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Central Bank Digital Currency (CBDC) – What is a CBDC?

Well from the title itself, you must have got the idea of this article and what CBDC stands for. What exactly is a Central Bank Digital Currency and how is it different than the existing mode of payments like Credit Cards or Cash?

To start with, let’s see why CBDC’s are being launched by governments across the world. If you are reading this article, you must have heard of Bitcoin. Well, with its rising popularity as a mode of payment the world’s central banks are now realizing their need to get in the game or they would soon be obsolete as the evolution of money passes by them.

A few months back, China announced its digital Yuan in four of its cities. A few months back, the US is also considering implementing a digital dollar. As more banks explore the possibilities of CBDC integration, there will be a strong push to the cryptocurrency infrastructure. It’s these systems that may make it possible for all cryptocurrencies to integrate into the economy seamlessly one day.

What Makes CBDC’s?

Well, these new types of Government Digital Currencies share some of the most important aspects with traditional cryptocurrencies like Bitcoin and Ethereum. One, of them, is both of these utilize blockchain technology to facilitate speedy transactions and monitor market activity. Consequently, CBDC’s function very similar to conventional cryptocurrency.

The major benefit of this form of currency is that they provide transparency. This form of added clarity provides bankers with more security and monitoring capabilities. Additionally, the peer-to-peer nature of blockchain tech helps in reducing transaction fees and transaction times significantly. But the major difference lies in the fact when discussing additional capabilities to cancel, remove or edit the transaction details in certain circumstances.

However, these are also called digital fiat currency or in simple terms, these CBDC’s will represent a country’s fiat currency and might be backed by forex reserves, gold reserves, etc but more than that they will be all centralized and can be monitored and produced by the governments.

Each CBDC will act as a digital equivalent of a paper bill and will be used as a mode of payment, as a store of value, or as an official unit of account.

There also arises a question of double-spending but certainly, there will be some form of identification attached to each unit of CBDC in order to prevent imitation just like we see with paper bills. So far, no country has launched officially a central bank-backed digital currency, however, the Bank of England (BOE) was the first to initiate a CBDC proposal. After that, we sat People’s Bank of China, Bank of Canada, etc introducing some form of a central bank-issued blockchain-based digital currency.

Most of the crypto folks are optimistic that the year 2021 will be one of CBDC’s and I also think the same. In India, however, we all are still waiting for proper bills on regulating cryptocurrency and their trading.

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