Exploring CBDCs: Rise and Implications

by Viktoriia Palchik

Published: April 02, 2024 at 5:57 am Updated: April 02, 2024 at 5:57 am

by Anastasiia O

Edited and fact-checked:
April 02, 2024 at 5:57 am

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In Brief

This article delves into the concept and significance of Central Bank Digital Currencies (CBDCs). From defining CBDCs and their various types to examining real-world implementations like China’s digital yuan and The Bahamas’ Sand Dollar, we explore how CBDCs are reshaping the global financial landscape. Additionally, we discuss ongoing initiatives by institutions like the Federal Reserve and Bank of America, as well as the potential benefits and challenges associated with CBDC adoption. Join us as we unravel the evolution of money in the digital age.

What are central bank digital currencies?

Let’s talk about CBDCs meaning, before delving into its history. The virtual equivalents of a nation’s fiat money, known as central bank digital currencies, are issued and managed by the central bank of a certain country and regulated by digital currency monetary authorities. CBDCs are centralized and usually rely on a centralized ledger kept by the main  authorities, in contrast to decentralized crypto that usually operates on blockchain.

The increasing adoption of crypto and the growing digitalization of financial operations have led to the creation of CBDCs. Their goal is to merge the pros of online money, like productivity and ease—with the security and control offered by conventional fiat currencies. There are many types of CBDCs, such as retail ones that are available to the ordinary clients for regular operations and wholesale ones that are only allowed to be used by financial institutions for transactions.

As CBDC is kind of a new technology, there are not a lot of examples of its implementation in our history, but Metaverse Post will try to provide you with some of the important ones. 

One of the several entities that has been working the hardest to create a CBDC is the People’s Bank of China (PBOC). In 2020, pilots and experiments for the digital yuan, or DCEP, started in a few different places. Widespread testing started and will be continued in following years. Positioned as a retail CBDC, China’s DCEP seeks to both challenge established virtual payment platforms and improve the nation’s payment infrastructure.

As one of the first nations to adopt a retail CBDC, the Central Bank of The Bahamas introduced the Sand Dollar in October 2020. The goal of the Sand Dollar is to lower transaction costs and improve financial inclusion in the country of islands.

Talking about Bank of America and its desire to implement the digital dollar, there are actually two forms of money in the US: paper money that is printed by the Federal Reserve and balances that are kept there by commercial banks. The Federal Reserve is experimenting with non-physical currencies in a number of ways, one of which is a potential CBDC. A few examples are the multiyear Federal Reserve Bank of Boston-MIT Digital Currency Initiative exploratory research project called Project Hamilton, which looks into the technical viability of a general-purpose CBDC that could be used by an economy the size of the United States; the Federal Reserve Bank of New York’s Innovation Center, which helps with collaboration with the International Settlements Center on various financial innovations; and the Board of Governors’ Technology Lab, which is currently conducting multiple CBDC experiments. Through practical experience with the possibility and limits of the technology, these trials enhance the policy debates surrounding virtual money. So if Bank of America goes digital, it’s just the matter of time.  

Numerous other nations have also been actively investigating and debating the possible issuing of CBDCs, including the United Kingdom, Canada, Singapore, Japan, and South Korea. Some have evaluated the potential and acceptability of establishing digital currencies issued by their individual banks through feasibility studies, pilot programs, or public surveys.

Digital currencies issued by governmental authorities have many potential advantages. These include improved payment system efficiency, a reduction in transaction costs, improved financial inclusion by giving marginalized populations access to virtual financial services, and increased transparency in financial transactions, which may help deter illegal activities like tax evasion and money laundering. However, as transactions may be controlled over by authorities, thus violating individual private rights, CBDCs additionally raise privacy and data security issues. Furthermore, the broad implementation may upend established financial institutions, changing the function of commercial entities and lowering their profitability.

Viktoriia is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.

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