All You Need To Know About Central Bank Digital Currencies (CBDCs)


Central Bank Digital Currencies or CBDCs are also a form of blockchain-issued digital currency. The applications and efficiency of blockchains have been recognized by all banking enterprises and financial experts.

Even European Central Bank, which has maintained a negative stance towards cryptocurrencies, has acknowledged its benefits to upgrading the current financial infrastructure. This article is going to discuss the uses of CBDCs and their role in the evolution of the existing financial skeleton.

What is a CBDC?

A CBDC is a short form for Central Bank Digital Currency. It is also a digital currency protected by cryptographic technology that is issued by a blockchain. However, the main difference is that CBDCs are controlled and regulated by centralized financial agencies such as Central Banks.

In most cases, CBDCs are an upgraded form of a fiat currency. In other instances, it is a new national currency that is issued by a Central Bank, and it is pegged to the value of the legal tender in the region.

In this manner, it can be said that CBDCs are a substitute for the fiat currency reserves or the legal tender that is issued by a Central Bank or other financial regulator in a sovereign nation.

How does a CBDC Work?

These days many people do not deal with payments using paper currencies. In most cases, people settle their bills using digital payment methods such as cash apps or credit/debit cards.

However, when people are using these applications, they are not using a digital form of fiat currency, but they are only using the bank wire method.

When people are using these digital payment platforms, they have to pay transaction fees at every turn. Therefore, using cash applications can be more costly than making direct cash payments.

On the other hand, there are certain restrictions in the control and management of paper currencies for the Central Banks. Central Banks can choose to print money very easily. However, if they wish to contract the money supply, they have to use lengthy, complicated, and time-consuming methods.

Therefore, many central banks in the world have decided to adopt blockchain technology for issuing the digital form of their legal tenders. In such cases, the Central Banks are going to use private blockchain networks to issue a digital form of their legal tender, such as Digital Dollars, etc.

To make the CBDC more accessible, the government can also issue a nationalized digital wallet for custodial and money management purposes for its citizens.

Origin of CBDCs

The concept of CBDCs has been derived from the creation and massive traction of the Bitcoin blockchain. However, CBDCs are likely to not use distributed ledger technology like most blockchains because they are under the control of a centralized government agency.

Central Banks have been working on digitization options for legal tender since the dawn of the 20th century. Finland Central Bank issued e-money cards in the 1990s. In 2000, Czechia issued the I LIKE Q project that allowed users to make micropayments on the internet.

The same financial agency introduced an updated version of Q digital currency called Corrency in 2021 that made use of smart contracts. The Bank of International Settlements, or BIS, has issued a new report based on a study conducted in 2021 that revealed that more than 80 Central Banks of different sovereign nations have been working on independent CBDC projects.

Another BIS report issued in 2020 revealed that about 86% of all CBDC projects were working on measuring the impacts of digitized legal tender, while 14% were already ready with the pilot programs.

Characteristics of CBDCs

CBDCs aims to be highly secure forms of digital currencies because they represent the legal tender of a nation. In the past, there have been some attempts to issue fake fiat currencies into a nation, and the perpetrators of these forgery scams are found to be working on a state level.

Therefore, if a country is opting for launching a new CBDC, they need to ensure that it contains sufficient defense against the notorious hack attack. If hackers can take hold of a CBDC, they can counterfeit or cripple the economy of the targeted nation in seconds.

Another important feature of CBDC is its impact on government policies. On account of the physical nature of the fiat currencies, the government can face a difficult time in the management of these currencies.

However, if the entire legal tender reserve is present in the digitized form, it means that the state agencies can directly and swiftly apply policy changes such as increasing or decreasing the money supply.

Financial instruments such as DFC liability will be easier to transfer and transmit through all types of digital payment channels. The users may be able to get better discounts in terms of digital payments when everyone has a government-issued digital wallet.

CBDCs are also thought to play an important role in the evolution of international trade agreements and payments. At present, international trade is dependent on designated currencies such as USD for settling all state-level contracts such as import and export deals.

However, with CBDCs, the governments would not need to depend on storing USD in their national and foreign reserves, and they can perform direct exchanges in a matter of seconds. Such a scenario can change the dynamics of international trade, and it may also have political and economic implications.

