The introduction of new forms of money such as central bank digital currency or CBDC has been responsible for shifting the dynamics in the financial ecosystem. As a digital variant of central bank money, CBDC has turned into a new age solution for a cashless society. Although there are various reasons to consider the adoption of CBDCs, it has been primarily promoted as a blockchain solution i.e. CBDC blockchain for the rising dominance of tech giants in the digital currency landscape.
So, why should you worry about CBDC blockchain solutions? Is it reasonable to bring blockchain into the equation with CBDCs? On the other hand, anyone could wander about the potential reasons for which one would consider using blockchain for CBDCs. The following discussion aims to provide you with a detailed impression of how far it is reasonable to go with blockchain solutions for central bank digital currencies.
Defining CBDC and the Role of Blockchain in CBDCs
One of the first factors about central bank digital currency blockchain solutions is the definition of CBDCs. Central bank digital currency or CBDC provides digital forms of central bank money to provide unique advantages for central banks in retail and wholesale perspectives. Some of the notable functionalities of CBDCs include improved infrastructure for interbank settlements or better financial inclusion for individual customers.
CBDC basically works as a legal tender and also enjoys the backing of a central bank. Interestingly, CBDC represents a claim against the concerned central bank rather than a Payment Service Provider or a commercial bank. Generally, you have to maintain a CBDC on a digital ledger that could be either blockchain-based or not.
The digital ledger should support the speed of payments between banks, individuals, and institutions with the assurance of better security. A recent study by the Bank for International Settlements (BIS) presented favorable prospects for considering CBDC blockchain solutions. The findings of the study clearly indicate that over 70% of institutions are presently engaged in active research and development of proofs of concept for central bank digital currencies.