Definition of Central Bank Digital Currency (CBDC)
The Central Bank Digital Currency (CBDC) is the digital form of national currency. Central banks, such as the Federal Reserve in the United States or the European Central Bank in the European Union, are likely to play key roles in managing national digital currencies. The central bank digital currency, which uses blockchain technology and exists only electronically, can generally be used for the same purposes as a fiat currency issued by a central bank.
How do Central Bank Digital Currencies Work?
Central banks developing digital currencies utilize blockchain technology, just like other digital currencies. To use the central bank digital currency, you will need a compatible digital wallet to send, receive, and store your digital currency. Here’s how to send money in the form of a central bank digital currency:
- Extract your digital wallet: If you are using a hardware wallet, you will need to connect the wallet to the internet.
- Initiate the money transfer process: You can send the digital currency to anyone with a wallet compatible with that currency.
- Wait for the transfer process to complete: The blockchain that secures the central bank digital currency uses a series of symbolic signatures to authenticate the transfer. Symbolic signatures are mathematical algorithms used to verify the transfer.
- Confirm receipt of the money: The digital wallet balances for you and the recipient should update automatically. You may be able to view all transactions (anonymously) on the central bank digital currency network using a blockchain explorer website.
Countries Using Central Bank Digital Currencies
Central bank digital currencies have not yet been widely adopted, but several countries are exploring or already using CBDCs. Here are some countries that are exploring or currently using central bank digital currencies:
- United States: The Federal Reserve Bank of Boston is collaborating with technical experts from the Massachusetts Institute of Technology (MIT) on a potential CBDC study.
- Nigeria: The eNaira is accepted in Nigeria as the country’s CBDC. The digital naira has been in use since October 2021.
- China: The digital yuan (eCNY) was launched in China on a limited basis as a pilot test in 2019. The digital currency is used in everyday transactions alongside wallets compatible with the digital yuan.
- Russia: The Russian government, in collaboration with several local partner banks, is conducting simulations for the digital ruble.
Advantages and Disadvantages of Central Bank Digital Currency
Advantages:
- Secured by blockchain technology.
- Backed by the government.
- Facilitates direct money transfers.
Disadvantages:
- Concentration of control over the blockchain network.
- No opportunity for currency appreciation.
- Requires a compatible digital wallet.
What Do Central Bank Digital Currencies Mean for Investors?
In general, central bank digital currencies may complement traditional assets in your investment portfolio. If there is a central bank digital currency available to you, you might consider using it, but remember that the central bank digital currency is equivalent to traditional currency. If your country’s currency is experiencing inflation, the digital currency issued by the same government will also lose value. If you want to invest in digital assets that have the potential to appreciate in value, there may be other digital currencies that are better options for you.
Source: https://www.thebalancemoney.com/what-is-a-central-bank-digital-currency-cbdc-5219917
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