How Central Bank Digital Currencies(CBDC) Work

What Is a Central Bank Digital Currency (CBDC)?

A central bank digital currency (CBDC) makes use of an electronic record or digitized token to define the virtual version of the sovereign currency of a specified nation or region. A CBDC, being centralized, is issued and regulated by the proficient financial authority of the country.

Understanding Central Bank Digital Currencies(CBDCs)

The passing years have witnessed scaling interest in cryptocurrencies like Bitcoin and Ethereum. These work on distributed ledger technology better known as Blockchain Technology. These virtual currencies have gained immense traction in the trading arena owing to their decentralized and regulation-free nature. Some view their rise as a potent threat to the traditional banking system that functions under the strict guidelines of the country’s regulatory authority.

There is little to no clarity regarding any suitable maintenance backing up the valuations of cryptocurrencies. Moreover, the iterative launch of new cryptocurrencies has added to the concerns about the chances of scams, thefts, and hacks.

Attempts to control the popularity and growth of such cryptocurrencies have met with failure. This has led the top central banks across the globe to work on or ponder over the introduction of their own versions of cryptocurrencies. These regulated cryptocurrencies are called central bank digital currencies are going to be enforced by financial authorities of respective countries.

Every CBDC unit is set to act as a secure digital instrument, an equivalent of paper currency fit to be used as a mode of payment, has a store of value, and a recognized official unit of account. Just as paper-based currency note bears a unique serial number, so shall a CBDC unit - in order to be distinctive enough to prevent counterfeiting. As this is to be issued by and controlled by the central bank, it will function alongside other formats of regulated money like coins, bills, notes, and bonds. CBDC aims at bringing the best of both worlds - the ease and security of the digitized version like the crypto and the regulated and sovereign-backed feature worthy of any instrument issued by the traditional banking system. The specific central bank remains solely responsible for its circulation and operation.