Why Are Central Banks Interested in CBDC? This is the explanation!

Digital currency is a phenomenon that is being widely discussed in the financial world. Not only cryptocurrencies such as Bitcoin or Ethereum, but also digital currencies issued by central banks, or what is called Central Bank Digital Currency (CBDC).

What is a CBDC and why are central banks interested in developing one? Check out the following review.

What is CBDC?

CBDC is digi moneytal issued and its circulation is controlled by the central bank, and is used as a legal means of payment to replace currency. CBDC will act as a digital representation of a country's currency. 

CBDCs differ from cryptocurrencies, as cryptocurrencies do not have a central authority overseeing them, and their exchange rates are determined by supply and demand in the market..

What is the Goal of Central Banks in Developing CBDC?

Central banks have several goals in developing CBDC, including:

• Increase the efficiency and inclusion of payment systems, by utilizing digital technology that is faster, cheaper and safer.
• Encouraging innovation and competition in the financial sector, by providing wider and easier access for the public and business actors to use digital financial services.
• Reduce reliance on cash, which poses potential risks of money laundering, terrorism financing and tax evasion.
• Maintaining the sovereignty and stability of the national currency, by anticipating the development of cryptocurrencies and foreign digital currencies that could threaten the role of the central bank as a monetary authority.

How is CBDC developing in the world?

Several central banks in the world have conducted research and trials related to CBDC, both for the retail segment (retail CBDC) and the wholesale segment (wholesale CBDC). Retail CBDC is CBDC used by the general public for daily transactions, while wholesale CBDC is CBDC used by financial institutions for interbank transactions.

One example of a retail CBDC that has been launched is e-CNY, which is a CBDC issued by the People's Bank of China. e-CNY can be used for various transactions, such as online shopping, bill payments, and money transfers.

Another example is the Sand Dollar, which is a CBDC issued by the Central Bank of the Bahamas. Sand Dollar aims to increase financial inclusion in the island nation, which has limited financial infrastructure.

Meanwhile, an example of a wholesale CBDC that is being developed is Project Garuda, which is a Bank Indonesia initiative to develop the Digital Rupiah. Digital Rupiah is Bank Indonesia's contribution to the country in the struggle to maintain Rupiah sovereignty in the digital era.

The first stage of Project Garuda is the wholesale Rupiah Digital cash ledger, namely CBDC which is used for interbank transactions, such as issuance, destruction and transfer of funds.

What are the challenges and opportunities for CBDCs in the future?

CBDC is an innovation that offers many benefits, but also faces several challenges, such as:

• Technical aspects, namely how to choose the right technology to support CBDC functions and features, such as speed, scalability, security and privacy.
• Legal aspects, namely how to adapt regulations and policies related to CBDC, such as legal status, consumer protection, and cross-border cooperation.
• Social aspects, namely how to increase public awareness and trust in CBDC, as well as overcome social challenges that may arise, such as digital exclusion and the impact on the banking sector.

On the other hand, CBDC also opens up new opportunities for central banks and society, such as:

• Opportunities to develop new business models based on CBDC, such as digital financial services, electronic commerce and the creative economy.
• Opportunities to increase interoperability of cross-border transactions, by utilizing CBDC as a more efficient and secure means of international payments.
• Opportunities to strengthen the role of central banks as monetary authorities, by utilizing CBDC as a more effective and responsive monetary policy instrument.

Conclusion

CBDC is digital money issued by a central bank as legal tender to replace currency. Central banks develop CBDCs to increase efficiency, innovation and stability of payment and financial systems.

Several central banks have conducted research and trials related to CBDC, both for the retail and wholesale segments. CBDCs face several challenges, but also offer many opportunities in the future.

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Read also:

Eurostable Coin: The Euro-Based Digital Currency Revolution

What Is Digital Dollar? How is it Different from Crypto?

Get to Know Off-Ledger Currency and Its Benefits

What is Decentralized Currency?

DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.