The global fintech sector is witnessing a large number of innovations and is driven by entities within and outside the conventional banking system. Wallets owned and managed by private fintech firms and cryptocurrencies are changing the way we think about and interact with money. Left to play the catchup game for a very long time, the central banks are getting ready to lead the charge through the introduction of central bank digital currencies (CBDCs).
What is CBDC
There is no agreement on what CBDC exactly is because the term is used to denote different concepts. According to a 2020 report by Brookings Institution, a CBDC is the legal tender issued by a central bank in a digital form.
Put simply, CBDCs are cash we hold in our wallets, except it exists in digital form. They are legal tenders issued by central banks in a digital form. For example, having 100 Indian rupees of CBDC is exactly like having a 100 INR of physical cash except that the 100 rupees of CBDC will be digitally stored. In other words, CBDCs are digital forms of the existing currency of a country and constitute m0 (total currency in circulation) of a country’s money supply. While CBDC is a new idea, central banks have been issuing digital currencies exclusively for limited users such as commercial banks. What is really novel about CBDCs is their potential to be used by retail users.
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