What is CBDC?
There exist thousands of private cryptocurrencies, namely, Binance Coin, Bitcoin, Cardano, Dogecoin, Ether, Litecoin, Ripple, Solano, Terra, and Tether, among others. The inevitable introduction of Central Bank Digital Currencies (CBDCs) would result in transformational change to the global financial system since Bretton Woods. Each country will have its own CBDC, owing to it's different economy, financial stability and paramount privacy, and adopting an equilibrium between developments on the policy front and on the design front. CBDC would be considered as a virtual currency backed by the sovereign guarantee of the country issuing it.
With the rising popularity of cryptocurrencies, it is time for the world’s central banks to come out with an alternative for private cryptocurrency. While the launch of digital currency would mean - money entering a new era - yet countries are considering preserving key aspects of traditional monetary and financial systems.
CBDC launch status
The Atlantic Council Research, Bank of International Settlements, and International Monetary Fund, in its latest report, stated that - 9 countries have already launched CBDCs, 15 countries were in a pilot stage, 16 were under the development stage, and 40 countries were in the exploratory stage of research.
Digital currency infrastructure
Though the CBDC decentralised technology might be similar to that of private cryptocurrencies, the permissioned access, if any, will make the former different. CBDCs permissioned approach might allow multiple financial entities, which is also called the indirect approach, to maintain financial records under the overall control and supervision of the central bank. The central bank would control the access to the blockchain having financial records, but these might also be accessible to permissioned entities.
Benefits outweighing challenges
The key areas under evaluation phase by the central banks include a scope of retail and wholesale payments; direct approach vs indirect approach; adoption of blockchain technology, centralised ledger or distributed ledger technology (DLT); validation mechanism to be token-based or account-based; besides distribution architecture between central bank issuance and indirect one.
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