Geldpo[^7^]https: www.imf.org en topics digital payments and finance central bank digital currency virtual handbook

Central Bank Digital Currency (CBDC): Definition, Example, and FAQs

A Central Bank Digital Currency (CBDC) represents a digital form of a country's fiat currency, issued and backed by its central bank. Unlike traditional digital money held in commercial bank accounts, a CBDC is a direct liability of the central bank, akin to physical cash. This makes it a foundational element within the evolving landscape of digital finance and a significant consideration for monetary policy. The exploration and potential adoption of a Central Bank Digital Currency are driven by various factors, including enhancing payment systems, promoting financial inclusion, and maintaining financial stability in an increasingly digital economy.

History and Origin

The concept of a Central Bank Digital Currency gained prominence as technological advancements in digital payments accelerated and private digital currencies emerged. While the idea of digital money is not new, the specific interest in central bank-issued digital currency deepened in the early 21st century. Sweden's Riksbank, for instance, began exploring an "e-krona" as early as 2016 in response to the rapid decline of cash usage in the country. Globally, interest intensified after 2019, with the Bank for International Settlements (BIS) reporting that a significant majority of central banks are actively researching or developing CBDCs.⁴ The International Monetary Fund (IMF) has also provided extensive resources and research on the subject, highlighting its growing relevance in the global financial system.³

Key Takeaways

• A Central Bank Digital Currency is a digital version of a national currency, issued and guaranteed by the central bank.
• It aims to combine the benefits of digital payments with the safety and trust of central bank money.
• Unlike cryptocurrency, a CBDC is centralized and directly controlled by the issuing monetary authority.
• CBDCs are being explored to improve domestic and cross-border payments, foster innovation, and promote financial inclusion.
• Key concerns include privacy, cybersecurity, and potential impacts on commercial banks and liquidity.

Interpreting the Central Bank Digital Currency

The interpretation of a Central Bank Digital Currency largely depends on its design and the policy objectives it aims to achieve. A retail CBDC, accessible to the general public, could allow individuals and businesses to hold digital money directly with the central bank, bypassing commercial banks for some transactions. This could influence interest rates and the broader banking sector by altering deposit flows. Conversely, a wholesale CBDC, limited to financial institutions, would primarily aim to improve the efficiency and security of interbank settlements, reducing risks in large-value transfers.

The Federal Reserve in the United States, for example, has been exploring the potential benefits and risks of a U.S. Central Bank Digital Currency, focusing on how it might improve the domestic payment system while addressing concerns about privacy and financial stability.² The design choices—such as whether a CBDC is interest-bearing, anonymous, or traceable—significantly impact its functionality and public acceptance.

Hypothetical Example

Imagine a country, "Diversifica," whose central bank decides to introduce a retail Central Bank Digital Currency, the "Diversi-Digital."

1. Issuance: The Central Bank of Diversifica issues 1 billion Diversi-Digital units, each pegged 1:1 to the traditional Diversi-Dollar.
2. Distribution: Citizens can open a digital wallet directly with the central bank or through authorized private financial institutions.
3. Transaction: A citizen, Alice, wants to buy groceries. Instead of using a debit card (which relies on her commercial bank account) or physical cash, she uses her Diversi-Digital wallet on her phone to transfer 50 Diversi-Digital units directly to the grocery store's wallet.
4. Benefits: This transaction is settled instantly, reducing processing fees for the merchant and providing a secure, direct payment mechanism for Alice, backed by the central bank.
5. Impact: If many citizens shift to using Diversi-Digital, the central bank gains more direct oversight over the money supply and potentially a new tool for implementing quantitative easing or targeted stimulus.

