What is a CBDC? Why central banks want to get into digital currencies
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What is a CBDC? Why central banks want to get into digital currencies

What is CBDC?

A central bank digital currency, or CBDC, isn’t too different from a traditional currency issued by a central bank. One can define CBDC as a digital version of fiat currency, bringing with it the conveniences of digital assets.

This digital currency would be tied to fiat reserves at a 1:1 ratio, providing citizens with a cheaper and more efficient way to manage their funds due to fewer fees and the instant nature of a digital offering. Pulling from blockchain technology, a CBDC would ideally provide the benefits of cryptocurrencies such as banking the unbanked and immediate transactions, without the drawbacks like potential volatility. 

Will CBDC be a gamechanger? Quite possibly. This guide aims to discuss the CBDC topic and examine if it’s a worthy successor to our current financial ways.

How can digital technology revolutionize finance?

The world is heading toward a cashless society. In 2020, the United Kingdom recorded a 35% drop in payments made via cash and coins. Approximately one in six payments are made in cash, with the other five made digitally via debit or credit cards. 

While COVID-19 certainly affected the U.K.’s use of physical cash, it is unlikely citizens will go back to cash thanks to the convenience offered by digital payments. Shopping, food delivery and services are becoming increasingly online as well, further supporting the world’s shift toward cashless payments. Over 80% of consumers around the world shopped online in 2020, with United States e-commerce sales predicted to reach $6.5 trillion in the near future. 

There’s no stopping the digital train, meaning a bank-issued digital asset feels like the logical next step for economic growth.

How does a CBDC work?

A CBDC would work similar to traditional funds, only it would be entirely digital. Users would have a digital wallet, accessible via their mobile phones or other virtual devices. From their mobile devices, they would be able to check their balances, receive government-issued funds like a tax return and transfer money between parties. 

Now, the digital features offered by a CBDC don’t sound too different from a traditional bank account. What’s the difference? Generally, it’s the use of blockchain technology to create a currency. 

Blockchain tech enables near-instant payments with next to no fees. This way, citizens could receive payments from the government almost instantly, rather than waiting days or weeks. 

Ideally, all companies within a country would exist on the central bank’s network, meaning anyone could move funds around instantly and cheaply, not just the bank. Part of that speed and efficiency is due to disintermediation. 

Disintermediation is the act of removing intermediaries between parties. Essentially, a central bank could send money right to a citizen, rather than sending it to various banks with differing policies and fees. Is CBDC about disintermediation? Absolutely. CBDC creates a central point for all of a region’s currencies to originate, rather than diversify funds across banks around the region.

Blockchains also doubles as an immutable ledger that automatically tracks all payments made across the network. Governments could look back at the ledger at any point for an untamperable history of processed transactions. 

By uniting a region’s spending and money movements, governments would have a full view of their citizen’s macroeconomic situation and could adjust accordingly.

However, blockchain networks are open by design, meaning anyone could look at processed transactions. To provide privacy for their citizens, central banks would utilize an altered form of blockchain called distributed ledger technology (DLT).

DLT networks are permissioned, meaning only certain parties have permission to view specific information. This way, a central bank could allow only its workers to look at the network as a whole, rather than it being entirely open.

Essentially, central banks are centralizing the decentralized nature of a blockchain while still harnessing its various benefits. The government is in control of the entire network but with faster and more efficient payments so that the country as a whole would enjoy a more connected financial ecosystem in the digital realm. A digital realm where everyone has access to all of the benefits associated with it such as paying each other, a business, or simply their taxes.

A CBDC could also serve as a way to bank the unbanked. People will not need to hold a bank account to participate in their region’s economy. Instead, all fund management is done via a digital device like smartphones, tablets, or laptops.

Of course, a central bank-issued digital currency is backed by funds held in the central bank’s reserves. This way, banks can still print money to adjust inflation rates, or to inject more money into the economy during a tragedy like COVID-19. 

Will CBDC replace cash? Unlikely. Most governmental parties plan for CBDC to work as a supplement to fiat, continuing to support fiat while also developing the digital ecosystem.

The pros and cons of a CBDC

While a central bank digital currency isn’t a perfect next-level solution to a country’s current financial situation, it’s sure to bring with it some unarguable benefits.

The pros of a CBDC

Pros of a CBDC


A CBDC distributed through blockchain technology is cheaper, faster and arguably more accessible than the current financial system. Anyone with a mobile device can utilize a CBDC, and digital currencies serve as a way to unite companies and citizens within a region.


A central bank digital currency removes the need for citizens to hold a bank account. Banks often require minimum amounts and charge fees for certain actions. Some banks even go so far as to block money movements for some customers. As a CBDC is simply managed via a digital device, anyone can hold government-issued funds without worry.


Thanks to blockchain technology, both businesses and citizens could move money as they’d like. A CBDC removes the need for banks or similar fund management groups to approve transactions, and limit how much money can move, as well as where it can go.


Ideally, a CBDC network would be built on blockchain’s untamperable technology. The network would serve as a historically accurate ledger of all transactions that the central bank can trust. Such oversight can assist banks in fighting illegal activity like money laundering and being able to point out suspicious transactions, and then take action. 

The cons of a CBDC

Cons of a CBDC


Blockchain enthusiasts will understand that a government-controlled network defeats the inherent purpose of blockchain. A CBDC would certainly provide the government with more control over citizens’ funds, as the digitized nature of CBDC allows for a complete oversight over all transactions. Citizens who want less government involvement over their financial lives might see a problem with CBDC.

Lack of banking options

Citizens making the financial move to a central bank to take advantage of the CBDC could be limiting themselves to that one bank. After all, a CBDC removes the need for local or regional banks, putting all control in the hands of a central bank. Citizens who want to use traditional banks over a government bank could struggle with the change.


With one entity, the government, in control of so much via the CBDC, any threats or mistakes within the system would be at the hands of the bank. Should employees input the wrong information or if there’s somehow a glitch in the system, the central bank’s reputation would be tarnished forever. 

In this same vein, central banks would need to cover the lending and debt services offered by traditional banks.

The current state of CBDC regulation

Believe it or not, a CBDC isn’t just a pipe dream. Countries around the world are considering regulating CBDC and some are currently experimenting with the idea.

Russia, for example, claims it will have a prototype digital ruble platform out in early 2022. The country is working to alter various federal laws to accommodate such a change, and a pilot program will see 12 central banks implementing a CBDC.

Singapore, one of the most blockchain-positive countries in the world, is building a retail CBDC, which it calls the “digital equivalent of today’s notes and coins.”

Over in France, the central bank finished up a 10-month experiment where 500 institutions tested a CBDC issued by the Banque de France. Entities involved traded government bonds and security tokens, and settled those trades via a central bank-issued currency.

The People’s Bank of China has been developing a prototype CBDC since 2016, via its Digital Currency Institute. Set to completely replace cash payments, this virtual currency has been available to the public since April 2020.

In the United States, progress regarding a CBDC is going a bit slower. In November 2021, the former chair of the Commodity Futures Trading Commission noted that a CBDC would be a great solution to the United States’ “slow” and “expensive” existing payment systems and that the country should work to implement one as soon as possible. 

The future of CBDC

While governments are experimenting with various implementations of CBDC, mass adoption and acceptance won’t occur until the world experiences a widely successful experiment. 

Even then, CBDCs will have to go through rigorous regulation before being spread to the masses, and implementation then brings up additional questions. Will foreigners be able to utilize this currency? Will taxes change based on a CBDC? 

Realistically, these questions will be answered differently with every implementation in various countries. Much like today’s current variety of financial policies in countries all over, a digital implementation will bring its own set of nuances to face

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