Types of CBDCs

At first glance, it may seem that CBDCs are a basic type of fiat currency substitute. However, after a closer examination, it becomes clear that CBDCs can be divided into two basic groups. Here are the two major types of CBDCs:

Wholesale CBDCs

As mentioned before, CBDCs are intended to play an important role in upgrading the international trade sector. However, the part of the CBDCs that are going to be used for international or big payments are designed differently, and they are called Wholesale CBDCs. They resemble the holding reserves for Central Banks.

These holding reserves are used as deposits for the settlement of interbank transactions. Central Banks can impose financial regulations using monetary policy tools using the reserve holdings such as controlling debt and interest rates.

Retail CBDCs

The Retail part of the CBDCs is backed by the state authority, and they are utilized by the citizens and corporations to settle financial payments.

This CBDC type can mitigate risks like private digital currency issuers going out of business and losing customer assets.  There are two further types of Retail central bank digital currencies mentioned as under:

Token-based CBDCs

Token-based CBDCs secure transactions and digital wallet accounts using private and public key combinations. Additionally, the users of this type of retail CBDC can perform their transactions anonymously, just like paper currencies.

Account-based CBDCs

Account-based CBDCs need digital identification of the users to access them and perform transactions. All the payment details and financial history of the users of account-based CBDCs are sent to government enterprises.

Why do We Need CBDCs?

In a world where there are countless digital payment methods, such as debit cards, credit cards, bank wires, digital payment applications, etc. Many people might think that digital money is already present and it is working properly.

However, it is important to note that many issues are connected with the fiat currency system. It is important to mention that people have been updating their financial systems since the dawn of civilization. The earliest humans used barter systems, where they exchanged commodities with each other as a mode of payment.

The next stage was to invent money as a unit of account that allowed people to assign values to their products and services in a more accurate manner. People moved from metallic coins to paper currencies because they were easier to store, cheaper to create, lighter, difficult to forge, and convenient for storing.

However, when democratic governments became popular around the world, central banks issued paper currencies based on their gold reserves. However, in the 20th Century, the gold standard was abolished, and fiat currencies were issued based on the value of the governments.

With the arrival of blockchain technology and the increasing use of digital services, it seems the ideal time to leave behind fiat currencies and adopt digital legal tenders.

Here are the issues that CBDCs are thought to address and offer a solution as per the financial experts and central banks:

Credit and Liquidity Risk

The presence of CBDCs is going to mitigate risks that are associated with the drainage of liquidity and the credit overturn. There are many cases where financial enterprises end up filing for bankruptcy on account of issues like Bank Runs and outstanding debts.

However, since CBDCs are universally used and adopted, the chances of such risks would decrease dramatically, which would make financial enterprises more secure and stable.

Cross-border Payments

Cross-border payments require a considerable amount of time consumption and red tape. On the other hand, several companies hold a monopoly for facilitating international remittances, and they can charge hefty transaction charges for the investors.

However, with CBDCs, everyone will be able to make cross-border payments in seconds and incur small transaction costs. The CBDCs networks will make the process of transaction verification so easy that the government structure will become more efficient and accurate.

International Payments

At present, every country in the world depends on the US dollar to perform major international trades. Therefore, every nation has to reserve a hefty amount of USD regardless of the currency exchange rates.

It can be costly for nations that have lower currency value in comparison to USD to make international trades. However, using CBDCs, nations would be able to make perform international transactions without needing a foreign designated currency.

Financial Inclusion

Many people in developing countries are unable to access financial services. However, everyone has a mobile phone. When CBDCs are issued, the government will be able to offer financial services to every citizen at their fingertips, and the process of national identity may also become fully digitized using state-sanctioned digital wallets.

Public Access

At present most people depend on third-party digital payment service providers for settling their bills such as Master, VISA, etc. However, when everyone owns a digital wallet and CBDC national ID, they will be able to make direct payments which could require smaller or non-existent transaction fees.

