Why Understanding the Meaning of CBDC in the Current Financial Scenario

What does CBDC mean? This is an increasingly relevant question for those seeking to understand the future of digital finance. A Central Bank Digital Currency represents a form of electronic coin issued and authorized by the central bank of a sovereign nation, functioning as the digital equivalent of traditional fiat currency.

Unlike decentralized cryptocurrencies, CBDCs have value directly backed by the monetary authority of each country. Various global governments are already at different stages of development and implementation of their own CBDC systems, with some nations already operationalizing these solutions.

The Two Pillars of CBDCs: Wholesale and Retail

CBDCs are divided into two distinct modalities, each with specific purposes in the financial ecosystem.

Wholesale CBDCs primarily operate between financial institutions, functioning similarly to traditional reserves held at central banks. These modalities facilitate liquidity management and transaction settlement between institutions, allowing financial entities to interact with monetary policy mechanisms that regulate lending rates and influence the market interest rate structure.

Retail CBDCs are aimed at direct use by businesses and end consumers. They provide a means of exchange backed by state power, eliminating intermediary risks that would be associated with private issuers of digital coins, such as the possibilities of insolvency or sudden bankruptcy.

Two Ways to Implement Retail CBDCs

In the retail context, there are two distinct technological approaches. The first, token-based, operates similarly to physical money, allowing for greater agility in transactions. The second, account-based, requires identity verification of the participants involved in the operation, offering greater traceability.

The Concrete Benefits of Central Bank Digital Coins

Understanding the meaning of CBDC implies recognizing its potential benefits. These electronic coins can significantly reduce the expenses associated with maintaining complex financial infrastructures, decreasing operational costs of international transactions.

Additionally, CBDCs address structural problems of the financial system, such as the risk of bank run events during periods of instability. They also provide alternatives for the population without access to the traditional banking system, offering methods of transferring resources at reduced costs, thus expanding financial inclusion.