What is a CBDC?
CBDC is an abbreviated form of Central Bank Digital Currencies. Blockchain sector has introduced decentralized financial networks meaning that people are able to make financial transactions without a centralized regulator or authority. Therefore, various sectors and industries have added blockchain solutions in their respective fields.
In the same manner, government officials are also conducting research on blockchain networks for issuing digital versions of the native fiat currency. The digital version of the national currency of a region is called CBDC.
State regulators utilize CBDCs for implementing upgrades such digitized monetary policies. However, most administrators are still conducting research regarding impact, risks, and practical utility of CBDCs.
Features of CBDCs
Features of CBDCs are categorized as under in regards to different aspects:
Instrument features refer to administrative dynamics of a given CBDC. It has the following use cases:
- Accepted and Available
- Low Cost
Systematic features of a CBDC describe the operational attributes. Its advantages are mentioned as follows:
Institutional features account for enterprise applications of CBDCs.
- Robust Legal Framework
Types of CBDCs
CBDC classification is based on various aspects taking reference from various parameters. At present, there is no baseline or standardized blueprint for implementation of CBDCs at a national or international scale. Therefore, sovereign nations have continued to use an independent regulatory approach for organizing CBDC pilots.
At the same time, governments are conducting independent research programs and developing native CBDC frameworks based on local technical resources. At the same time, the objectives and economic goals of every nation for CBDCs also varies from one another.
Such as ECB is working on developing a wholesale CBDC while Chin is developing retail CBDC. Here are different types of CBDCs based on functionality, scope, accessibility, and design:
Classification Based on Functionality
Central banks and administrative agencies develop different variants of CBDCs to solve different problems. Therefore, CBDCs are usually divided into the following branches based on their functionalities:
Retail CBDCs are designed for nationalized use and implementation. It means that local businesses and citizens of a nation are able to use these CBDCs based in place of the paper currency or legal tender.
They are published and issued by Central bank digital currency and used as a means for implementing digitized monetary policies. However, some analysts have shared reservations regarding programmability of retail CBDCs that can create privacy constraints and lack of financial independence.
Wholesale CBDCs are meant for using in international trade in place of international reserve currencies such as US Dollar and Euro. This type of CBDC is used to settle national bank transactions among at an international scale.
Wholesale CBDCs can bring nuanced changes to the international trade and commerce. They have the potential to reduce national debt levels by alleviating forex differences. However, the transition requires careful scrutiny and detailed research to understand all relevant aspects and identifying any negative implications.
Classification Based on Accessibility
CBDCs can also be classified based on accessibility outlining the technical resources and infrastructure requirements:
Online CBDCs operate in an online environment with devices that are actively connected to internet such as digital wallets. It is implemented on banking platforms and online transaction channels.
Online CBDCs paves the way for cashless economy and ensures security and advantages such as instant transactions, lower costs, and greater financial inclusion. Online CBDCs also require active internet connection for verification.
Offline CBDCs operate in an offline setup. The users have to make offline transactions using digital wallets that have peer-to-peer features.
However, offline CBDCs are unable to operate successfully without an active internet connection and require an internet connection to synchronize with a regulated channel, make changes, and install upgrades.
Online and Offline CBDCs are two sides of the same coin. The first option offers advantages such as real-time transaction confirmation and authorization. On the other hand, offline CBDCs have to process transactions in an offline setup and use current connectivity options such as IoT and peer-to-peer trading.