CBDC - Central Bank of Digital Currency is a type of digital currency that represents the physical currency. Most people get confused and cannot identify whether it is a form of cryptocurrency or not. So, in this article, we will discuss all about CBDC and to know more about it stay tightly bound with us for the further exposure.
What Is a CBDC?
Central Bank Digital Currency, or CBDC for short, is a digital version of fiat money that is governed by the CBDC central bank or authority. The purpose to design CBDC is to represent, issue, and manage digital currency with the help of centralized authority as well as its aims to provide secure, efficient, and stable payment methods.
CBDC is a type of digital currency, but it differs from other cryptocurrencies like Bitcoin, Ethereum, Litecoin, and others in certain important ways. As all these mentioned cryptocurrencies are managed by the decentralized network which means there is no involvement of centralized authority.
CBDCs are regulated by the central bank which means their functionality is almost similar to the regular cryptocurrency, like the same laws and regulations will be implemented on it as it is implemented on the regular cryptocurrency.
Now, the question raised is “Is the CBDC cryptocurrency?” so, the answer is no. CBDC is not the cryptocurrency we discussed. Cryptocurrency is backed by a decentralized network which means there is no centralized authority to manage or regulate it. On the other hand, CBDC is regulated and managed by the central bank and it is the digital form of regular currency.
Like all other technologies, CBDC also comes with certain risk and security challenges. Some of them are given below:
- Single Point of Failure: As we discussed it is regulated by a centralized authority which means it has a central system to manage it. If the central system will compromise the entire infrastructure can be compromised.
- Privacy Risks: Even a single transaction is monitored and tracked due to some security concerns as well as required user-sensitive information to make sure whether they are authentic or not. So the user's data is under the control of intermediaries which means there is no privacy for users.
CBDC offers a potential of benefits given below:
- It provides a secure way to access the financial services
- Fast and efficient payment method
- It enhanced the security
- Advanced transmission of monetary policies
- Exclude depends on the physical cash
Overall, CBDC is a central bank of digital currency. Although it's a form of digital currency, it is not similar to cryptocurrency. Cryptocurrency is managed by the decentralized network whereas the CBDC is a digital form of regular cryptocurrency and is regulated by the central bank. The purpose to develop CBDC is to perform secure and efficient transactions without the resilience of physical currency.