Central Bank Digital Currency (CBDC): Overview, Challenges and Where it is headed

Central Bank Digital Currency (CBDC) has become a prominent topic in modern finance, drawing attention from central banks globally. Initially associated with countering cryptocurrencies, CBDC has evolved into a significant innovation with potential implications for monetary policy and financial systems worldwide. This technical paper offers an overview of CBDC, tracing its evolution, providing high-level insights, and discussing its future trajectory. Through this exploration, we aim to shed light on the importance of CBDC and its evolving role in the financial landscape.

CBDC Overview

CBDC stands for Central Bank Digital Currency. It's essentially a digital form of a country's official currency, issued and controlled by its central bank, like how physical cash is issued. Unlike cryptocurrencies like Bitcoin, which are decentralized and not backed by any government, CBDC has the full backing of a central bank.

Why CBDC?

Real-time payment systems (RTPs) are witnessing significant growth worldwide and serve as a pivotal driver of digitization, facilitating instantaneous and secure financial transactions within a fully digital ecosystem. Then the question is, why CBDC? Here are some compelling reasons why CBDCs are listed:

• Security and central bank backing: Backed by the central bank, CBDCs offer high security and stability compared to decentralized cryptocurrencies.
• Faster and cheaper transactions: Potential for faster and cheaper transactions compared to traditional banking systems, especially cross-border.
• Financial inclusion: Could provide access to financial services for those currently unbanked 
  or underbanked.
• Programmable features: Central banks could potentially program features into CBDCs to implement monetary policy more effectively, such as expiry dates or targeted stimulus programs. For example: Ensuring funds released for given project/purpose are put to right use (Subsidies or grants, etc …).

The CBDC is meant to solve the major issue of cross-border transactions by providing a seamless and efficient method of transferring funds internationally, thereby reducing costs and increasing transparency in financial transactions. But of course, for this to happen, CBDC must be adopted by the relevant authorities, financial institutions, and the general public, ensuring widespread acceptance and integration into the existing financial infrastructure.

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