What Are CBDCs? A Detailed Comparison of Online and Offline CBDCs

Working with the traditional financial system requires a lot of maintenance and handling of complex systems. To mitigate such challenges, reduce cross-border transaction fees, and offer an alternative money-transfer system, the CBDCs concept was presented to the world. It simply promotes financial inclusion with risk-free and widely accepted digital money. Promoting financial services by offering easy and safer money access for underbanked and unbanked populations is the chief motive behind CBDCs introduction.       

A Complete Overview Of CBDCs

CBDCs are a digital form of a nation’s fiat money and are specifically allocated by the central bank or the country’s monetary supremacy. The root idea behind the concept intro is to promote financial inclusion and simplification of the involved monetary and fiscal policies.    

CBCDs are much more similar to cryptocurrencies and only differ in value pegged to and showcase the country’s official currency. In addition to this, the technological architecture makes CBDCs different from cryptocurrencies. Crypto mainly works with blockchain technology whereas the digital form of currency operates on distributed ledger technologies (DLTs). 

Shifting of individuals from fiat currency or cash, mainly during the COVID-19 pandemic, introduced the idea of CBDCs to the world.

However, the concept was first introduced by the Bank of Finland in 1993 with the launch of Avant smart card, cash in electronic form. The vision has been acquiring popularity recently and has already been familiarized in many lands such as Nigeria, Bahamas, and Jamaica.

Moving forward, the People’s Bank of China is actively dedicated to the research and development of retail CBDCs, whereas the European Central Bank is investigating the usage of wholesale CBDCs for pay.      

Characteristics Of CBDCs  

The central bank creates these digital tokens which are then distributed to authorized financial systems, allowing them to control, manage, and regulate currency circulation. The digital form of fiat currency issued by the legislative bodies holds a wide range of features and is categorized into three types.

Instrumental characteristics: the instrumental features of CBDCs are convenience, convertibility, low cost and, acceptance & availability. 

System characteristics: CBDCs are highly secure, scalable, flexible, available, resilient, and interoperable. Those features undoubtedly enhance the popularity and usage of CBDCs in the global financial marketplace.   

Institutional characteristics: The institutional features of the fiat currency in digital form are legal standards and a robust legal framework. Also, each nation has its legal framework and standards for CBDCs.       

Online Vs. Offline CBDCs 

After exploring the core features of CBDCs, it is time to uncover the two main types of CBDCs that are online and offline.

Online CBDCs: Online CBDCs ensure convenience and compatibility with the broader societal trend, denoting a cashless economy. It is accessible through online or electronic channels such as online banking platforms, digital wallets, and different internet-based financial platforms.

Streaming on internet-based technology, the digital currency improves payment security along with increased transaction speed, greater access without bank accounts, and reduced costs. 

The only condition to use online CBDCs is a strong internet connection that develops instant access to the central banking system, offering seamless transactions and validations.  

Offline CBDCs: Offline CBDCs, as the name suggests can be used without looking for continuous internet connectivity. Based on the robust security protocols for offline transactions, the CBDCs made it easy for individuals to avail services with spotty or no internet access. 

In the offline mode, Offline CBDCs store the transaction temporarily and synchronize the same with the central system when encountering an internet connection. No reliance on the internet or external power source is a key feature. 

Also, the process requires a unique user device. However, genuine peer-to-peer offline transactions are more challenging and bring technical and policy troubles.  

Conclusion

Introduction to CBDCs transformed the traditional financial system into a digital and autonomous system, under the supervision of government. The digital form of fiat currency offers a variety of features making transactions available, secure, and instant. With CBDCs, users can make both online as well as offline transactions. Online CBDCs offer real-time online transactions whereas offline CBDCs work without internet connectivity.      

FAQs

What are CBDCs? 

CBDCs are the digital transformation of the fiat currency, which is issued and regulated by the central bank or the nation’s monetary authority. 

Can CBDCs be operated offline?

Yes, CBDCs can be used in both offline and online modes based on functionality and accessibility.   

Nancy J. Allen is a crypto enthusiast, with a major in macroeconomics and minor in business statistics. She believes that cryptocurrencies inspire people to be their own banks, and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning. She frequently researches, and posts content on the top altcoins, their theoretical working principles and technical price predictions.