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Blockchain for Central Bank Digital Currency (CBDC)

Central Bank Digital Currency (CBDC) is a digital type of central bank money that provides specific retail and wholesale advantages to central banks including improved financial access for individual customers and a more effective interbank settlement network.

What Is Central Bank Digital Currency?

A CBDC is a digital type of central bank money that is a legal tender developed, sponsored by a Central bank representing the central bank and not a commercial bank or a payment service provider (PSP). A central bank’s digital currency is the digital form of central bank money. CBDC is operated on a distributed ledger (which can or can not be a blockchain) to automate and improve payment security between banks, institutions and individuals. More than 70% of institutions are actively looking for and developing evidence of concept for CBDCs, according to a recent study by the Bank for International Settlements. Three aspects that define the digital currency of a central bank:

  • Digital asset. The CBDC are digital properties. It is included in a digital booklet that acts as the sole source of reality (distributed or not).
  • Central bank-backed. Like banknotes, CBDC represents central bank statements.
  • Central bank controlled. The supply of CBDC is entirely regulated and decided by the central bank.

What Are the Use Cases of CBDCs?

For retail and/or wholesale payments, CBDC can be created. While the CBDC retail refers to a digital cash version, the new infrastructure for interbank settlements is referred to as the wholesale CBDC. Central banks that tested CBDC concentrated in particular on easy and cheap payments.

  • Retail. Retail CBDC is used for payments, similar to the digital bills, between persons and enterprises or other persons. The CBDC retail volume typically reaches 100,000,000 transactions per day.
  • Wholesale. CBDC wholesale is used to make interbank transactions simpler, i.e. Payments between the few banks and other central bank accounts. Wholesale CBDC volumes are typically under 100,000 transactions per day.

What Are the Benefits of CBDC?

The Central Bank’s financial system is currently facing a variety of challenges, from expensive payment settlements to declining use of banknotes and a shortage of financial access for people far from bank branches. Researchers have reported that the cost of clearing and clearing securities for central banks in the G7 countries is more than $50 billion a year, owing in large part to the resources required to move funds and reconcile accounts. In addition, today’s cross-border payment processes require the movement of assets and confidential transaction data across a variety of separate correspondent banks, exposing organizations and individuals to settlement and operational risks.

Blockchain-based CBDC addresses inefficiencies and weaknesses in our current central banking infrastructure by simplifying the development of a stable payment network that acts as a massive, decentralized clearinghouse and asset registry.

Benefits of Retail CBDC

  • Increase availability. Digital currency can be distributed on mobile devices for citizens who are distant from bank branches without access to physical cash and who have increasing access to and useability.
  • Flexible reconciliation. A CBDC is fully digital and does not currently entail the costly and long-term reconciliation of e-commerce and trans-border payment systems.
  •  Encourage digital development.  The platform-based software model of CBDC decreases barriers to entry for new companies in the payment market, promotes competition and creativity, and drives financial institutions towards the globalization of services.
  • Boost monetary policy. CBDC provides central banks with direct influences on money supply, facilitates the distribution of public benefit to individuals and improves control of tax control transactions.

Benefits of Wholesale CBDC

  • Enhance settlement of interbank transfer. CBDC payments are instantly settled between counterparties on an individual order basis through automation and decentral networking solutions, reducing the risk of overnight batch processing or collateral processing.
  • Reduced risk to counterparties. By enabling payment-vers-payment settlements for payments in different currencies, CBDC mitigates credit risk for cross-border payment transactions.
  •  Participate in digital asset marketsWith the advent of more tokenized asset markets, tokenized payments would be needed. CBDC offers a broad, decentralized clearing and asset registry for the promotion of the transition in digital assets.
  • Stay competitive. Whilst centralized platforms such as SEPA in Europe have cut the costs of real-time money transfer, the majority of financial institutions charge customers above cost. CBDC provides enhanced banking facilities to end-users and ensures central banks maintain their position in interbank settlement in the broader use of stablecoin technology.

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