What is CBDC?

CBDC stands for Central bank digital currency (CBDC, also called digital fiat currency or digital base money) is the digital form of fiat money (a currency established as money by government regulation, monetary authority, or law).

Advantages of CBDC:

• The cost of making cash can be very high for countries living on secluded islands. CBDCs can help mitigate these costs.
• Traditional financial systems often deal with loads of intermediaries involved that shoot up the costs and fees involved.
• CBDC could be a brilliant method for banking the unbanked. According to the World Bank, around 80% of people in Indonesia, the Philippines, and Vietnam, and 30% in Malaysia and Thailand, are unbanked. In Myanmar, only 23% of people have a legit bank account. CBDC can help create an inclusive financial system.
• CBDC can make the global payment system a lot more resilient. Currently, the payment system is concentrated in the hands of a few large companies. Using a DLT-based coin can have a very positive effect here.
• According to IMF, a properly executed CBDC can counter new digital currencies. Privately-issued digital currencies can be a regulatory nightmare. A domestically-issued CBDC which is, denominated in the domestic unit of account, would help counter this problem.
• One of the biggest problems with cryptocurrencies (eth to paypal
• ) is its price volatility. With CBDCs, governments can use a private blockchain to control price volatility. While this will compromise on decentralization, it can help increase the widespread usage of blockchain technology.
• Speaking of widespread usage of blockchain technology, utilizing CBDCs can help banks experiment more with Distributed Ledger Technology (DLT). Some central banks are considering the option of providing CBDC only to institutional market participants in order to develop DLT-based asset markets.
• CBDCs can increase the economy’s response to changes in the policy rate. For example, during a period of prolonged crisis, CBDCs can theoretically be used to charge negative interest rates.
• CBDCs can help encourage competition and innovation in the financial sector. New entrants can build on the tech to enter the payments space and provide their own solutions. It will also reduce the need for most smaller banks and non-banks to run their payments through the larger banks.
• As electronic and digital payments take over from physical cash, the central banks will look to replace physical cash with its electronic equivalent, i.e., CBDC. Doing this will increase the proceeds from creating money, aka, seigniorage, earned by the bank.