What is CBDC? Digital Currency Explained

State money evolves slowly. Financial rails evolve fast.” — DNA Crypto.

Central bank digital currency (CBDC) is a type of fiat currency that doesn’t exist as banknotes or coins but exists only as digital data. Digital currencies are stored in digital wallets. Typically, its definition is inseparable from that of a “central bank.”

What Exactly is Central Bank Digital Currency?

Central Bank Digital Currency, CBDC, is the digital equivalent of physical cash that can be transferred into circulation by central banks. Just as CBDCs use the current infrastructure to move physical cash between bank accounts, blockchain technology could be used to enable these transfers digitally. The main questions surrounding this topic are: why we need this and what the implications are for central banking. In the UK, the Bank of England is the central bank, and it’s currently working closely with HM Treasury to bolster digital currency across the UK.

How CBDC Differs from Cryptocurrency?

CBDCs and crypto assets are both digital currencies, but they differ in key ways. Crypto assets are decentralised, peer-to-peer virtual currencies that can be traded independently of central banks or governments, with the most well-known crypto asset being bitcoin. Central banks issue CBDCs as a substitute for cash, meaning they can be used to make payments just like physical notes and coins. They may also be used to make payments between financial institutions. In contrast, crypto assets are typically transacted privately between two parties, with no involvement from the issuing bank or government institution.

Why is the UK Considering a Central Bank Digital Currency?

Change is inevitable, and we must be willing to adapt with the times. The challenges facing the global economy are immense, but so is the opportunity. Cash has been steadily declining in importance since the introduction of ATMs and contactless cards in the 1990s and 2000s. Today, only about 15% of all payments in the UK are made in cash – down from 40% two decades ago – and many businesses no longer accept it. This trend is expected to continue as more people adopt digital payments and other non-cash methods, such as QR codes and mobile wallets, gain traction. But there are still concerns about whether we have sufficient cash available in emergencies or during bank holidays when banks aren’t open. Surely, this is food for thought.

What are the Chances CBDC will replace Cash?

Despite the potential official adoption of digital currency by governments, cash remains a popular payment method, and it’s essential to many people. The Bank of England will continue issuing money in the UK as long as people want to use it, and has no plans to stop providing notes and coins within the next decade. Ultimately, central bank digital currency has the potential to promote a cashless society. This will likely take time to achieve, but the push toward further adoption of digital currencies is inevitable. Stay tuned, as this technology will undoubtedly be the next big thing in financial services.


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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.