The Why and How of Central bank digital currencies

Central bank digital currencies have recently emerged as a hot topic in the financial space, especially of the 2022 Indian budget. Banks, Institutions, and governments are performing research and analysis on the economic and technical feasibility of Central bank digital currencies.

Cryptocurrencies today are extremely volatile, risky, used for nefarious purposes and lack government backing. Central bank digital currencies overcome these concerns while using the same underlying distributed ledger technology of cryptocurrencies.

Central bank digital currency is an electronic form of central bank money that citizens can use to make digital payments and store value. A Central bank digital currency offers three main elements: A digital currency, Issued by the central bank and Universally accessible.

If a country issues a Central bank digital currency, its government will consider it to be legal tender, just like fiat currencies. Both Central bank digital currency and physical cash would be legally acknowledged as a form of payment and act as a claim on the central bank or government.

A central bank digital currency increases the safety and efficiency of both wholesale and retail payment systems. Central bank digital currency  can facilitate quick settlement of retail payments and improve the efficiency of making person -to-person payments. If a country intends to become a cashless society, a digital currency with government or central bank backing is a credible alternative. Introducing Central bank digital currency will boost crypto adoption as people will have access to the platforms to convert cryptocurrencies into legal tenders. 

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