Central Bank Digital Currency is the latest financial technology that’s being talked about in not-so-hushed whispers in Central Banks across the world. In essence, it is a digital currency issued by the government of a country that acts as a fiat currency.

CBDCs don’t necessarily replace existing physical currencies like notes and coins but act as a supplement. They act as digital tokens and are considered legal tender for any and all transactions. The value of these digital tokens is equivalent to the monetary value of the country’s physical fiat currency. A CBDC is not the same as a cryptocurrency. 

Similar to how cryptocurrencies are stored in wallets, a CBDC is stored using technology created by a government for the express purpose of digital currency-enabled transactions. Currently, not many CBDCs exist in the world. But many countries hope that when they are able to make their CBDC scale to cover the entire country, it will replace currency notes.

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According to the International Monetary Fund, close to 100 countries are working on their own CBDCs. Some countries have already come out with their own version of it. As of July 2022, four countries have their own digital currencies up and running: The Central Bank of Bahamas (Sand Dollar), the Eastern Carribean Central Bank (DCash), the Central Bank of Nigeria (e-Naira) and the People’s Bank of China (e-CNY).

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There are broadly two kinds of Wholesale CBDCs and Retail CBDCs.

Wholesale CBDCs are similar to reserves held by banks. The central bank of a country will help financial institutions deposit funds or use them to settle interbank transfers. 

Retail CBDCs on the other hand, are the currency used by consumers and businesses for day to day transactions. Retail CBDCs can be further broken down into two kinds of approaches to how a transaction is handled. The first way is through a token-based retail CBDC accessible with a key. This allows users to make transactions anonymously. The second way is through account-based retail CBDC which requires an account to be digitally verified to be accessible.