The advent of cryptocurrency brings about another dimension in finance. One of which is Central Bank digital currency (CBDC).
Central Bank Digital Currency are digital tokens, similar to cryptocurrency that are issued by the Central Bank.
It is observed that CBDC is a prototype of cryptocurrency but with a difference.
Difference between Central Bank Digital Currency (CBDC) and cryptocurrency
Decentralization
Depending on the type of cryptocurrency, almost all cryptocurrency is designed to be decentralized whereas CBDC relies heavily on the activities of a central authority, usually the Central Bank of the country.
Technology
Though CBDC can use either blockchain, distributed ledger technology or other consensus mechanism, it is not compulsory while cryptocurrencies are built on the blockchain.
Value
Cryptocurrencies derive value from the forces of demand and supply thereby causing high volatility while CBDC are pegged to the fiat in circulation.
CBDC is traditional money (paper money and coin) in digital form that is issued and governed by a country’s Central Bank which is influence in term of supply and value by the country’s monetary policy and the Central Bank
Types of Central Bank Digital Currency (CBDC)
There are two types of Central Bank Digital Currency
Wholesale CBDC
Wholesale CBDC refers to the settlement of interbank transfers and related to wholesale transactions in Central Bank reserves.
This is similar to holding reserves in the Central Bank. The Central Bank grants an institution an account to deposit funds which can be used to settle interbank transfers.
Retail CBDC
Retail CBDC are government backed digital currency that is used by consumers and businesses.
These are government-issued currency that works as a medium of exchange, settlement of debt and store of value.
They are used for day-to-day transactions among citizens.
Types of retail CBDC
Retail CBDC can be further sub categorized into two.
Token based retail CBDC
These are retail CBDC which mirror the cryptocurrency where transactions are validated by private keys.
Like cryptocurrency, token based CBDC allows users to execute transactions anonymously.
Account-based retail CBDC
This is the type of CBDC that requires digital identification which is facilitated by KYC (know-your-customer).
It requires the user to have an account on the specified platform to access and use the digital currency.
CBDC in Nigeria
More than 60 central banks are exploring CBDC at different levels while 9 countries have launched their CBDC of which Nigeria is one of them.
In May 2021, the Central Bank of Nigeria announced that it will create her CBDC which was launched on October 1st 2022. Nigeria CBDC is called e-Naira.
Do you miss any of this?
Basics of blockchain technology
History of blockchain technology
Introduction to cryptocurrency
Different types of cryptocurrency.
Types of cryptocurrency wallets
Beginner’s guide to crypto trading
About Kumo
Kumo, registered as Kumo Technologies Inc in Delaware, U.S. is a fiat and crypto social payment app which allows users to exchange fiat (NGN) to crypto, save and earn interest in dollar with as low as $5, utility payment such as DSTV subscription, airtime, data among others.
Kumo wallet is your all-in-one social payment app for seamless payment solutions.
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