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Central bank digital currencies (CBDCs) are an electronic form of money that consumers and businesses hold with their country’s central bank, such as the Bank of England.

What’s different about CBDCs?

Most money is held electronically, but currently only large financial institutions hold deposits with the Bank of England. A CBDC would extend this facility to businesses and consumers.

Deposits held with banks are at some risk because the bank could collapse. Customers are also subject to banks’ commercial policies and charges. In theory, a CBDC would overcome this.

How do CBDCs differ from cryptocurrencies?

Cryptocurrencies are typically not managed by any central authority and their value can fluctuate. One type of cryptocurrency – the stablecoin – attempts to manage that problem by backing the ‘currency’ with assets. A CBDC would be managed by a central bank and have the same security as cash.

What are the benefits and challenges of CBDCs?

In some ways CBDCs respond to the challenges posed by stablecoins. They would aim to promote reliability and stability while allowing customers to take advantage of more innovative approaches to payments.

But implementing CBDCs also poses technical and security challenges. It would rely on giving millions of customers access to the central bank. This could create serious risks of, for instance, cyber-attack. The approach also raises concerns about data privacy.

Moving money from commercial banks to a central bank could threaten the current financial system.

In addition, the complexity of arrangements means that a new system would probably rely on creating new intermediaries to manage access. This would undermine some of the logic of the new approach.

What plans are there to introduce CBDCs?

Central banks around the world, including the Bank of England, are exploring the concept of CBDCs. There are as yet no plans to introduce a CBDC in the UK.

Two central banks – in Nigeria and the Bahamas – have introduced CBDCs.

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