Page 31 - Banking Finance June 2022

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The database would keep a record (with appropriate
privacy & cryptographic protections) of the amount of
money held by every entity, such as People &
Corporations
In contrast to crypto currencies, CBDC would be
centrally controlled and so a block-chain or other
distributed ledger would likely not be required or useful
even as they were the original inspiration for the
concept
Researchers propose multiple ways that a retail CBDC
could be technologically implemented

Reduces risk: Payment for goods & services needs
Characteristics
to be done in a timely manner. With instant
CBDC is a high-security digital instrument like paper
payments, Merchants no longer need to use
bank notes
intermediaries to handle the risk or to absorb the
it is a means of payment, a unit of account & a store of risk cost themselves
value and like paper currency, each unit is uniquely
Reduces complexity: Merchants will not need to
identifiable to prevent counterfeit
separately keep track of transactions that are slow,
Digital fiat currency is part of the base money supply (where the customer claims to have paid but the
together with other forms of the currency. As such, DFC money has not arrived yet) therefore eliminate the
is a liability of the central bank just as physical currency waiting queue, which could simplify the transaction
is process
It's a digital bearer instrument that can be stored, Financial inclusion: Safe money accounts allowing any
transferred & transmitted by all kinds of digital legal resident or citizen to be provided with a free or
payment systems & services. low-cost basic bank account

The validity of the digital fiat currency is independent Preventing illicit activity: CBDC makes it feasible for a
of the digital payment systems Central Bank to keep track of the exact location of every
unit of the currency. This tracking has a couple of major
Proposals for CBDC implementation often involve the
advantages
provision of Universal Bank accounts at Central Bank
It makes tax avoidance & tax evasion much more
for all citizens
difficult, since it would become impossible to use
There are two types of CBDCs methods such as off-shore banking and unreported
1. Retail: Retail CBCDs are meant for use by employment to hide financial activity from the
individuals, Households & Corporations central bank or government
2. Wholesale: Wholesale CBCDs are meant for use by Combating crime: It makes it much easier to spot
Financial Institutions criminal activity and thus put an end to it. (in cases
where criminal activity has already occurred,
Potential advantages of CBDC tracking makes it much harder to successfully
launder money, and it would often be
1. Technological efficiency: instead of relying on
straightforward to instantly reverse a transaction
intermediaries such as banks & clearing houses, money
& return money to the victim of the crime)
transfers & payments could be made in real time,
directly from the payer to the payee. Being real time Proof of transaction: a digital record exists to prove
has a couple of major advantages: that money changed hands between two parties which

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