Cost Effective

Just like the transition from metal coins to paper currency was cost-effective. The shift from paper currencies to digital payment structures is also going to save costs for the government. Central Banks will not need experts to verify paper currency authenticity or a department to look for counterfeit currencies. The government also does not need artists to create intricate currency designs and to purchase expensive dyes or specialized paper for printing new money.

Forex Shorting

There have been some controversial cases where giant financial enterprises sent a country into a forced economic crisis by shorting their legal tender. However, with the help of CBDCs, governments could exercise better control over their national currency reserves and take preventive measures to avoid incidents like forex shorting.

Can CBDCs Create New Issues for the Existing Economy?

Many Central Bank researchers have been trying to work on the possible negative outcomes of CBDC implementation. Here are some of the most important immediate issues that can arise from the introduction of CBDCs in the current economy:

Economic Shock

The most talked about concern associated with CBDCs is that they can change the economic makeup drastically. The change brought by the CBDCs could be so rapid that the existing financial structures like banking reserves, international trade banks, interest rates, CPI, and other economic factors can experience imbalance.

Therefore, government officials need to introduce these changes gradually and ensure that they can implement tools for financial management.

Commercial Stability

The arrival of Central Bank Digital Currencies or CBDCs, can send government institutions into a spiral. The government may become unable to handle the sudden spike or decline in liquidity, and therefore the government must put proper financial control apparatus in place to monitor the stability of commercial and financial infrastructure at all times.

Monetary Policies

All the current monetary policies and legislative systems are created keeping in view the fiat currency-based economy. The government needs to update the existing financial policies and legal requirements following the requirements of the wholly digitized monetary system on account of the implementation of the CBDCs.

If the government tries to apply the same monetary policies on CBDCs, it can create a raft in the financial system of the government.

Privacy and Engagement

Many people view CDBC as a dystopian nightmare. Financial experts claim that with the implementation of CBDCs, government agencies will be able to invade the privacy of their citizens in all aspects. There are some Central Banks that are considering the possibility of a private CBDC that works very much like fiat currencies.

However, at present, the government also sanctions banks and other financial enterprises to report all financial transactions that are above an assigned limit. With the introduction of CBDCs, the government will be able to easily track and monitor such transactions, which can be troublesome for citizens.


Some experts have predicted that most developed nations will stop fighting against each other on the battlefields. Rather the wars in the future are going to take place on the digital front. Governments of today set up hacking cells and try to sabotage their enemies using mass hack attacks.

When a government switches to CBDCs, it means that in case of a successful cyber-attack, the economy of the entire country can be at stake and come to an abrupt halt. Therefore, governments have to invest heavily in securing their CBDC reserves and servers to make sure that their citizens are secure at all times.

CBDCs vs Cryptocurrencies

It has already been established that both cryptocurrencies and CBDCs are quite similar to each other. However, they have some major differences. A cryptocurrency is usually a privately owned financial project, or it is part of a decentralized financial network.

On the other hand, the CBDCs are operated and controlled by a regulated financial monitor such as Central Banks. Since cryptocurrencies are decentralized therefore, they can use distributed ledger technology; in this manner, they can be stored on any server and remain under the use of the public.

However, CBDCs do not use DLT because they are private financial networks that are owned by governments and centralized financial regulators. Cryptocurrency-issuing blockchains are open sources, and they are permissioned networks.

In this manner, everyone can look at the records or the core programming of a blockchain at their discretion. However, a CBDC project is not going to be open-sourced or permissioned network. Only authorized officials would be able to look at the code and be able to interact with the server based on their authorization level.

Both CBDCs and cryptocurrencies issue digital currencies that are accessible and used by the masses. Cryptocurrencies are unregulated, and they are used for trading and other investing purposes. The CBDCs are going to be used as a unit of account from the start, and they can be used for forex trading, and they are fully regulated as legal tender.


The CBDCs are said to offer a chance for the current financial infrastructure to evolve and upgrade. However, the citizens have many concerns regarding the introduction of CBDCs. The voters should raise their concerns to the elected officials to make sure that governments can eliminate them before the introduction of CBDCs.

The only way to make CBDCs a successful project is by addressing the regulatory and commercial issues attached to them and ensuring that they are geared towards improving the lives of the citizens.

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