- Aug 25, 2021 | BW Businessworld
Central Bank Digital Currency (CBDC) is a digital or virtual form of legal tender issued by a central bank. It functions in the same way as fiat money and can be exchanged for fiat money in a one-to-one ratio. CBDC is not similar to private virtual currency (VCs), as VCs do not have any intrinsic value, have no issuer, and are not convertible in one-to-one ratio into sovereign currency. However, CBDC would be a sovereign currency in electronic form, and it would appear on a central bank’s balance sheet as a liability (currency in circulation). The insane growth of VCs and since it is not regulated due to its Peer to Peer (P2P) transaction system, the central banks need to come up with an alternative for the same to safeguard the public from the volatile nature of VCs. In addition to this, the need for CBDC stems from the fact that central banks across economies want to popularize a digital mode of transactions that is more stable and secure and to incorporate the ease of transactions, easier international trade, accountability in the blockchain, and strong security features of digital currency into the existing fiat currency.