Use Cases of Central Bank Digital Currency (CBDC)
Blockchain-powered CBDC removes the inefficiencies and vulnerabilities that plague the current central banking infrastructure by simplifying the design of a secure payments system that functions as a large-scale decentralized clearinghouse and asset register.
Retail CBDC
Retail CBDC is used as a payment option between individuals and businesses or other individuals. This is quite alike digital banknotes. The everyday volume of retail CBDC is normally higher than 100,000,000 transactions.
Benefits:
Increase availability: an increase of surface area for availability of digital currency may be extended to distribution on mobile devices, thus making it available to individuals without paying a visit to the bank.
Streamline reconciliation: A CBDC is inherently digital and does not require the expensive and time-consuming reconciliation process currently followed in e-commerce and cross-border payments.
Foster digital innovation: CBDC’s platform-based software model allows the entry of new firms in the payment sector, thus creating an environment of competition and inspiring innovation. This eventually leads to the globalization of services for financial institutions.
Enhance monetary policy: CBDC allows central banks the direct influence over the money supply, thereby easing the distribution of state benefits to the needy and thus improving control over transactions for tax controls.
Wholesale CBDC
Wholesale CBDC serves as an interbank settlement ie. to sort payments between the banks and other parties that hold accounts at the central bank. The daily volume of wholesale CBDC, normally remains lower than 100,000 transactions.
Benefits:
Improve interbank payment settlement: Automation and decentralized netting solutions, allow CBDC to settle payments instantly between counterparties on an individual order basis. Thus, the risk involved in overnight batch processing and collateralization is diminished.
Reduced counterparty risk: credit risks are mitigated by way of CBDC payment transactions in cases of cross-border payment transactions. This is achieved by enabling payment-versus-payment settlement for transfers in different countries.
Participate in digital asset markets: with the emergence of more tokenized assets, there is a certainty of the need for tokenized payments. CBDC assures a large-scale, decentralized clearinghouse and asset register to promote the digital asset revolution.
Stay competitive: despite the reduction in the cost of real-time money transfer, by centralized platforms like SEPA in Europe, most financial institutions charge their customers above the cost. The streamlined banking infrastructure of CBDC benefits the users by ensuring that the central banks maintain a role in interbank settlement amidst the ever-increasing adoption of stable coin technology.
