Central Bank Digital Currencies (CBDCs) | Blockchain Use Cases | ConsenSys (2024)

FAQs

What are the use cases for a CBDC? ›

A central bank digital currency (CBDC) is the digital form of a country's fiat currency. A nation's monetary authority, or central bank, issues a CBDC, which promotes financial inclusion and simplifies implementing monetary and fiscal policy.

One of the main advantages of CBDCs is that they can provide a secure and reliable means of digital payment and remittance. CBDCs can be used for online and offline transactions and can be integrated into existing payment systems.

The core idea of the CBDC solution is to provide low-cost, fast and secure payment for both domestic and cross-border scenarios. At the same time, it has to provide offline and instant payment options, and ensure high anonymity, security and privacy of the transactions processed.

Why is the Federal Reserve considering a CBDC now? The Federal Reserve is charged with promoting monetary and financial stability and the safety and efficiency of the payment system and is studying how a CBDC could improve on an already safe and efficient U.S. domestic payments system.

Two broad categories of CBDC can be distinguished: general-purpose or retail (CBDC-R) and wholesale (CBDC-W). The private sector, non-financial customers, and enterprises might all potentially use retail CBDC (e-R), but wholesale CBDC (e-W) is only intended for certain financial institutions.

Central bank digital currency (CBDC) is money that a country's central bank can issue. It's called digital (or electronic) because it isn't physical money like notes and coins. It is in the form of an amount on a computer or similar device.

How many types of digital currency are there? There are three types of digital currency: cryptocurrency, stablecoins and CBDCs. Cryptocurrency is a form of decentralized digital currency that isn't pegged to any fiat currency.

Two broad categories of CBDC can be distinguished: general-purpose or retail (CBDC-R) and wholesale (CBDC-W).

CBDCs hold the promise of lower costs, greater efficiency, improved access to financial services, and greater transparency and accountability in financial flows and payment systems. However, CBDCs also introduce new risks and require a higher degree of technical and regulatory complexity.

How will CBDC affect cash? ›

Cash use may continue to fall, and card use (the main cash substitute) may fall by more, if CBDC is issued. The extent of this reduction depends on the demand for retail CBDC and the incentives (primarily transaction fees) that can play a determining role in CBDC adoption and use.

CBDCs may have some benefits, but their drawbacks are considerable. While they can improve payment efficiency and provide central banks with new monetary policy tools, they raise severe concerns about financial privacy, surveillance and control, financial stability, cybersecurity, and commercial bank disintermediation.

A CBDC could undermine both the foundation and future of financial markets by reducing credit availability, disintermediating banks, and challenging the rise of cryptocurrency. “A CBDC would be one of the tools to fight crypto.” Another concern is the central storage of financial information.

CBDCs can, however, induce changes in the retail, wholesale and cross border payments that have negative spillover effects on monetary policy, through their effects on money velocity, bank deposit disintermediation, volatility of bank reserves, currency substitution, and capital flows.

CBDCs, if instituted correctly, would be able to optimize financial systems that have grown outdated and been failing to meet the needs of the world's most vulnerable demographics from a financial perspective.

Today, like the currency of most nations, the dollar is fiat money, unbacked by any physical asset. A holder of a federal reserve note has no right to demand an asset such as gold or silver from the government in exchange for a note.

CBDC is better than crypto as it is regulated by the central authority, which immobilizes illegal activities like money laundering. In addition, CBDCs are digital versions of fiat currency issued and backed by central banks, while cryptocurrencies are decentralized digital assets not backed by any central authority.

CBDC can be used as a means of payment and store of value, while UPI facilitates electronic transactions. CBDC is backed by the central bank, while UPI is not. Overall, the main difference between the two is that CBDC is a digital currency and UPI is a payment platform.

The interactive database now features 114 countries— triple the number of countries we first identified as being active in CBDC development in 2020.

The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.

Is Bitcoin a CBDC? ›

Unlike decentralized digital currencies like Bitcoin, CBDCs are issued and backed by a government entity and transact on a centralized, permissioned blockchain.

As people move toward more electronic or digital forms of payment, it might seem like paper money is on its way toward obsolescence. But experts say that cash will always be around.

In 1993, the Bank of Finland launched the Avant smart card, an electronic form of cash. Although the system was eventually dropped in the early 2000s, it can be considered the world's first CBDC.

When it comes to other crypto coins and other cryptos, the largest stablecoin is undoubtedly the USDC, although there are plenty of other coins out there. USD Coin stands out because of its high market capitalization, liquidity and stability.

