Why are Central Banks Betting on CBDCs?

Central Bank Digital Currencies (CBDC) are no longer just a futuristic idea. While decentralized cryptocurrencies gained popularity, central banks in different countries decided to create their own digital version of fiat currency. The key difference: the value of a CBDC is directly controlled by the central bank, it is not as volatile as Bitcoin or Ethereum.

Two Models of CBDC for Different Users

Not all CBDCs work the same. There are two categories that respond to different needs:

Wholesale CBDC: Designed for financial institutions and banks. These digital coins act as reserves at the central bank, facilitating interbank settlements and improving liquidity management. Banks can access the central bank's monetary policy tools, allowing for more efficient regulation of loan rates and interest rates.

Retail CBDC: Available for businesses and consumers. This is where innovation becomes practical. Retail CBDCs provide a stable, government-backed exchange method, eliminating risks such as the insolvency of private issuers. Additionally, they exist in two formats: token-based (similar to physical cash, without the need for identity verification) and account-based (that require identifying participants).

Real Benefits: Why Central Banks See Them as the Future

CBDCs promise to solve problems that the traditional financial system has not addressed for decades. They significantly reduce the costs of cross-border transactions, which is crucial in an increasingly connected world. They also address the risk of third parties that can lead to bank runs and other events of financial instability.

Another decisive benefit: they provide financial access to unbanked populations, eliminating the need to build complex financial infrastructures within each country. In summary, CBDCs promise greater privacy, financial security, transferability, and convenience for end users, while simplifying and reducing the costs of the entire financial ecosystem.