A central bank digital currency (CBDC) is a digital form of a country’s fiat currency. It is issued by the central bank and is widely available to the general public. CBDCs are still in their early stages of development, but many central banks around the world are exploring the potential benefits and risks of issuing them.
Types of CBDCs
There are two main types of CBDCs: retail and wholesale.
- Retail CBDCs are designed for use by the general public, similar to how traditional cash and coins are used today. They could be used to make payments to businesses, friends, and family members, or to purchase goods and services online.
- Wholesale CBDCs are designed for use by financial institutions, such as banks and other payment providers. They could be used to settle payments between banks, or to provide access to liquidity to financial institutions.
Potential benefits of CBDCs
CBDCs have the potential to offer a number of benefits, including:
- Increased financial inclusion: CBDCs could make it easier for people without bank accounts to access financial services.
- Faster and cheaper payments: CBDCs could enable faster and cheaper payments, both domestically and internationally.
- Greater financial stability: CBDCs could help to improve financial stability by reducing the reliance on private sector payment systems.
- Enhanced monetary policy implementation: CBDCs could give central banks more control over the implementation of monetary policy.
Potential risks of CBDCs
There are also a number of potential risks associated with CBDCs, including:
- Privacy concerns: CBDCs could raise privacy concerns if the central bank is able to track all transactions made using CBDCs.
- Cybersecurity risks: CBDCs could be vulnerable to cyberattacks, which could disrupt or even disable the payment system.
- Financial stability risks: CBDCs could pose financial stability risks if they are not carefully designed and implemented. For example, if CBDCs offer a higher interest rate than traditional bank deposits, this could lead to a run on banks.
CBDC pilots and experiments
A number of central banks around the world are currently conducting pilots and experiments with CBDCs. Some of the most notable examples include:
- China: China is one of the most advanced countries in terms of CBDC development. The People’s Bank of China has been conducting pilots of its digital yuan, e-CNY, since 2020.
- Sweden: The Swedish central bank, the Riksbank, is also developing a CBDC, known as the e-krona. The Riksbank has been conducting pilots of the e-krona since 2017.
- United States: The US Federal Reserve is still in the early stages of exploring the potential for a CBDC. In 2022, the Fed published a paper outlining its research on CBDCs and seeking public input on the issue.
MCQs and answers
- What is a central bank digital currency (CBDC)?
(A) A digital form of a country’s fiat currency (B) A type of cryptocurrency (C) A new type of bank account (D) A new type of payment system
Answer: (A)
- What are the two main types of CBDCs?
(A) Retail and wholesale (B) Public and private (C) Centralized and decentralized (D) None of the above
Answer: (A)
- What are some of the potential benefits of CBDCs?
(A) Increased financial inclusion (B) Faster and cheaper payments (C) Greater financial stability (D) Enhanced monetary policy implementation (E) All of the above
Answer: (E)
- What are some of the potential risks of CBDCs?
(A) Privacy concerns (B) Cybersecurity risks (C) Financial stability risks (D) All of the above (E) None of the above
Answer: (D)
- Which central bank is one of the most advanced countries in terms of CBDC development?
(A) People’s Bank of China (B) Swedish central bank (C) US Federal Reserve (D) All of the above (E) None of the above
Answer: (A)