What is Central Bank Digital Currency?
The concept of digital currency precedes distributed ledger technology. It began as a way to distinguish between Internet versions of digital money (i.e. DigiCash, eCash) and electronic cash that existed on physical platforms (i.e. Chipknip and Mondex) and grew more complex with the advent of web platforms that provided access to accounting (i.e. Paypal). These examples are all private market currency solutions that do not involve a central bank.
Though the concept of a Central Bank Digital Currency (CBDC) remains largely theoretical, the evolution of new technologies such as DLT is increasing the feasibility of putting a CBDC into practice. At a high level, a CBDC is a digital store of value (money) and method of exchange issued by a central bank. Theoretically, a CBDC introduces a new digital mechanism for real-time settlement between individuals.
CBDCs are intended to be 1:1 exchangeable with other forms of money (such as notes, coins and deposits at banks). They may be issued in an alternate form exchangeable for fiat currency that is held on deposit by a central bank and payable on demand to the owner. CBDCs can also be issued as a new form of money supply in addition to traditional central bank money issuance.
One of the main purposes of a CBDC is to broaden access to central bank liabilities (such as notes and coins) in digital form. In addition to broadening this access, a CBDC system must also be designed to be practically functional (for example, it cannot only be accessible through proprietary networks such as SWIFT or Fedwire).