Understanding the Central Bank Digital Currency (CBDC)

Central Bank Digital Currency (CBDC) has become a hot topic of discussion in the world of finance and economics. In fact, in one of our earlier insights we did briefly talk about CBDCs. Let’s understand it in a bit more detail today.

So, what is a CBDC?

There are two main types of Central Bank Digital Currency- the Retail CBDCs and Wholesale CBDCs.

transactions, such as for the purchase of goods and services. Whereas a Wholesale CBDC is designed for use by financial institutions and other large organizations for interbank transactions and settlements (source 1).

How do CBDCs work?

Central Bank Digital Currencies work on a Distributed Ledger Technology (DLT). The DLT is a decentralized database that records transactions in a transparent and secure way. “DLT networks are permissioned, meaning only certain parties have permission to view specific information. This way, a central bank could allow only its workers to look at the network as a whole, rather than it being entirely open” (source 2).

Typically designed to be programmable, CBDCs can include smart contract functionality that allows for automated and conditional transactions. For example, a particular country might choose to program its Central Bank Digital Currency for purchase of specific types of goods or services, or control its validity by adding an expiry date to it (like bank cards).

CBDCs are also designed to be interoperable, meaning that they can be exchanged between different digital wallets and payment systems. This interoperability is important for ensuring that Central Bank Digital Currencies can be used as a widely accepted form of payment.

Why do we need CBDCs?

There are several reasons why central banks around the world are exploring the possibility of issuing a Central Bank Digital Currency. Let’s look at a few of these:

1. To remain effective and relevant

Banks have been looking out for ways to make their monetary systems as strong and modern as possible, to keep up with the advancements in financial technology. As the use of cash continues to decline and digital payments become more common, central banks need to ensure that their monetary systems remain relevant and effective.

2. Solution for the unbanked

Central Bank Digital Currency could also help to improve financial inclusion by providing access to digital payments for those who are currently unbanked (source 3). It could be used to provide low-cost and accessible financial services to people.

3. Ease of use

The ease of use and accessibility facilitated by a CBDC could probably invite people who are unwilling to get involved with the traditional banking setups, to be a part of the financial banking systems of the country.

4. Reduce financial instability

Central Bank Digital Currencies could help reduce the risk of financial instability by providing a more secure and resilient form of digital money. These are backed by the central bank, therefore less susceptible to the kinds of market fluctuations and risks that can affect cryptocurrencies like Bitcoin.

What are the challenges of CBDCs?

While a Central Bank Digital Currency offers many potential benefits, there are also some challenges associated with it.

1. One of the main challenges is ensuring the security and integrity of CBDCs. These are digital, therefore are susceptible to cyberattacks and other forms of fraud. Central banks will need to ensure that their Central Bank Digital Currencies are secure and resilient, and that they have robust cybersecurity measures in place to prevent hacking and other attacks.

2. Another challenge is in making sure that Central Bank Digital Currencies fit in the financial systems without causing unstable markets. CBDC is a new form of money, it could potentially disrupt the existing monetary system if not designed and implemented carefully. Central banks will need to ensure that their CBDCs are compatible with existing financial infrastructure and do not create unintended consequences.

3. Further on, CBDCs pose a challenge to privacy. Since these are likely to be more transparent than traditional fiat currencies, there could be concerns amongst the users with regard to privacy and surveillance. While transparency in transaction records could help improve accountability and prevent financial crime, CBDCs would need to be designed by ensuring a way that balances privacy and transparency.

4. Finally, there are also legal and regulatory challenges associated with CBDCs. With a new format of money, it is likely that new laws and regulations will be required to govern it. Therefore, to make sure that Central Bank Digital Currencies are effectively integrated into the existing legal and regulatory framework, a close coordination between central banks, financial regulators, and policymakers will be required.

How are Cogito’s CBDCs better?

We have been discussing all about the Central Bank Digital Currencies around the world so far, and while there are several examples of it being tried and implemented, do you know that Cogito Metaverse has its own Central Bank Digital Currency?

Yes, we do. At Cogito Metaverse, which is governed by the Principality of Cogito, we have two official CBDCs- the CBC and COG. The Principality of Cogito is a global principality in the digital space which brings together smart minds and is a haven for ordinary people, investors, businesses and non-profit organisations. It breaks the physical traditional borders and is open to people around the world.

The CBC and COG are currencies issued by the central bank of the Principality of Cogito. Even though they are CBDCs, the CBC and COG are different from the general government issued CBDCs. If you are wondering how, then have a look at the pointers below.

• The transactions done using the Principality of Cogito CBDCs are not entirely disclosed to the tax departments around the world.

• The Principality of Cogito CBDCs do not come with a validity period and are not programmed to be expired

• The residents of the Principality of Cogito can freely use its CBDCs as its usage is not restricted.

• The COG and the CBC are 100% cash and asset backed.

• The Principality of Cogito CBDCs are already being used to transact around the world.