Introduction to central bank digital currencies (CBDC)

August 8, 2022

What is a CBDC?

A CBDC is a type of electronic money issued by a central bank, intended to serve as legal tender. The key point being that it originates from the central bank; it is effectively a sovereign currency in electronic form and would appear as a liability in a central bank’s statement of financial position and an asset to users holding it.

What is the difference between a CBDC and other forms of Digital currency?

There has been a great deal of new digital “currencies” and “tokens” being developed globally, spurned by the recent popularization of cryptocurrencies such as Bitcoin. The main difference however, between a CBDC and another form of digital currency, is that the CBDC is issued by a central bank and is therefore centralized. Cryptocurrencies are fundamentally decentralized, meaning there is no singly governing authority. Additionally, unlike cryptocurrencies whose value can either appreciate or depreciate arbitrarily, a CBDC is pegged to the respective national currency, thus mirroring the fluctuation of the national currency.