1. Bitcoin (BTC) Created in 2009 by someone under the pseudonym Satoshi Nakamoto, Bitcoin (BTC) is the original cryptocurrency. As with most cryptocurrencies, BTC runs on a blockchain, or a ledger logging transactions distributed across a network of thousands of computers.

Pilot launch

The apex bank identified eight banks for phase-wise participation in the retail CBDC pilot and the first phase shall commence with four lenders — State Bank of India, ICICI Bank, YES Bank, and IDFC First Bank. Four others — Bank of Baroda, Union Bank of India, HDFC Bank and Kotak Mahindra Bank.

Through a “permissioned blockchain,” CBDC provides decentralized transaction histories along with the benefit of more security in their Distributed Ledger Technology.

The Federal Reserve has made no decision on issuing a central bank digital currency (CBDC) and would only proceed with the issuance of a CBDC with an authorizing law.

Changes in the Regulatory Environment

The rise of CBDCs may result in regulatory changes for cryptocurrencies. Governments may impose stricter regulations on cryptocurrencies to prevent them from competing with CBDCs, or they may outright ban cryptocurrencies in favor of CBDCs.

What is the challenge of CBDC? ›

The sizing for the infrastructure required for the CBDC will remain tricky if payment transactions are carried out using the same system. The RBI will have to map the technology landscape thoroughly and proceed cautiously with picking the correct technology for introducing CBDCs.

In a recent research report by Bank of America, analysts concluded that "CBDCs (central bank digital currencies) appear inevitable." According to their research, CBDCs have "the potential to revolutionize global financial systems and maybe the most significant technological advancement in the history of money."

It will be a legal tender-based payment option and make cross-border payments more transparent. Being permissible in respective countries, the CBDCs of different countries will be compatible and interoperable while making cross-border CBDC payments.

1. The Bahamas. In 2020, the island nation launched the world's first central bank digital currency, or CBDC, called the Sand Dollar.

Why Eliminate Cash? Cash can play a role in criminal activities such as money laundering and allow for tax evasion. Digital transactions or electronic money create an audit trail for law enforcement and financial institutions and can aid governments in economic policymaking.

The policy objectives for a U.S. CBDC system require that the CBDC expand equitable access to the financial system, preserve the role of physical cash, and collect only strictly necessary data.

A CBDC could undermine both the foundation and future of financial markets by reducing credit availability, disintermediating banks, and challenging the rise of cryptocurrency. “A CBDC would be one of the tools to fight crypto.” Another concern is the central storage of financial information.

For more efficient interbank payments, wholesale CBDC is issued only by financial institutions and clearinghouses. With the emergence of private digital currencies such as Bitcoin [2], Ethereum [3], Diem, or Libra [13], CBDC often assumes to be implemented by using blockchain or DLT.

A major use case for cryptocurrency is decentralizing the legacy financial system. Blockchain technology enables decentralized finance (DeFi) by supporting peer-to-peer financial transactions of varying complexity.

In the proof of concept, intermediaries validating a CBDC transaction need to look at information on past transactions of the CBDC units being transferred, all the way back to the moment when they were first issued.

What is CBDC challenge? ›

The Global CBDC Challenge organised by MAS, in partnership with IMF, World Bank, ADB, UNCDF, UNHCR, UNDP and OECD, seeks innovative retail CBDC solutions to enhance payment efficiencies and promote financial inclusion.

Integrity. Protection against counterfeiting and double-spending must be enforced in all CBDC use cases, as must the correctness and finality of all transactions. Unlike with physical bank notes, a core risk for a CBDC system is double-spending—that is, the ability to spend the same value more than once.

There are two main security risks posed by a CBDC. First, individual accounts could be compromised through weaknesses in cyber security. Second, the centralised CBDC ledger, which would be a critical piece of national infrastructure, would be a target for attack from hostile state and non-state actors.

The Minister state that the CBDC pilot launched by the RBI in retail segment has components based on blockchain technology.

RBI classified CBDC into retail CBDC that will be designed to complete individual financial needs and wholesale CBDC which will be traded between RBI, Public and Private sector banks for currency distribution purpose and economic stability. Pilot project for digital rupee was launched on 1 November 2022.

What Is a CBDC? A CBDC is a digital national currency. In the case of the United States, a CBDC would be a digital form of the U.S. dollar. Like paper dollars, a CBDC would be a liability of the Federal Reserve.

Ethereum has the most utility and greatest number of real-world use cases of any top crypto.