What is a Central Bank Digital Currency (CBDC)?

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Overview:

The Reserve Bank of India (RBI) Deputy Governor recently said that Central Bank Digital Currency (CBDC) platforms could bring about a substantive change in the sphere of cross-border payments.

About Central Bank Digital Currency (CBDC):

  • CBDCs are a form of digital currency issued by a country's central bank.
  • Examples of central banks include the Reserve Bank of India (RBI), the US Federal Reserve System, the Bank of Japan.
  • CBDCs are similar to stablecoins, except that their value is fixed by the central bank and equivalent to the country's fiat currency.
  • Advantages:
    • It provides businesses and consumers with privacy, transferability, convenience, accessibility, and financial security. 
    • It also decreases the cost of maintenance that a complex financial system requires.
    • It reduces cross-border transaction costs.
    • It would also reduce the risks associated with using digital currencies, or cryptocurrencies, in their current form. CBDCs, backed by a government and controlled by a central bank, would give households, consumers, and businesses a secure means of exchanging digital currency.

What are Stablecoins?

  • They are cryptocurrencies whose value is pegged or tied to that of another currency, commodity, or financial instrument.
  • Stablecoins aim to provide an alternative to the high volatility of the most popular cryptocurrencies, including Bitcoin (BTC).
  • Unlike cryptocurrencies like Bitcoin, stablecoins’ prices remain steady in accordance with whichever fiat currency backs them.
  • E.g., USDC stablecoin is backed by dollar-denominated assets.

 


Q1) What are Cryptocurrencies?

A cryptocurrency is a digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.

Source: RBI’s Shankar urges increased adoption of CBDC for efficient cross-border payment