Practical Applications

A Central Bank Digital Currency has several practical applications across various facets of the economy:

• Enhanced Payments: CBDCs can facilitate faster, cheaper, and more efficient domestic and international payments, particularly for cross-border payments. This can reduce friction and costs associated with traditional correspondent banking.
• Financial Inclusion: In economies where access to traditional banking services is limited, a retail Central Bank Digital Currency can provide a secure and accessible digital payment method for unbanked and underbanked populations, fostering greater financial inclusion.
• Monetary Policy Implementation: A CBDC could offer central banks new tools for implementing monetary policy. For instance, it could enable direct distribution of stimulus payments or allow for nuanced control over interest rates on digital holdings.
• Combating Illicit Activities: While some designs allow for anonymity, a well-designed CBDC can incorporate features to combat money laundering and terrorist financing by providing a transparent and traceable ledger for transactions, when necessary.
• Innovation: A CBDC can serve as a platform for private sector innovation, enabling new financial products and services built on top of the central bank's digital infrastructure.

Limitations and Criticisms

Despite the potential benefits, Central Bank Digital Currencies face several limitations and criticisms:

• Privacy Concerns: One of the most significant concerns is the potential for government surveillance and loss of financial privacy. Unlike cash, a CBDC's digital nature allows for transactions to be tracked, raising questions about data security and the extent of state control over individual spending.
• ¹ Financial Stability Risks: A retail CBDC could potentially lead to disintermediation of commercial banks if large amounts of deposits shift from banks to central bank digital wallets, impacting bank lending capacity and overall financial stability.
• Cybersecurity Risks: Centralized digital systems are vulnerable to cyberattacks, fraud, and technical glitches. A widespread CBDC system would require robust security measures to protect against these threats.
• Technological Infrastructure: Implementing a nationwide Central Bank Digital Currency requires significant investment in technological infrastructure and can present substantial operational challenges, especially in regions with limited internet or power access. Countries like Nigeria, with its eNaira, have faced adoption challenges partly due to infrastructural and trust issues.
• Public Acceptance and Education: Widespread adoption of a CBDC depends on public trust and understanding. Overcoming inertia and educating the populace about the benefits and functionality of a new digital currency can be a major hurdle.
• Impact on Inflation: While a CBDC aims to stabilize the currency, its direct impact on inflation would largely depend on how it's integrated with existing monetary policy frameworks and managed by the central bank.

Central Bank Digital Currency vs. Cryptocurrency

While both a Central Bank Digital Currency and cryptocurrency exist in digital form, their fundamental characteristics and underlying philosophies differ significantly:

The confusion often arises because both represent digital money. However, a Central Bank Digital Currency is an evolution of fiat currency in digital form, while most cryptocurrencies aim to be alternatives to traditional financial systems. The former maintains the existing monetary hierarchy, whereas the latter often seeks to disrupt it. stablecoin can be seen as a bridge, attempting to combine the stability of fiat currencies with some aspects of cryptocurrency technology, but still typically issued by private entities rather than central banks.

FAQs

Is a Central Bank Digital Currency the same as Bitcoin?

No, a Central Bank Digital Currency is not the same as Bitcoin. A CBDC is issued and controlled by a country's central bank and is a digital form of its official national currency. Bitcoin, on the other hand, is a decentralized cryptocurrency that operates without a central authority and is not backed by any government.

Will a Central Bank Digital Currency replace cash?

Central banks generally state that a CBDC is intended to complement, not replace, physical cash. It aims to provide an additional option for digital payments, especially as cash usage declines in many economies. The goal is to ensure that the public retains access to central bank money in a digital form.

How would a Central Bank Digital Currency affect my bank account?

The impact of a Central Bank Digital Currency on your bank account would depend on its design. If it's a retail CBDC, you might have the option to hold funds directly with the central bank, which could potentially reduce deposits in commercial banks. However, many proposed CBDC models involve commercial banks acting as intermediaries, so your interactions might still primarily be with your existing bank, using the CBDC through their services.

What are the main benefits of a Central Bank Digital Currency?

The main benefits of a Central Bank Digital Currency include enabling more efficient and cheaper payments (especially cross-border payments), fostering greater financial inclusion by providing accessible digital money, offering a secure and risk-free digital alternative to private money, and potentially providing central banks with new tools for implementing monetary policy.