate counterparty risk and enable tokenized payments. In short, they are a great way to facilitate payments and reduce costs. While there are many questions, the benefits of CBDC are many.

CBDCs are currently in research and development stages in several countries, including China, Japan, Sweden, and the United Kingdom. The United States, on the other hand, has remained hesitant and only recently launched a pilot project. While China has led research on CBDCs, other countries have followed, including the Bank of England and the European Central Bank. In the Bahamas, the Central Bank of the Bahamas, for example, has already launched a CBDC – the Sand Dollar – and has been in circulation for more than a year. Sweden’s Riksbank has developed a proof of concept for the CBDC and is exploring the policy implications. Meanwhile, in China, the digital renminbi is continuing to advance, with more than 100 million users transacting in it each year.