Rumor: What is a central bank digital currency (CBDC) and how does it work?


Digital currency, which was once reserved for the IT industry, is increasingly making its way into the realms of central banks. As part of the “e-krona” initiative, Swedish Bank Riks has revealed its intention to introduce a central bank digital currency. The Swedish currency is the crown. The significance of this development is that Sweden will receive a digital currency issued by the central bank which is an identical replica of its physical currency. Digital money will only vary in appearance and transfer from the actual crown. The value will remain the same and the e-Krona will be accepted as legal tender.

What is central bank digital currency?

Likewise, the Chinese central bank has also announced a digital currency project. Against this background, it’s interesting to learn how different the central bank‘s digital currency will be from its commercial cousins ​​- virtual currencies and cryptocurrencies.

The Basel-based Bank for International Settlements, which performs pioneering and authoritative research in central banks, appointed a Central Bank Digital Currencies Committee (2018). In its report, the Committee observed that it is not easy to define the CBDC. “CBDC is not a well-defined term. It is used to refer to a number of concepts. – the BIS commission on CBDCs.

Yet this money is supplied to large financial entities or what can be said to wholesalers. On the other hand, the digital currency that the general public obtains in the form of virtual currencies and cryptocurrencies from different technological players does not come from central banks. In fact, central banks do not provide retail digital currency for public use. It is this retail digital currency that we are talking about and that is in our imaginations.

A fact about CBCD is that central banks around the world are already providing digital currency to commercial banks and other financial institutions in the form of reserves or settlement of balances. This means that when a bank has higher reserves with the Reserve Bank of India, it gets that much money in the form of CBCD.

The mixture of already existing reserves and regulations at banks (of which we can say are examples of CBDCs) and retail money offered for issuance (like e-Krona) to the public, requires careful definition of CBDC. The BIS points out that “a CBDC is a digital form of central bank money that is different from traditional reserve or settlement account balances.”

We can define that “the CBDC is a digital payment device which is issued and fully supported by a central bank and which is legal tender”.

Central bank digital currency is also referred to as digital fiat currency or digital base currency. CBDC is a new form of digital central bank money that is different from reserves or settlement balances held by commercial banks with central banks. This is a point we already discussed when we mentioned that the CBDC is for public (general) use and not just wholesale (banks) use.

BIS’s opinion that CBDC is a concept because it can have different features and versions, compels us to acquire much more knowledge about the different specifications of CBDC.

Summary of the news:

  • What is central bank digital currency (CBDC) and how does it work?
  • Check out all news and articles for rumor updates.
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About Ruben V. Albin

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