DEFINITION of Central Bank Digital Currency (CBDC)

Central Bank Digital Currency (CBDC) represents the digital form a fiat currency of a particular nation (or region), and is issued and regulated by the competent monetary authority of the country.

BREAKING DOWN Central Bank Digital Currency (CBDC)

Over the years, traditional banking regulatory authorities across the globe have struggled to control the growing clout of popular cryptocurrencies like bitcoin and ethereum which work on a blockchain network. Such virtual currencies have gained immense popularity owing to their decentralized and regulation-free nature, and have become a threat to the present-day traditional banking system that operates under the purview and control of a country’s regulatory authority (like a central bank). There is no clarity about any suitable reserve maintenance to back up the valuations of cryptocurrencies. Additionally, the continued launch of new cryptocurrencies has also raised concerns about the possibility of scams, thefts and hacks. (See also, Hackers Have Stolen $1.1B in Crypto This Year.)

Unable to control the growth and influence of such cryptocurrencies, many leading central banks across the globe are working on or contemplating launching their own versions of cryptocurrencies. These regulated cryptocurrencies are called central bank digital currencies, and will be operated by the respective monetary authorities or central banks of a particular country. Also called digital fiat currencies or digital base money, CBDC will act like a digital representation of a country’s fiat currency, and will be backed by a suitable amount of monetary reserves like gold or forex.

Each CBDC unit will act like a secure digital instrument equivalent to a paper bill, and can be used as a mode of payment, a store of value and a unit of account. Like a paper-based currency note that carries a unique serial number, each CBDC unit will also be distinguishable to prevent imitation. Since it will be a part of the money supply controlled by the central bank, it will work alongside other forms of regulated money, like coins, bills, notes and bonds. CBDC aims to bring in the best of both worlds – the convenience and security of digital form like cryptocurrencies, and the regulated, reserved-backed money circulation of the traditional banking system. The particular central bank or other competent monetary authority of the country will be solely liable for their operations.

The Bank of England (BOE) was the pioneer to initiate the CBDC proposal. Following that, central banks of other nations, like China’s People’s Bank of China (PBoC), Bank of Canada (BoC), and central banks of Uruguay, Thailand, Venezuela, Sweden and Singapore, among others, are looking into the possibility and validity of introducing a central bank issued digital currency.