Central bank digital currencies broadly refer to the digital versions of fiat currencies.
The fiat currencies are issued by the central banks of respective countries. These currencies are issued based on the economic conditions and needs for trade and commerce in a country. Previously, the fiat currencies were issued based on gold reserves. The process of minting and maintaining these currencies requires quite a bit of work in terms of printing, logistics, transfers, reserves, etc. There is a lot of paperwork and many of layers of bureaucratic processes in currency management at the central bank level.
On the other hand, digital/crypto currencies like bitcoin are issued on a decentralized network and are relatively easy to manage considering they are governed via code and consensus rather than via bureaucratic processes. This brings in a ton of efficiency.
Inspired by the idea of crypto currencies, some of the fiat currency issuers have been experimenting with the idea of issuing digital versions of fiat currencies using decentralized systems. This could allow more liquidity, more security, and faster digital payments while simplifying processes and overheads.
CBDCs would also allow increased efficiency in cross-border payment settlements where the processes take quite a bit of time at in the current system.
How open and transparent CBDCs would be? Would they all follow the same practices and would they all have their blockchain? Would they even use blockchain or just be a sufficiently efficient centralized digital payment system? These and many more questions are still unanswered while the idea of CBDCs is still in the exploratory stage.
Episode 28 - Central Bank Digital Currency (CBDC)