January 26, 2022

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Meaning of Central Bank Digital Currency (CBDC) and Key Explanations

Meaning of Central Bank Digital Currency (CBDC) and Key Explanations
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Central bank digital currency, CBDC, is a form of cryptocurrency made from blockchain technology. The only difference between it and other cryptos and stable coins is its centralized nature. In this article, we will define this term and explain it in detail.

Meaning of Central Bank Digital Currency

CBDC is a virtual currency backed by fiat of a country or region. It is a digital currency or token created by a country’s central bank to serve as legal tender. Holders of central bank digital currency have a claim on the bank. So, instead of printing fiat or paper money, CBDC is in electronic format.

Key Explanations

It is believed that electronic money is cheaper. Therefore, lower transaction costs. Unlike the fiat counterpart, where doing transactions online is expensive. Digital money promises to be cheaper. And make remittances from foreign countries easier.

It is backed by the central bank. Since they create it, they back it! Once a country launches its version, it becomes a legal tender backed by the central bank and the government of the country. The value of the digital form is the same as the fiat money. The digital token can be accessed only from a computer, smartphones, and other digital gadgets.

A person with CBDC has a claim on the central bank. This means that the money becomes a liability to the apex institution. Such claims also serve as legal tender. This means that it can be stored, invested, used for buying and selling. In fact, in Nigeria, the central bank has stated that any merchant that does not accept its electronic naira may face the law.

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In Africa, Nigeria is the first country to issue the digital currency named e-Naira. South Africa and Kenya are working on theirs according to a source. In total, five countries of the world have launched the CBDC. Fourteen countries are on their pilot (testing) stage and 16 countries are currently working on theirs. And guess what! The United States of America is not planning on making CBDC.

Other features of Central Bank Digital Currency

Already, I have mentioned that the CBDC is created by the central bank of a country and that owning it is a claim on the bank. More so, the digital token is centralized. Meaning that it is fully controlled by the Bank. And not distributed form, in the case of bitcoin and other cryptos and stable coins. What this implies is that the Central bank can easily control the currency through its monetary policy.

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It is believed that digital tokens will drive financial inclusion, especially in developing economies like Nigeria. But the question here is, how many Nigerians can afford a feature phone? How much more is a smartphone? Many of these people are living below 2 dollars a day and inflation is taking a better part of citizens’ little cash. However, there is a claim that it will help fight corruption.

Another problem with the CBDC is privacy. Since it is centralized, the central bank can easily monitor citizens’ income. Thereby breaching people’s right to privacy of how their resources are used.

Conclusion

Central Bank digital currency is the country’s fiat in electronic form. It doesn’t change the value but eases transactions and makes them cheaper and easier. According to sources familiar with the matter, it will drive financial inclusion and reduce corruption. But may affect the privacy of individuals.

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