Central bank digital currencies (CBDC) have created a buzz worldwide. Countries like The Bahamas & Nigeria have already launched their CBDCs and became the first ones in the race of adopting the centralized digital currency.
Other countries like India, Sweden, Russia, China, and UAE are developing and pilot testing their CBDCs.
What is Central Bank Digital Currency (CBDC)?
Central bank digital currency is a virtual form of a country’s fiat currency (such as INR, Dollar, etc) issued and regulated by the nation’s monetary authority. This currency can be stored in a digital wallet linked to the central banks of respective countries.
Also Read – Which Countries Have Adopted CBDC?
Now the question arises, we already have digital or online payment systems then how CBDC is different from current online payment systems.
Difference between CBDC & Online Payment Gateways
Let’s understand this by taking an example,
You went to the market and bought apples for Rs. 200.
You did a payment of Rs 200 to the fruit seller via UPI or say GPay.
Rs. 200 has been debited from your account and credited to the seller’s account.
You have shown the message to the fruit seller; he also confirms the same.
You have successfully completed the transaction within seconds. But in reality, it takes time to settle the transaction.
In the backend, the transaction happens between two different bank accounts via an online payment gateway (Such as GPay, Paytm, etc). Online payment gateways require time to link with banks and then also settle the payment with RBI – the central bank of India. It probably takes a day.
And until the settlement, the seller’s account waits for the payment and also stands a risk of losing it.
This happens when we do transactions with UPI or other payment gateways.
How will the CBDC transaction happen?
If we use CBDC, the payment of Rs. 200 will immediately transfer from your account with RBI to the seller’s account with RBI. It won’t take time to settle as both the accounts will directly link with RBI.
At present consumers do not have direct access to central bank money. Central bank prints money, distribute it to other banks, and then from those banks, we access money. So banks are the mediator whenever we do any online transaction.
In the case of CBDC, there won’t be any mediator as it will be issued and regulated by RBI only.
This is the main difference between central bank digital currency (CBDC) and online payment gateways.
Though users will not experience any difference while doing transactions with CBDC but they can surely reap long-term benefits with reduced transaction charges.
Experts mention that at some point we all pay certain invisible charges whenever we do online transactions with UPI, Net banking, or any other digital medium.
As CBDC will make currency management cheaper, there are chances that online transaction costs may go down.
CBDC FAQ
How is CBDC different from cryptocurrency?
Cryptocurrency like bitcoin is a decentralized digital currency and not regulated by any bank whereas central bank digital currency (CBDC) is regulated and issued by Central Banks.
How is CBDC different from cash?
Cash payment is not traceable whereas CBDC transactions can be tracked as every CBDC of cash gets a unique digital identity.
What is the name of RBI’s central bank digital currency?
Digital Rupee is the name of India’s Central bank digital currency.
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