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A central bank digital currency (CBDC) is a digital version of government-backed, fiat money. This type of digital currency is issued by a central bank and tied to the country’s national currency. More than 80 countries around the world are researching or developing CBDCs, and they’re at various stages of the process.
Here are 3 things you should know about Central Bank Digital Currencies.
1. They are pegged to the value of the country’s fiat currency
Central bank digital currencies are digital tokens, similar to cryptocurrency, issued by a central bank. They are pegged to the value of the country’s fiat currency. Many countries are developing CBDCs, and some have even implemented them. Because so many countries are researching ways to transition to digital currencies, it’s important to understand what they are and what they mean to society.
2. The goal is to provide convenience and financial security
The main goal of CBDCs is to provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security. CBDCs could also decrease the maintenance a complex financial system requires, reduce cross-border transaction costs, and provide those who currently use alternative money transfer methods with lower-cost options.
3. There are two types of CBDCs, wholesale and retail
Wholesale CBDCs are similar to holding reserves in a central bank. The central bank grants an institution an account to deposit funds or use to settle interbank transfers. Central banks can then use monetary policy tools such as reserve requirements or interest on reserve balances to influence lending and set interest rates. While Retail CBDCs are government-backed digital currencies used by consumers and businesses. Retail CBDCs eliminate intermediary risk—the risk that private digital currency issuers might become bankrupt and lose customers’ assets.