The development of the financial market, including the popularization of cryptocurrencies, has spurred research in the CBDC field. The pandemic has only accelerated this process. Central Bank Digital Currency (CBDC) refers to electronic obligations of the monetary regulator in the national currency, used for payments and as a store of value. Non-cash payments are a convenience that consumers are trading for traditional purchases and service payments. Therefore, experts consider CBDC a financial breakthrough that will dictate subsequent changes in this industry.
Why is such currency needed?
The practice of virtual money issuance involves standard non-cash transactions in the network, online purchases, service payments, and contract agreements. However, the system of central bank digital currencies differs from traditional non-cash transactions in several ways:
- network stabilization, increasing CBDC competitiveness compared to cryptocurrencies and tech companies;
- lower costs for transfers in the network, increasing financial inclusion as central banks are designed to work with a digitized economy;
- transparency, accessibility, and security - CBDC will provide an expanded interface for fiscal policy, avoiding the trap of zero interest rates;
- the practice of CBDC will also popularize the use of the national currency for financial transactions;
- to reduce risks in settlements and guarantee access to the bank's liquidity 24/7, a commercial version of CBDC is sufficient.
Financial stability, increased security, and guaranteed efficiency are the directions in which the central bank digital currency system is considered in a developed economic environment. This motivates major organizations to conduct research in the chosen area.
Varieties of CBDC
Since there is still no common classification system for CBDC, several parameters are used to divide the network. To describe the central bank digital currency, parameters such as architecture, infrastructure, payment capabilities, anonymity, access conditions, and technology are considered.
The architecture parameter is divided into categories: wholesale (direct, commercial) and retail (hybrid, non-direct, intermediated). Although nearly 70% of central banks worldwide actively study the technology, only about four banks plan to apply the direct CBDC model to increase inclusivity. Seven organizations prefer the hybrid model, while the rest have not yet decided.
Popular Versions of CBDC
Wholesale, direct, or commercial CBDC is a specialized payment system available to a specific range of users, including financial institutions and market professionals. The advantages include increased stability, flexible policy, 24/7 liquidity, demand adjustment tools, and reduced transfer fees. However, the drawbacks include a limited distribution sphere. The prospects for implementing wholesale CBDC are multifaceted. This will significantly speed up transactions and facilitate access between financial and equity platforms. The use of wholesale CBDC improves the conditions for cross-border payments by reducing the number of intermediaries in the network.
Retail CBDC is available to a wide range of users and serves as an alternative to cash and deposits (although without interest). Features of such a system include:
- the issuance of the financial resource is strictly controlled by the monetary regulator of the banking system, supported by the policy of a specific organization;
- retail digital coins are also subject to financial reporting by the central bank;
- the chosen digital currency must be accepted and used simultaneously by citizens, organizations, and government structures;
- conversion of CBDC to fiat money is available on a one-to-one basis;
- an open-to-implement infrastructure;
- low transaction and transfer fees.
This direction is popularized in countries with a developing economy, while already formed states consider it too bold (premature) to create such competition between retail digital currencies and private sector means.
There are also hybrid forms of CBDC (wholesale and synthetic). In this case, financial obligations are directed to the central bank, while intermediaries handle transfers and transactions. This CBDC is universal as a measure to improve interaction with independent payment systems.
