A central bank digital currency (CBDC) is a digital currency issued by a central bank as a new form of legal tender. Instead of printing money, the central bank issues widely accessible digital coins so that digital transactions and transfers become simple. The concept of the digital currency CBDC is inspired by cryptocurrencies such as Bitcoin or Ethereum but differs in that CBDCs are fiat currencies issued by central banks in digital form. The Bahamas launched Sand Dollar—the first official CBDC in 2019 and currently over 130 countries are actively working p a sustainable CBDC system.
Digital central bank currencies can be implemented in different ways. CBDCs are based on blockchain technology, distributed ledger technology (DLT), or a customized solution designed to meet the specific needs of the central bank. The technologies used for digital central bank money are known for their transparency and security, making CBDCs well-suited for fast and secure transactions in everyday payments. Unlike cryptocurrencies, CBDCs are not decentralized but are directly linked to the currency of the respective country. How are they used?
CBDCs represent the digital equivalent of a national currency and serve as a bridge between a traditional monetary system and the digital world. Primarily, they are intended for use in everyday payments—like cash to purchase products or services, carrying out secure transactions in real-time. Furthermore, the currency can promote financial inclusion by making it easier for people without a bank account to access the financial system. CBDCs are primarily categorized into two; Retail CBDCs: designed and issued by the central bank to ordinary individuals and businesses for daily transactions. Some retail CBDCs are; Bahamas — Sand Dollar China — Digital Yuan (e-CNY) Nigeria — eNaira Imagine you go to a store, scan a QR code at the checkout, and pay instantly with your Digital Naira app — no credit card fees, no cash handling, no waiting for bank settlement. Faster and Cheaper Payments, Financial Inclusion, resilience in payment systems, combatting illicit activities, innovation in payments and many more are benefits of a retail digital fiat currency.
Wholesale CBDCs
Primarily used for interbank payments, securities settlement, and cross-border transactions. Wholesale CBDC aims to make large-value transactions more efficient, faster, and secure. Only accessible to banks and other regulated financial entities and not intended for retail or consumer use. Faster settlement, reduced counterparty risk, improved liquidity management and cross-border efficiency are benefits of wholesale CBDC. Examples are; Canada — Jasper Switzerland — Project Helvetia Benefits of CBDCs
Improved Payment Efficiency. Faster, more secure, and potentially 24/7 payment processing.
Increased Transparency. Better tracking of money flows to combat money laundering, fraud, and tax evasion.
Financial System Resilience. Could serve as a backup if private payment systems fail. The steps involved in creating a CBDC are summarised as follows;
Assess Need – Identify goals like improving payment systems.
Design Model – Choose between retail/wholesale systems.
Legal Framework – Ensure laws and regulations support CBDC issuance and use.
Develop Prototype – Build and test a small-scale technical version.
Pilot Program – Roll out to a limited group, gather feedback, and refine.
National Launch – Deploy nationwide with public education and support.
Monitor & Improve – Maintain, upgrade, and adapt based on user and economic impact.
The creation of a Central Bank Digital Currency (CBDC) is a complex yet transformative process that holds the potential to reshape national and global financial systems. While it offers significant benefits like enhanced payment efficiency and financial inclusion, it also requires careful planning, strong legal backing, and public trust. As countries move forward, balancing innovation with stability and privacy will be key to the successful implementation of a CBDC.
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