Central bank digital currency (CBDC) - Financial definition
Concise definition of the term central bank digital currency
Central bank digital currency refers to a digital means of payment issued by a central bank, and thus the digital version of the respective national currency.
Comprehensive definition of the term central bank digital currency
Central Bank Digital Currencies (CBDCs) are digital currencies issued by a central bank. They are designed to act as a legal tender and can be held directly by individuals or businesses. While there are some potential benefits to CBDCs, there are also several dangers associated with them.
- Surveillance: CBDCs could lead to increased government surveillance of financial transactions. Central banks could potentially track and monitor all transactions made using CBDCs, which could infringe on individual privacy rights.
- Financial Control: CBDCs could give central banks more direct control over the economy. This could potentially lead to more centralized decision-making, reducing individual and business autonomy in financial matters.
- Negative Interest Rates : Central banks could use CBDCs to impose negative interest rates, which would discourage savings and encourage spending. This could lead to economic instability and could disproportionately impact lower-income individuals.
- Cybersecurity Risks: Digital currencies are inherently vulnerable to cyberattacks. A successful cyberattack on a CBDC system could lead to widespread financial disruption and loss of trust in the currency.
- Disintermediation of Banks: CBDCs could potentially bypass the need for commercial banks, leading to bank disintermediation. This could result in a loss of revenue for banks and could lead to a reduction in the availability of credit for individuals and businesses.
- Loss of Anonymity: Cash currently offers a degree of anonymity that digital currencies, including CBDCs, do not. This could lead to a loss of financial privacy for individuals.
- Dependence on Technology: CBDCs rely on technology to function, which means they are vulnerable to technology failures or disruptions. This could lead to a loss of access to funds for individuals and businesses.
- Programmable features: CBDC will have settings that can be changed. For example, money can be programmed to have an expiration date or be restricted for certain uses.
In conclusion, while CBDCs have the potential to offer certain benefits, they also pose significant risks. It is important to carefully consider these risks before implementing CBDCs.