A central bank digital currency is a new form of money that does not exist in a traditional reserve account.
CBDCs are presently mostly in the hypothetical stage with some in proof-of-concept programmes. China’s digital RMB is the first digital currency to be issued by a major economy.
Central banks have previously implemented e-money through the use of cards. In 2000, in Czechia, a project was launched to implement micropayments on the Internet using a virtual currency called Q, which is fully convertible into the Czech koruna.
A central bank digital currency is a public savings or payment medium, provided by the central bank.
The Global Currency Initiative proposed the development of a decentralized CBDC for international transactions by 2022.
Central bank digital currency would be implemented using a database run by the central bank, government, or approved private-sector entities, and would likely be centrally controlled.
A digital fiat currency is a high-security digital instrument that functions as a means of payment, unit of account, and store of value. It can be stored, transferred, and transmitted by all kinds of digital payment systems and services.
Despite potential advantages, central bank digital currencies have potential risks, including disintermediation of the banking system.
Banks in some countries don’t need a reserve requirement anymore. Instead, they create new deposits (money) when a client asks for a loan and guarantees the loan with a property.
CBDCs are fully reserved and commercial banks do not create debt or new money, and they do not earn interest.
CBDCs would weaken the balance sheet positions of commercial banks, but a central bank could limit the demand for CBDCs by setting a ceiling on the amount of holdings.
Most central bank digital currencies are centralized and can be replaced by local currencies if the controllers are not careful. A well-run digital currency could also stall social developments if the privacy of its users is not sufficiently protected.