A central bank digital currency (CBDC) is digital fiat money that is issued by a central bank and therefore has legal validity in that country.
Therefore, we are facing a legal currency similar to other physical ones such as the dollar (USD), the Mexican peso or the euro. In this case, the difference with them is that it is a virtual currency more similar to cryptocurrencies. In fact, it was created to compete with them.
It is important not to confuse a book entry with this type of money. For example, I can make a transfer in euros over the Internet, but this does not make it a digital currency. In fact, traditional money has bills and coins (cash) and the other does not.
Characteristics of the central bank digital currency (CBDC)
Money, from its origin, has fulfilled two tasks. One is as a means of exchange and the other as a form of accumulation or savings. Therefore, the central bank digital currency (CBDC) has similar characteristics to traditional money, but with its own peculiarities.
- This type of currency relies on technology as a way to promote exchange. In this way, look for speed, comfort and simplicity.
- There are different emission options depending on the objective pursued. Among them we have to replace cash, monetary policy, improve payment systems or avoid banking crises.
- They may or may not be anonymous, in this case through a checking account. In addition, there are two types, open, with any issuer, or closed, only issued by financial entities. In turn, the interest payment would be given or not.
- Of course, they allow accumulation and, therefore, savings.
- By not having a physical format, they serve to prevent fraud, theft or loss. It also makes it possible to reduce certain illegal businesses or the shadow economy.
- One of its objectives is to promote positive competition between payment platforms and make them more efficient, with less environmental impact.
Drawbacks of central bank digital currency (CBDC)
Let’s look at some of its main drawbacks.
- Being a legal tender currency, it is audited by the central bank that issues it and this affects the lack of privacy.
- Lack of universality. As with fiat money (the currencies of different countries), this virtual currency may not be accepted by others.
- Being digital, they could be manipulated by hackers. Therefore, they are not exempt from the risk of hacking.
- The existing legislation is not too clear and detailed as it happens with the traditional currency in which everything is measured.
Let’s finally see some examples of CBDC in different countries.
- Euro chain: Virtual currency project of the European Central Bank (ECB) that emerged in 2019. This currency would have controlled privacy.
- FEDcoin: In this case, the issuer is the US Federal Reserve (FED) and its launch year is 2024. On the other hand, one of its big obstacles is the country’s legislation, which should be changed.
- DCEP: In this case it is the digital currency of China and behind it is its government, the People’s Bank of China and corporations such as AliPay or WeChat.
- Petro: The Venezuelan government is the promoter of this central bank digital currency (CBDC). This is, perhaps, one of the most controversial has generated.