According to the Bank for International Settlements (BIS)’s January report, roughly 86% of the 65 surveyed central banks were engaging in some form of central bank digital currency (CBDC) work. Moreover, nearly 60% said it was either "likely" or "possible" that they would issue a CBDC for retail use in the next six years.
A CBDC is a country's fiat currency in digital form. Instead of using the traditional printing method, the central bank can issue electronic coins or accounts backed by the government. The main difference between CBDCs and cryptocurrencies is that CBDCs are centralized while cryptocurrencies are decentralized. Cryptocurrencies run on distributed-ledger technology, which means that multiple devices worldwide are constantly verifying the accuracy and not just one central hub.
The main benefits of digital currencies are that they are cheaper to manage and transfer. They are also suitable for providing services to the unbanked, especially through the phone. Digital currencies are also transparent and can reduce illicit activities while allowing governments to enact monetary policies more quickly and seamlessly through CBDCs.
A central bank digital currency is considered a central bank liability, so the government must keep reserves and deposits to back it up. They can be in various designs that:
- Restrict or open access
- Are anonymous or fully transparent
- Have operational hours (ranging from current opening hours to 24 hours a day and seven days a week)
- Have or does not have interest-bearing characteristics
The many variants of CBDCs usually fall into two main categories: wholesale and general purpose. The wholesale variant limits access to a predefined group of users while general-purpose variants are widely accessible.
China started its digital currency initiative in 2014, called the e-Yuan, and the central bank has already launched massive trials in Shenzhen, Chengdu, and Hangzhou. China can use digital currencies to solve its substantial debt problem, which will help stop the practice of acquiring multiple loans pledging the same collateral since the e-Yuan will make it easier to track assets and liabilities. On the other hand, countries like the US are a bit late to the game. In February 2020, Federal Chairman Jerome Powell said that it would finally start public discussions on the matter.
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