What is CBDC?

What is CBDC?

A central bank digital currency or, shortly, CBDC is explained as a virtual asset that is backed and issued by central banks. As cryptocoins and stablecoins have obtained boosted engrossment from holders, monetary authorities across the globe have decided to create a substitute to physical money or risk missing out on the future of funds. Generally, cryptocoins are grounded on DLT, meaning that a payment’s accuracy is being constantly validated by devices via the world rather than by a single central hub. CBDC in its turn is run on digital ledgers (which may not necessarily be blockchains), making more quickly and more secure payments between banking structures, companies, and clients.

Main peculiarities of CBDCs

A CBDC has an instrument, system, and institutional characteristics which are listed below:

Instrument features:

  • Convertibility (it should exchange at par with cash; operations with it should be straightforward in implementation);
  • Affordability (CBDC payments should have low costs or no costs at all for the end-user);
  • Accessibility (CBDC should be accessible for both online and offline operations).

System features:

  • Security and resiliency (CBDC should ensure the highest levels of protection against any vulnerability and failures in operations);
  • Scalability (CBDC should be capable to accommodate the potential for large-scale volumes possible in the future);
  •  Interoperability (Flow of funds between systems must be easy and available 24/7);
  • Flexibility (CBDC should feature a flexible structure and be adaptive to quickly-changing terms and conditions).

Institutional features:

  • Robust legal mechanisms (the issuance of CBDC should be grounded on unambiguous authority);
  • Compliance with standards (The operation with currency must be in line with enforceable legal and regulative requirements).

CBDC and cryptocoins: main differences

Virtual currency the issuers of whom are central monerary authorities are commonly mistaken for other types of crypto assets. As mentioned above, CBDCs have central banks at the center of every payment. But cryptocoins, such as Ethereum are tokens designed by utilizing cryptographic methods by a DLT or blockchains.

Another distinctive feature between these assets is that cryptocoins use public blockchains where anyone can become a participant in the blockchain network’s essential operations, whilst CBDCs apply private blockchains, distributed ledgers that function as closed, secure databases and are not decentralized.

The limitations on CBDC networks are imposed by monetary authorities. Hence, while cryptocoins feature decentralized nature, CBDCs are developed under the centralization approaches. In this respect, cryptocoins ensure anonymity; while CBDCs allow central banks to see who holds what.

CBDCs should not be mistaken for stablecoins; instead, they would be the fiat currency itself. For example, a CBDC dollar bill would be the same as a common dollar bill. This currency can only be used for payments, any stockpiling or usage for investment purposes is outright banned.

Holders can decide on how much and what kind of data they wish to make public as unquestionably autonomous with a peer-to-peer paradigm. Contrary to this, CBDC payments will automatically send vast amounts of details to tax and supervisory offices.

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