ABC from IQeon: What is central bank digital currency (CBDC)?

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23.11.2021
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Digital currency of central banks.

Dear friends, we continue the "ABC from IQeon" section, in which our team explains complex concepts from the world of digital assets in a simple manner. Let's talk about the central bank digital currency (CBDC) today.

CBDC (central bank digital currency) is the digital currency of the central bank.

The CBDC is created and fully controlled by the country's central bank and is legal tender, as opposed to digital or virtual currencies such as decentralized Bitcoin and Ethereum or centralized Ripple and Cardano.

Currently, many countries are testing their own digital banking currencies, but China is particularly far advanced in this matter.

At the moment, two more retail CBDCs have been released - the Sand Dollar of the Bahamas and DCash, which operates in the territory of the Eastern Caribbean states. Sand Dollar was launched in October 2020. The main goal of the project is to increase financial inclusion. So far, the currency is designed for internal use only.

DCash is the digital version of the East Caribbean dollar, launched in February 2021. One of the key objectives of the project is to provide a safer, more efficient and cost-effective option for conducting financial transactions.

CBDC classification and its peculiarities

There is no single generally accepted classification of CBDC. The key parameters by which you can divide them into types are:

  • architecture;
  • infrastructure;
  • technology and conditions of access;
  • level of anonymity;
  • possibility of application for domestic and / or cross-border payments.

For example, depending on the architecture, there are two main categories of CBDC:

  • Wholesale (other titles are commercial, or direct)

    The wholesale version of CBDC is a payment system operated by central banks. It is available only to a narrow circle of users, for example, financial institutions that store funds in central bank accounts and professional market participants. The analogs of wholesale digital currencies are correspondent accounts and bank deposits in central banks.

  • Retail

    Retail CBDCs are digital currencies available for widespread use by individuals and legal entities. Serve as a replacement for cash (or a supplement) and an alternative to bank deposits.

The retail category includes three types of architectures:

  • Hybrid

    Hybrid digital currencies are a cross between direct (wholesale) and indirect (synthetic) CBDCs.

    Payment processing is handled by intermediaries, but the digital currency itself is a direct payment request to the central bank.

  • Intermediary

    Intermediary CBDCs represent a direct payment request to the central bank, while payments are made by intermediaries.

  • Indirect (synthetic)

    The sCBDC model is also known as “two-tier” CBDC. Such currencies are also called indirect or synthetic because they resemble the existing two-tier banking system. Intermediaries represented by issuing companies ensure all obligations of the regulator to retail customers, control communications, network payments and messages to other intermediaries.

According to experts, the development of CBDC is one of the most important trends in the monetary sphere, which will radically change the world of money in the next decade. However, today such currencies are still in the testing stage.

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