CENTRAL BANK DIGITAL CURRENCY (CBDC) Flashcards
What is a Central Bank Digital Currency (CBDC)?
A digital form of a country’s official currency, issued and regulated by its central bank.
How does a CBDC differ from cryptocurrency?
CBDCs are:
Centralized: Issued and controlled by a central bank.
Legal Tender: Backed by the government, guaranteeing their value.
Generally not designed for investment: Focus is on payments and transactions.
What are some potential benefits of CBDCs?
Financial Inclusion: Can reach unbanked populations.
Payment Efficiency: Potentially faster and cheaper transactions.
Greater Control: Central banks have more tools for monetary policy.
Name the first country to issue a CBDC and what it’s called.
The Bahamas, with the “Sand Dollar” (digital B$)
Is a CBDC interest-bearing or non-interest bearing?
CBDCs can be designed as either interest-bearing or non-interest-bearing. The Bahamian Sand Dollar is a non-interest bearing CBDC.
What is the name of Nigeria’s CBDC?
The eNaira
Is the eNaira an interest-bearing currency?
No, the eNaira is a non-interest-bearing CBDC.
What are some of the reasons why countries are interested in CBDCs?
Enhancing financial inclusion, modernizing payments systems, combating illicit financial activity, and increasing monetary policy effectiveness.
How does a CBDC differ from cryptocurrency?
Centralized vs. Decentralized: CBDCs are centralized, controlled by the central bank. Cryptocurrencies are often decentralized, operating on distributed ledger technology like blockchain.
Backing: CBDCs are backed by the government and central bank, providing stability. Cryptocurrencies are often backed by their perceived value and network.
What are some countries experimenting with CBDCs?
China, Britain, Japan, Singapore, Sweden, India, and many others.
Why did India announce the Digital Rupee in Budget-2022?
Efficiency: CBDCs could make transactions more efficient and reduce costs.
Financial Inclusion: CBDCs could provide access to financial services to those without traditional banking access.
Innovation: A CBDC could foster innovation in financial technologies.
What technology often underlies CBDCs?
Blockchain technology, although other technologies could also be used.
How does CBDC differ from physical currency?
Exists in digital form only, issued and regulated by the central bank
List three advantages of CBDCs.
Reduced costs of physical cash management (printing, transportation, etc.)
Decreased potential for counterfeiting.
Greater traceability of transactions (potentially aiding in combating illegal activity)
Describe a potential drawback of CBDCs.
CBDCs could lead to reduced privacy as transactions may become more easily trackable by the central bank or government.
Give an example of how CBDCs could offer programmability.
Government benefits could be programmed to be spent only on specific items within a set timeframe (e.g., funds for farmers restricted to purchasing seeds and tools within a certain period).
How could CBDCs change international financial transactions?
CBDCs could ease cross-border payments by potentially removing intermediaries and reliance on traditional systems like SWIFT. Countries could directly conduct transactions using digital versions of their currencies.
What is a potential tax implication of widespread CBDC adoption?
Increased transaction traceability could make it easier for tax authorities to monitor economic activity and potentially reduce tax evasion.
What is the “digital divide,” and how does it pose a challenge to CBDC adoption?
The digital divide refers to the gap between those with access to technology (computers, smartphones, internet) and those without.
This creates inequality in CBDC access, as some people can’t use them due to lack of devices or connectivity.
How does limited financial literacy impact CBDC usage?
Financial literacy means understanding how money and financial systems work.
People with low financial literacy may struggle to understand how to use and manage CBDC wallets and transactions securely.
Discuss the challenge of limited access points in relation to CBDCs.
If businesses, especially in rural areas, don’t accept CBDCs, it limits their usability.
This can discourage adoption and make CBDCs less convenient than traditional cash in some locations.
How are CBDCs vulnerable to events like cyberattacks, natural disasters, or power outages?
CBDCs rely heavily on electricity and internet infrastructure.
Disruptions in power or networks can make it impossible to access or use the digital currency, potentially causing economic standstills.
What are the environmental concerns surrounding CBDC maintenance?
CBDC blockchains require vast amounts of energy to function, mainly for running servers.
This contributes to e-waste from server hardware and emissions related to power generation.
What is the E-Rupee?
The E-Rupee is a digital form of currency issued by the Reserve Bank of India (RBI). It is considered a Central Bank Digital Currency (CBDC) and will be equivalent in value to traditional fiat currency.
