CBDC's: What are they and how can they redefine money?

Blockchain has been a trending subject ever since the introduction of cryptocurrencies. Although cryptocurrencies were not widely used by the general public and were not very popular among governments of most countries, blockchain technology, as the backbone of these cryptocurrencies, showed its true potential and is now being adopted by governments as the base for their CBDCs, i.e., Central Bank Digital Currencies. In this article we will explore what CBDCs are and how they can redifine the future of money.

What are CBDCs ?

CBDCs or Central Bank Digital Currency is a blockchain based digital currency, whose value is pegged to the fiat currency or paper currency of the country. CBDCs are essentially digital tokens issued by the Central Bank of a country that represents the currency of the country in a digital format. CBDCs take their inspiration from cryptocurrencies and are based on the blockchain technology just like cruptocurrencies. However the main difference between cryptocurrencies and CBDCs is that while the value of cryptocurrencies is determined by the market and the record ledger for the transactions are public, in case of CBDCs the value of the currency is fixed by the central government of a nation and the record ledger is not publically accessible. 

How do CBDCs work ?

There is a lot of confusion between CBDCs and the current digital alternatives for transacting like credit cards, online bank transfers, UPI (India), etc. The major differentiating factor between these online transacting tools and CBDCs is that instead of the liability falling on the bank, it solely rests with the Central Bank, making CBDCs inherently much safer. CBDCs are more like virtual currency, unlike the current online transaction tools which are merely modes of transactions or tools that facilitate transfer of funds from the payer's bank account to the recepeint's bank account. Instead of recording a debit and credit transaction on two different ledgers at the senders and receivers banks, in case of a CBDC a single transaction record can be entered into the ledger with the central bank signifing the flow of funds from the payer (debit) to the receipient (credit). When using the blockchain technology to record transactions, all transactions are recorded as 'blocks of data' in a 'public ledger'. These blocks are validated with the help of 'public keys' and once added they are irreversible. Additionally as the blocks are added, it forms a chain like structure that shows the movement of money. However, since CBDCs are issued by the central bank, unlike cryptocurrencies, their ledgers are not essentially public. Additionally, all transactions recorded are private to a certain extent, as the government can track the transactions if need be through specific legal methods.

Benefits of CBDCs

Though not very apparant, CBDCs have certain benefits for both the people using them to transact as well as the economy as a whole.

1. CBDCs will make the banking system much more secure as liability can be easily shifted from banks, which are prone to collapses as we have seen recently, to the Central Bank of the nation.
2. CBDCs simplifies the transaction recording process thanks to the use of blockchain technology.
3. CBDCs will reduce the pressure on commercial banks.
4. CBDCs provide a certain degree of privacy, unlike the banking system, as it is based on the blockchain technoloy which stores transactions in a block of data which cannot be regularly tracked without proper procedures. However, this privacy cannot be compared to that of cash.
5. Since CBDCs are digital, their supply  can be regulated much more easily to meet the needs of the economy as compared  to hard cash once they are fully adopted.