NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Central banks around the world are experimenting with so-called Central Bank Digital Currency (CBDC). But what is it and why does it matter?

CBDC is a digitized version of domestic currency where the central bank issues new money equivalent to – and redeemable for – its domestic currency, often removing the equivalent amount of currency from the money supply.

It could be issued using distributed ledger technology, where transactions would operate and settle on a peer-to-peer basis.

CBDC may be issued for general use (“retail” CBDC) for peer-to-peer payments and payments from consumers to merchants; or for use by commercial banks and clearing houses (“wholesale” CBDC) for more efficient interbank payments that occur outside traditional correspondent banking and other payment systems.

While it may seem far-fetched, at least 44 central banks, according to survey research by the BIS, are currently or will soon be researching and experimenting with CBDC.

Photo courtesy of fsecart.