What is Central Bank Digital Currency?

Fiat currencies are central bank digital currencies (CBDC). They are issued by central banks and exist only in a digital form. Some countries even implemented them into their financial systems. A number of countries nowadays are searching for ways to fully transition to digital currencies.

Additionally, these countries are analyzing how CBDC will impact the economy, stability, and the existing financial system.

CBDCs can be any currency - U.S. dollar, euro, or Japanese yen.

To specify, a CBDC is a government-backed currency. It’s quite an unusual property for cryptocurrency projects, nevertheless, El Salvador and other similar countries are encouraging changes by adopting Bitcoin as a legal tender.

Unlike Bitcoin, which is a decentralized cryptocurrency, the central bank's digital money is controlled and regulated. CBDCs symbolize a country's standard currency via the use of technology. However, no country has formally introduced a CBDC, but a few governments are nearing the end of the process of producing and issuing CBDCs.

There are no CBDC solutions available to the public as of November 2020. Yet they only operate as proof-of-concept initiatives, such as the People's Bank of China's Digital Currency/Electronic Payments or the central bank of Uruguay's digital Uruguayan peso.

CBDCs stay in the structure of the standard financial system, which is backed by trust in the currency’s issuer - the central bank or political authority.

To be fair, the idea is inspired by cryptocurrencies like Ethereum or Bitcoin.

CBDCs can choose whether or not to use a data model such as the blockchain. In any case, they cannot be considered legitimate cryptocurrencies. The fundamental problem is that they are not decentralized, as CBDC production and development are managed by central banks. Their value is not supported by something other than the public's belief in the issuer.

CBDCs have benefits over conventional fiat currency configurations. One of them is that they may be transferred directly between two individuals without the involvement of third-party payment services. Also, the government's direct authority over its currency led to more active monetary policy execution.

The CBDC's functioning is subject to the country's monetary authority or central bank. Bringing together the banking services, a supported flowing money supply, and the reliability and safety of cryptocurrencies in their digital form.

CBDCs are produced by the country's appropriate monetary authority and are strictly controlled. CBDCs should not be confused with cryptocurrencies. If anything, the qualities of CBDCs can be diametrically opposed to those of cryptocurrencies. 

Whereas most stablecoins, or fixed-value crypto-assets, reflect particular fiat currencies and function on a public, private blockchain ledger, CBDCs are managed by their producers and run on permissioned, restricted blockchain networks.

All in all, a central bank digital currency (CBDC) is a digital currency established as a legal tender by a country's central bank. It is managed and controlled by the government regulations and laws of that country. The virtual version of fiat currency is represented by a digital token or electronic record utilized by the country's central bank.

Furthermore, the main purpose of CBDCs is to give businesses and users convenience, privacy, security, as well as ease of use. It decreases the support for complicated financial systems demands and reduces cross-border transaction fees.