Central Bank Digital Currencies (CBDCs) are the currencies that a central bank issues giving them the status of legal tender in line with the law or regulations of the government. They are digital tokens, just like cryptocurrencies – such as Ethereum (ETH) and Bitcoin (BTC) – and the value of the fiat currency of the country is utilized as a peg for them. CBDCs are being adopted across the globe in the regions taking into account the Eastern Caribbean and Nigeria.
The Distinction Between CBDCs and Fiat Currencies
The utilization of a blockchain or such a distributed database is not mandatory for CBDCs but one cannot categorize them as true cryptocurrencies. This is because they do not have decentralization as central banks issue them and maintain full control over their distribution and production analogous to the traditional currencies. The value of CBDCs is additionally not supported by anything instead than the trust of the common masses in the entity issuing them.
Nonetheless, the central bank digital currencies offer many benefits over traditional currency, taking into account the ability to deliver them straightly to the rest of the parties with no dependence on any 3rd-party payment processors. Apart from that CBDCs also provide better control to the authorities over their distribution, paving the way toward implementing monetary policy in an additionally effective manner. A country’s competent authority issues CBDCs and regulates them contrary to the cryptocurrencies.
The Procedure for Structuring CBDCs
The two most frequently discussed structuring patterns for CBDCs are token-based and account-based CBDCs. There is a requirement for the central banks to pay attention to particular characteristics of central bank digital currencies in mind. They include privacy, distribution method, and access. This is since CBDCs come under the span of fiat currencies, making it clear that they should have easy access with no excessive complexities in transfers.
Token-Based CBDCs
With the token-based CBDCs, the consumers are given universal access at the greater law-enforcement actions’ cost. The operation of the token-based technology is analogous to the blockchain as distributed ledger technology is used by it to validate the ownership chain for transactions’ confirmation. There might also be the involvement of great hazards for tokens or keys in a non-custodial wallet to be lost by the consumers.
