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Central Bank Digital Currency (CBDC)

A Central Bank Digital Currency (CBDC) is a digital form of a country’s national currency issued and regulated by its central bank. Unlike cryptocurrencies, which are decentralized, CBDCs are backed by the government and function as legal tender, designed to facilitate secure and efficient payments. CBDCs can be used by individuals and businesses for transactions in a manner similar to cash or bank deposits, but with the advantages of digital payments, such as faster transactions and lower costs.

Example

China’s central bank is piloting the digital yuan, a CBDC that allows users to make digital payments using a smartphone app, while the European Central Bank is considering a digital euro.

Key points

• A CBDC is a digital version of a country’s national currency issued by its central bank.

• It is government-backed, functions as legal tender, and can be used for digital transactions.

• CBDCs aim to enhance payment efficiency, financial inclusion, and reduce dependence on cash.

Quick Answers to Curious Questions

CBDCs are centralized and issued by a country’s central bank, whereas cryptocurrencies like Bitcoin are decentralized and not backed by any government.

Benefits include faster payments, reduced transaction costs, enhanced financial inclusion, and decreased reliance on physical cash.

Yes, CBDCs are considered legal tender, meaning they can be used for transactions like cash or bank deposits.