Central Bank Digital Currency (CBDC) refers to a type of digital currency that is issued and backed by a central bank. There is no doubt that cryptocurrency has left a significant impact on the global economy and finances. It marked the beginning of a digital era where people could conduct financial transactions using digital currencies.

It earned a separate trade market, allowing traders and investors to maximize their gains and make the most out of the volatile market. Although crypto has risks, no one can deny that it has changed the outlook with which currencies are perceived to date.

A new concept emerged when cryptocurrency gained a significant portion of the global financial and economic market. This is what we know as the central bank digital currency or CBDC. Being a novice concept, not many people are aware of it. Keeping this in mind, we have discussed the fundamentals of central bank digital currency in the following article.

What is central bank digital currency?

As the name suggests, CBDC is a digital currency under the operation and regulation of a centralized bank. There will be no fixed bank that will regulate the tokens. Instead, any financial organization working in the centralized form can release a token of itself for digital operations. It is the first step to define digital currencies with centralized rules and regulations because crypto is entirely decentralized. Even the forex market involving the physical currency pairs is decentralized.

Many countries are already on the path of releasing their digital currencies in collaboration with different central banks, while a few have already released the tokens in circulation. During the period of Covid-19 fiat currencies suffered enormous setbacks. This has led to the release of digital tokens. To make it more legally binding, these will be authorized by the respective Governments.

Types of Central Bank Digital Currency:

So far, central bank digital currencies can be classified into two primary categories. These are:

Wholesale CBDCs

These CBDCs will be treated like huge funds deposited into dedicated accounts in different financial organizations. However, it will be necessary for the organization to gain authority from the central bank to deal with digital currencies. Since these will act as fund reserves, a specific interest rate will be charged on the transactions.

Retail CBDCs:

The retail CBDCs will behave like the money individuals and businesses currently use. As these will be circulated in the market, they will be mined in huge quantities. Third-party companies will not be interfering in the transactions, so the overall security of the assets will be high. This is one of the predominant reasons, different countries plan to release retail CBDCs first and then wholesale CBDCs.

What are the potential benefits of central bank digital currencies?

Understanding the true potential of the central bank digital currencies is exceptionally crucial. Without complete knowledge, it won’t be possible to accept the shift in the financial and currency paradigm. So, without further ado, let’s discover ways the central bank digital currencies can quickly revolutionize the current financial and economic markets. The central bank digital currencies can quickly help to streamline the payment processes in many areas.

For instance, managing traditional currencies is tricky regarding business transactions or individual payments in bulk. This is why central banks should focus on developing and releasing digital currencies. These can make every transaction digital, and fund records will be changed automatically. There is no need to deal with currency conversions or storage of assets in electronic wallets.

Since these digital currencies will be centralized, people can easily use them to conduct regular finances. As these will be authorized by the Government it will be more legal. This is, in fact, the most significant advantage of central bank digital currencies. It also acts as one of the prime differentiators of CDBCs and crypto tokens, as the latter is decentralized with no backing from government and regulatory authorities.

People will also benefit from keeping their assets and transaction histories safe from cybercrimes. Since digital currencies will be under the regulations of the central banks, there won’t be any need for a third-party or intermediary body. This will further decrease the occurrence of crimes, ensuring the currencies can be safely handled for various purposes.

Let’s move further!!

With the central bank’s digital currencies, it will be possible for financial organizations to reduce overheads and transactional fees. Often when people want to transfer funds from one account to another, a specific charge is deducted. For more significant transactions, the costs are also high. This problem can be easily solved with the help of digital currencies under the regulations of the central banks

Lastly, the central bank’s digital currencies will make international payments easier and swifter. Usually, when one needs to make any international payment, the currencies need to be converted. This further involves the use of spread in the form of pips. Since the currency valuation differs from one country to another in terms of the fiat currencies, many countries need to pay more. But the central bank digital currencies will be universal. Plus, the conversion factor won’t be high, further reducing the spread. So, making international payments won’t be difficult.

Are CBDCs similar to cryptocurrencies?

No, the central bank digital currencies aren’t the same as cryptocurrencies. There are significant differences between each, which is why countries focus more on releasing CBDCs. For instance, these digital currencies will be centralized and can be controlled according to the rules and standards of the central banks. On the other hand, there are no such provisions for cryptocurrencies.

Conclusion:

With a clear understanding of the fundamentals of central bank digital currencies, it won’t be much of a hassle to look forward to a world where people can use the e-rupee to make regular transactions. Although there are several challenges to overcome and new rules and regulations to be set, CBDCs can change the world’s current financial and economic scenarios.