In this article, you will learn what does CBDC stand for. While cryptocurrency gained much attraction due to its decentralized system, governments around the globe are trying to make the most out of virtual currencies in a different way. They can do this with the use of a digital currency, which will be under the control of the central bank. That currency is the CBDC.
What does CBDC stand for?
CBDC stands for Central Bank Digital Currency. CBDC is a digital form of central bank money, which is a legal tender created and backed by a central bank that represents a claim against the central bank and not against a commercial bank or a Payment Service Provider ( PSP). CBDC is managed on a digital ledger (which can be a blockchain or not), expediting and increasing the security of payments between banks, institutions, and individuals.
According to a recent study conducted by the Bank for International Settlements, more than 70% of institutions are actively researching and developing proof of concept for CBDCs. Here are three aspects that define a central bank digital currency:
- Digital assets. CBDCs are digital assets. They are accounted for in a digital ledger (distributed or not) that acts as the single source of truth.
- Central bank backed. CBDC represents claims against the central bank, just as banknotes do.
- Central bank controlled. The supply of CBDC is fully controlled and determined by the central bank.
What Are the Use Cases of CBDCs?
CBDC can be built for retail and/or wholesale payments. While a retail CBDC refers to a digital version of cash, a wholesale CBDC refers to a new infrastructure for interbank settlements. Central banks that have been trialing CBDC have been focusing especially on fast, low-cost payments.
- Retail. Retail CBDC is used for payments between individuals and businesses or other individuals, akin to digital bank notes. The daily volume of retail CBDC is usually greater than 100,000,000 transactions.
- Wholesale. Wholesale CBDC is used to facilitate interbank settlement, ie. payments between the few banks and other entities that have accounts at the central bank. The daily volume of wholesale CBDC is usually less than 100,000 transactions.
What Are the Benefits of CBDC?
Central bank financial infrastructure currently faces a number of challenges, from costly payment settlement to the decreasing use of bank notes and lack of financial access for citizens far from bank branches. Studies have estimated that the cost of clearing and settling securities for central G7 bank countries are over $50 billion per year, due in large part to the resources required to transfer assets and reconcile accounts.
Blockchain-based CBDC solves for the inefficiencies and vulnerabilities in our current central banking infrastructure by simplifying the creation of a secure payments system that serves as a large-scale, decentralized clearing house and asset register.
Benefits of Retail CBDC
Increase availability. Digital currency can be distributed on mobile devices, increasing access and usability for citizens who are far from bank branches and cannot access physical cash.
Streamline reconciliation. A CBDC is natively digital and does not require the costly and time-consuming reconciliation currently needed for e-commerce and cross-border payments.
Foster digital innovation. CBDC's platform-based software model lowers barriers to entry for new firms in the payments sector, fostering competition and innovation and pushing financial institutions toward the globalization of services.
Enhance monetary policy. CBDC gives central banks direct influence over the money supply, simplifying the distribution of government benefits to individuals and improving control over transactions for tax controls.
Benefits of Wholesale CBDC
Improve interbank payment settlement. Through automation and decentralized netting solutions, CBDC payments are settled instantly between counterparties on an individual order basis, reducing the risk of overnight batch processing and collateralization.
Reduced counterparty risk. CBDC mitigates credit risk in cross-border payment transactions by enabling payment-versus-payment settlement for transfers in different currencies.
Participate in digital asset markets. As more tokenized asset markets emerge, there will be a need for tokenized payments. CBDC provides a large-scale, decentralized clearing house and asset register to help foster the digital assets revolution.
Stay competitive. Even though the cost of real-time money transfers has been reduced by centralized platforms like SEPA in Europe, most financial institutions charge customers above cost. CBDC allows end users to benefit from streamlined banking infrastructure and ensures main intain bank Interbank settlement amidst the wider adoption of stablecoin technology.
Bottom Line
CBDCs give central banks future-oriented tools to allow them to implement monetary policy in more direct, innovative ways and keep pace with technological change. So knowing what does CBDC stand for helps the banks with their transitions.
