A Central Bank Digital Currency (CBDC) is backed by a government’s central bank, which means they hold the liability, not your private bank.
As decentralized digital currencies like bitcoin have become more popular the world’s central banks are beginning to realize they need to get in the game or let the evolution of money pass them by.
What is a CBDC?
A Central Bank Digital Currency (CBDC) is the digital form of a country’s fiat currency that is also a claim on the central bank.
Instead of printing money, the central bank issues electronic coins or accounts backed by the full faith and credit of the government.
CBDCs are the liability of the central bank, which means the government must maintain reserves and deposits to back it up, rather than a private bank.
The Swedish Riksbank is by far the central bank that has done most work on the topic, and the ECB is also moving fast.
The BIS together with the Riksbank, the Fed, the ECB, the Bank of England, the Bank of Japan, the Bank of Canada, and the Swiss National Bank issued a joint report discussing the core features of CBDC.
More recently, the People’s Bank of China (PBOC) issued 10 million worth of digital yuan to 50,000 people in the Shenzhen area.
The move is the latest in a series of trials testing out China’s new Digital Currency Electronic Payment (DCEP).
The People’s Bank of China (PBOC) published a draft law that would give legal status to the Digital Currency Electronic Payment (DCEP) system, and for the first time, the digital yuan will be allowed to circulate and be converted like physical currency.
The central government has made it clear that the goals of the DCEP include replacing cash, maintaining government control over the currency, and creating as many small retail application scenarios as possible.
China is also looking to internationalize the yuan by enhancing its use in international settlements.
Further advancements in the implementation of CBDC are likely to raise
questions about the implications for monetary policy and exchange rates.