Central bank digital currencies (CBDC) are a digital representation of a country’s fiat currency issued by the government, in order to replace the traditional, physical form of fiat currencies.
With more and more countries close to issuing their own digital currencies, including China, United Kingdom, Japan, Philippines, Taiwan, central bank digital currencies are now a reality.
U.S.A. is also takin a step forward to CBDC. Earlier this month, Federal Reserve Board Governor Lael Brainard has announced:
“We have been conducting in-house experiments for the last few years, through means that include the Board’s Technology Lab, which has been building and testing a range of distributed ledger platforms to understand their potential opportunity and risk.”
Fed Governor Lael Brainard said that the Boston Federal Reserve Bank will work with the Massachusetts Institute of Technology researchers on a multiyear project to develop and test the use cases of a “hypothetical” central bank digital currency (CBDC).
Brainard said the existence of other CBDCs and private cryptocurrencies, like Bitcoin and Libra, emphasizes the need for the U.S. to evaluate cryptocurrencies:
“Digital currencies, including central bank digital currencies (CBDCs), present opportunities but also risks associated with privacy, illicit activity, and financial stability. This prospect has intensified calls for CBDCs to maintain the sovereign currency as the anchor of the nation’s payment systems.”
Also, a former governor of the Reserve Bank of India, Raghuram Rajan, said that Bitcoin and Facebook’s Libra cryptocurrency may eventually be “in competition” with central bank digital currencies.
Rajan, who also served as the International Monetary Fund’s chief economist, said:
“I would like to think that [Bitcoin and Libra] are also in competition with the central bank digital currency.”
Central bank digital currencies are expected to work just like regular currencies issued by central banks, but they will exist entirely online.