What is CDBC?

What does CDBC stand for? Central bank digital currency. A CBDC is a digital form of a nation’s currency issued by a central bank.

According to the US Federal Reserve’s central bank digital currency definition: “A CBDC is a digital form of central bank money that is widely available to the general public.”

It went on to add that

“A CBDC would differ from existing digital money available to the general public because a CBDC would be a liability of the Federal Reserve, not of a commercial bank.”

This article discusses what a central bank digital currency (CBDC) means compared to cryptocurrencies and explores how CBDC works.

History of central bank digital currency: CBDC examples

According to Forbes, in 2019, The Bahamas became the first nation to pilot a CBDC when its central bank issued a digital representation of the Bahamian dollar, known as the sand dollar.

The project's main objective was to give unbanked and underbanked communities within the Bahamas access to regulated payments and financial services. The project also expected the new currency to reduce service delivery costs and increase transactional efficiency for financial services across the nation.

On 20 October 2020, the Central Bank of the Bahamas completed sand dollar’s pilot phase and rolled out the CBDC to the nation’s public.

Today, China is leading the world in developing and deploying CBDCs with its currency e-CNY. In February 2022, China conducted a pilot for e-CNY use at the Beijing Winter Olympics.

The US is not far behind, with President Joe Biden signing an executive order on 9 March 2022 which placed “urgency on research and development of a potential United States CBDC.” Meanwhile, the Governing Council of the European Central Bank launched an investigation phase of a digital euro project in July 2021.

“More than four-fifths of the world’s central banks are similarly engaged in pilots or other central bank digital currency (CBDC) activities,” said consulting firm McKinsey & Company.

How is CDBC different from cryptocurrency?

According to those behind the Bahamian CDBC: “Sand dollar is not a cryptocurrency (e.g. Bitcoin). Sand dollar is a central bank digital currency (CBDC). This means it is a centralised, regulated, stable, private and secure unit of account and means of exchange. The digital B$ (Bahamas Dollar) is a direct liability of the central bank, in the Bahamas, backed by the foreign reserves.”

They added: “Cryptocurrencies are private-sector issued or minted. While they may be backed by other assets, including central bank currencies, they may not represent the liability of any government or central authority. In some cases, cryptocurrencies may also not be backed by any underlying asset.”

Bitcoin (BTC) and most other cryptocurrencies are based on the principle of decentralisation. When the pseudonymous Satoshi Nakamoto released a technical paper called ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ in 2008, he did so with the intention of creating a peer-to-peer electronic cash payment system that works without needing a centralised financial institution.

On the contrary, central bank digital currency (CBDC) is issued by a centralised financial body and is not decentralised.

While Bitcoin uses a decentralised public ledger to record and verify transactions, according to the international affairs think tank Atlantic Council, China is using a centralised ledger to record retail transactions. e-CNY Wallets with lower balance and transaction limits are allowed to keep their anonymity, but those with higher transaction limits require more rigorous identity and know your customer (KYC) verification.

Governments and central banks are particularly concerned about the growing circulation and transaction volumes of privately-issued stable coins pegged to fiat currencies.

“Some efforts to create CBDCs have been born out of reservations about the impact of privately issued stablecoins on financial stability and traditional monetary policy,” said McKinsey & Company.

Types of CBDCs

There are two types of CBDCs. Wholesale CBDCs are designed to be used among financial intermediaries only, while retail CBDCs are intended for use by the wider economy.

According to BIS, wholesale CBDCs are built on the current two-tier structure: the central bank acts as the foundation of the payment system while payment service providers handle customer-facing activities.

Retail CBDCs, on the other hand, are digital tokens or currencies issued directly by the central bank to the general public. Retail CBDCs eliminate the risk of private issuers going bankrupt as they are directly linked to the central bank.