What’s The Hype Around Central Bank Digital Currency (CBDC) ?
Recently e-Naira, the Central Bank Digital Currency (CBDC) was launched in Nigeria amidst much fanfare. Nigeria is the latest country to join a bandwagon of countries like Bahamas, Sweden and China. A recent survey reveals that almost 85% of central banks are in various stages of rolling out their own CBDC. Some banks are in conceptualisation stage while some banks are building the product while others are getting ready for a pilot rollout. Almost every day, we see dozens of blogs being published on CBDC. But what is the CBDC hype all about?
What is a CBDC?
What are the Objectives of CBDC?
Difference between cryptocurrencies and CBDC
Below are high level differences between cryptocurrencies and CBDCs.
|Privately Issued||Issued by central bank of a country|
|Not backed by any asset or reserves||Backed by reserves of central bank/government|
|Limited supply||Supply managed and controlled by central bank|
|Fully blockchain based||Can exist as blockchain based or just as system of records|
|Cryptocurrency mining is required to add new blocks to blockchain network||Mining process is not required to add new block to blockchain|
|Crypto mining involves huge computing power and resources||No such energy and resource requirements are needed|
|Can be enabled as permissionless or permissioned network||Usually enabled as permissioned network|
Types of CBDCs
Three types of CBDCs exist today
- Direct CBDC
- Indirect CBDC
- Hybrid CBDC
CBDC Operational Modes
CBDC can be operated in 2 modes
- Account based CBDC
- Token based CBDC
In an account based CBDC ecosystem, the central bank will hold accounts for all users of the CBDC wherein managing account reconciliation of all transactions that happen in the ecosystem. As the whole population is brought into the CBDC ecosystem, central bank will have tough time in maintaining the digital accounts of whole population.
In a token based CBDC ecosystem, the CBDC is created as a token with a specific denomination. The transfer of a token from one person/entity to another person/entity does not require reconciliation of two accounts (as against an account based CBDC which requires reconciliation). The transfer results in real time transfer of ownership similar to the physical cash exchange that exist today.