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    Home»Cryptocurrency»What are central bank digital currencies?
    Cryptocurrency

    What are central bank digital currencies?

    February 17, 20224 Mins Read


    AS the digital world of NFTs, cryptocurrencies and the Metaverse expands, you might start to see the phrase Central Bank Digital Currencies (CBDC) pop up too.

    Central bank digital currencies are digital versions of a country’s national currency, but what does that actually mean and how can you use it?

    Central bank digital currencies are digital versions of a country's national currency

    1

    Central bank digital currencies are digital versions of a country’s national currencyCredit: Getty

    What are central bank digital currencies (CBDC)?

    Central bank digital currencies (CBDC) are a new form of money that is digital, issued by a country’s central bank and considered as legal tender.

    A CBDC would allow households and businesses to directly make electronic payments using money issued by the Bank of England.

    CBDC is sometimes thought of as equivalent to a digital banknote, although in some respects it may have as much in common with a bank deposit, the Bank of England says.

    It could lead to “a more robust, efficient, trusted, regulated and legal tender-based payments option”, Money Control reported.

    How does a CBDC work?

    A CBDC in England would be denominated in pounds sterling, just like banknotes.

    The digital variation would have the same equivalent worth as its real-life counterpart.

    CBDCs are designed to be similar to cryptocurrencies, but may not need blockchain technology or consensus mechanisms to operate.

    Any CBDC would be introduced alongside cash and bank deposits – rather than replacing them.

    In a fully-implemented system, it can be used to shop just like a bank card and offer a reduced dependency on cash.

    Why do governments want a CBDC?

    Financial regulators could give people easier access to central bank money.

    CBDC could create new opportunities for payments and the way the bank keeps prices and the whole UK financial system stable.

    Last year’s, The Kalifa Review of UK Fintech recommended UK financial regulators such as the Bank of England, the Treasury and the FCA should also get more involved in digital currencies and crypto assets.

    The report suggested the Bank of England could create its own digital currency.

    Mr Kalifa said a central bank digital currency (CBDC) “would
    be a significant development which could help support the
    adoption of new technologies such as blockchain in financial services.”

    It suggested a CBDC would give individuals access to central bank money in digital form.

    The report said: “The UK would be able to take advantage of its mature payment network, and to build a more efficient and innovative structure on top of it.”

    But there are concerns, mainly around privacy and security and they have the potential to create challenges, which would need careful managing.

    CBDCs present opportunities for states to closely keep an eye on monetary flows of individuals.

    Mu Changchun, the director of the The People’s Bank of China’s Digital Currency Research Institute, has said the digital yuan will have “limited anonymity”.

    Small payments are linked to users’ phone numbers with larger payments requiring more extensive Know Your Customer data. 

    What countries are working on CBDCs?

    By the end of 2021, there were at least 81 countries looking into CBDC projects.

    Of these, 32 countries are in the early stages of researching whether they actually want a CBDC and what the benefits are.

    Another 16 countries in the “development” stage, which is when things get more serious as countries develop proof-of-concepts and launch studies. 

    Fourteen countries were experiencing in the pilot stage by developing a CBDC that is put forward for testing.

    A huge factor in understanding and deciding whether to pursue a CBDC is analysing the security risks involved.

    So far, five countries have launched CBDCs; the Bahamas, Saint Kitts and Nevis, Antigua and Barbuda, Saint Lucia, and Grenada.

    What is the future of CBDC?

    The bank of England has not yet made a decision on whether to introduce CBDC.

    Other countries are expected to launch full-fledged CBDCs this year once they are approved from their pilot programmes.

    As more countries trial CBDCs and the interest in virtual currencies (VCs) climbs, it may become vital to have regulator.

    Rabi Shankar, Deputy Governor of the Reserve Bank of India, said: “CBDC is a digital or virtual currency but it is not comparable to the private virtual currencies that have mushroomed over the last decade,” Sankar said.

    “Usually, certainly for the most popular ones now, they do not represent any person’s debt or liabilities. There is no issuer. They are not money, certainly not currency, as the word has come to be understood historically.

    “It is not clear what specific need is met by these private VCs that official money cannot meet as efficiently, but that may in itself not come in the way of their adoption.

    “If these VCs gain recognition, national currencies with limited convertibility are likely to come under threat.”



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