Imagine a future where you no longer carry cash, payments are fast and easy, and everyone has access to financial services. Welcome to the world of Central Bank Digital Currencies (CBDC), a big step forward in how we use money.

What is CBDC?

Central Bank Digital Currencies (CBDC) are digital versions of a country’s fiat currency, issued and regulated by its central bank. Unlike decentralized cryptocurrencies such as Bitcoin, CBDCs are government-backed, offering a stable and secure form of digital money.

CBDC aims to modernize financial systems, enhance payment efficiency, and increase financial inclusion. While some countries pursue these innovations for economic benefits, others are motivated by the disruptive rise of private cryptocurrencies like Bitcoin.

The first CBDC, called DCash, was launched in 2020 by the Central Bank of The Bahamas. Since then, other CBDCs have been introduced, such as DCash by the Eastern Caribbean Central Bank, e-Naira by the Central Bank of Nigeria, and JamDex by the Bank of Jamaica. So far, four central banks have fully tested and launched their CBDC, covering 11 countries, including 8 Caribbean nations.

Types of CBDC Projects

Countries are approaching CBDC at different stages of exploration and implementation. Here are the key types of CBDC projects:

1. Research:

At this stage, central banks are analyzing the feasibility, implications, and potential benefits of CBDC.

Examples: Mauritania, Liberia is collaborating with blockchain solutions firm Gluwa

2. Proof of Concept (PoC):

Central banks develop prototypes to test the technology and design features of a potential CBDC.

Examples: UK ( Digital pound), Morocco's central bank Bank Al-Maghrib (BAM) announced its plan to issue and oversee the e-dirham.

3. Pilot:

In this stage, central banks launch small-scale, real-world trials to evaluate a CBDC performance in practice.

Examples: China is piloting the Digital Yuan in various cities, allowing consumers to use it for everyday transactions.

4. Launched:

Fully operational CBDC are implemented for use by the public or financial institutions.

Examples: The Bahamas (Sand Dollar), Nigeria (eNaira), and Jamaica (Jam-Dex) have officially launched their CBDC.

Pros and Cons of CBDC

Pros:

1. Efficiency in Payments: Faster and cheaper cross-border transactions compared to traditional banking systems.

2. Financial Inclusion: Can provide access to financial services for unbanked populations.

3. Reduced Cash Dependency: Lowers the cost of printing, managing, and distributing cash.

4. Enhanced Transparency: Digital records can help reduce fraud and tax cheating.

5. Government Can Easily Distribute Money: CBDC makes it easier for governments to directly send money to people during emergencies or as part of financial aid programs. 

Cons:

1. Privacy Concerns: CBDC could allow the government to watch people's financial activities more closely.

2. Disruption to Banks: Direct access to CBDCs might destabilize traditional banks by reducing their role in the financial system.

3. Cybersecurity Risks: Increased reliance on digital systems may expose economies to cyberattacks.

4. Implementation Costs: Developing and maintaining a CBDC infrastructure requires significant investment.

Malaysia’s Approach to CBDC

Malaysia is taking a measured approach to CBDC development, focusing on wholesale rather than retail implementation. Bank Negara Malaysia (BNM) is exploring the potential of a wholesale CBDC to improve cross-border payments and enhance monetary policy tools.

Malaysia has chosen private blockchain technology for its CBDC plans to ensure secure, efficient, and scalable operations. Private blockchains allow only approved participants, like central banks, to access and use the system. This helps Malaysia maintain control and reduce risks linked to public blockchains, such as misuse or lack of transparency.

According to The Sun Daily, BNM has emphasized its role in collaborative efforts such as Project Dunbar, which seeks to use CBDC for international settlements. This initiative, involving countries like Singapore, South Africa, and Australia, demonstrates Malaysia’s commitment to leveraging blockchain technology for real-world solutions in cross-border payments.

Conclusion

The reasons for developing CBDC are many and varied. Countries are at different stages, from research to testing and launching, showing a mix of economic needs and competition in technology. For countries like Malaysia, exploring CBDC means finding a balance between embracing new ideas and managing risks like privacy concerns, costs, and the impact on traditional banks.

Want to know if CBDC is the same as a stablecoin? Stay tuned for our next article!