What are CBDCs: Definition, Use Cases and Examples

The world of digital assets is extensive and it is easy to get lost without a clear explanation. This is a short guide to introduce you to CBDCs – one of the types of digital assets in this constantly evolving realm.

What are CBDCs?

CBDCs stand for Central Bank Digital Currencies. They are digital currencies issued and backed by central banks, which are the monetary authorities of a country or a group of countries. Unlike traditional currencies, which are physical and rely on cash and coins, CBDCs exist only in digital form and can be transacted using digital devices such as smartphones and computers. 

They are designed to operate like cash, allowing individuals and businesses to make digital payments and store value without relying on traditional financial intermediaries.

Different types of Crypto Assets

CBDCs can take different forms, such as retail CBDCs, which are accessible to the general public and can be used for everyday transactions, and wholesale CBDCs, which are used by financial institutions for interbank settlements and other transactions.

What are Wholesale CBDCs?

Wholesale CBDCs, also known as interbank CBDCs, are digital currencies that are designed for use by financial institutions to settle transactions between themselves. 

These CBDCs are not intended for use by the general public, but instead are used by banks and other financial institutions to manage their reserves.

Find more on this project on CFTE’s analysis of blockchain projects.

What are Retail CBDCs?

Retail CBDCs, also known as general-purpose CBDCs, are digital currencies that are intended for use by the general public for everyday transactions. These CBDCs can be used to make purchases, pay bills, and transfer money, just like traditional forms of currency. Retail CBDCs are typically designed to be user-friendly, accessible through mobile devices and other digital platforms, and widely accepted by merchants and other service providers.

In addition, we can divide retail CBDCs into three models: direct model, indirect model and hybrid model.

  • Direct Model

A direct model makes it possible for everyone, from community banks to informal gig workers, to deposit their money directly with the central bank.

  • Indirect Model

An indirect model enrols the commercial banks to provide and maintain the accounts or wallets used for CBDC holdings. The idea is not replacing the existing financial services.

  • Hybrid Model

A hybrid model is that the customer does not have an account with the central bank,  instead, they use an intermediary such as e-money provider or other payment service providers (PSPs) to access their CBDC.

Find more on this project on CFTE’s analysis of blockchain projects.

Conclusion

CBDCs have been proposed by many central banks as a way to modernise their payment systems, increase financial inclusion, reduce transaction costs, and enhance the efficiency and security of the monetary system. 

However, there are also concerns about the potential risks and challenges associated with CBDCs, such as the impact on the banking system, privacy concerns, and the potential for fraud and money laundering.

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