Central Bank Digital Currency

CBDC is the digital form of fiat money. It is issued and regulated by the government and hence receives its legal tender status. Most proof-of-concepts are based on blockchain technology and inspired by cryptocurrency like systems. But unlike cryptocurrency, the CBDC will be centrally controlled. In this case, the concept of a distributed ledger used in bitcoin won’t be required. In a way, a CBDC can be seen as the digital version of “cash” as we know it. A CBDC will not need intermediaries and clearing houses to complete transactions. Money transfers and payments can be in real-time. It can help curb illicit money activity (like tax evasion). CBDC’s can provide an easy way for everyone the park money safely. This can lead to improved competition among banks to provide better solutions for deposits.

This opens up another way in which the central bank can directly affect the economy. Currently the reserve banks use quantitative easing and interest rates to control the circulation of currency. But with a direct method to inject money into circulation, also known as Helicopter Money, can increase liquidity. CBDC’s will counter the effects of the more distributed cryptocurrencies like Bitcoin and corporate digital currencies like Facebook’s Libra.

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