As explained in this article, a CBDC "is digital money in the national unit that represents legal tender backed by the central bank, similar to physical currency in circulation."
It is fiat money whose value derives from the trust placed in its issuer. As such, its supply and value are influenced by a country's monetary policies, trade surpluses, and central bank.
This type of money is built on a digital ledger and may or may not leverage blockchain or distributed ledger technology (DLT).
In other words, CBDCs are not cryptocurrencies (such as Bitcoin), as they are not governed by distributed autonomous communities, but by a centralized authority.
Virtual Currencies
CBDCs respond to a clear trend: businesses and consumers are increasingly choosing digital formats for their financial interactions. The need for them is driven by the rapid digitization of economies, the push for real-time payments and settlements, and the demand for more efficient domestic and cross-border monetary transactions.
On the other hand, many central banks are also recognizing the growing influence of digital currencies and are concerned about potential impacts on the financial system.
It is expected that the centralized technology behind CBDCs could "reduce costs, facilitate the seamless flow of money, improve financial inclusion, and provide safer access to money through digital channels."
Furthermore, CBDCs could provide "a more resilient payments landscape, supporting competition, efficiency, controls, and innovation in payments. They would also address the declining use of cash by improving the usability and availability of legitimate central bank money."
Digital Currencies Issued by Central Banks
Different central banks may adopt distinct approaches to implementing CBDCs. These nuances relate to their capacity to completely replace physical banknotes and coins, the degree of anonymity or privacy, access and availability, and the ability to yield interest, among other variables.
Currently, there are two common design models for CBDCs: token-based and account-based. Each approach features a different technical infrastructure, as well as varying levels of access and privacy.
More than 60 central banks are exploring CBDCs at different maturity levels. Additionally, three active retail CBDC projects already exist: the Bahamas Sand Dollar, Cambodia's Bakong, and the Eastern Caribbean DCash.
As noted in the document we are summarizing, the introduction of CBDCs "is a disruptor for the financial ecosystem, fostering payment efficiency and representing an additional alternative to the current monetary model from an operational and technological standpoint. Central banks are moving rapidly toward implementation; therefore, commercial financial institutions should leverage this time to explore the digital currency landscape and reinvent it for emerging services, opportunities, and value creation."
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