The Future of Money: Introduction to Central Bank Digital Currency


 Over the past year, a number of central banks from around the world have announced launching digital versions of their fiat currencies which have a store of value and can be used as means of payment. According to the wiki, Central bank digital currency (CBDC, also called digital fiat currency or digital base money) is the digital form of fiat money - a currency established as money by government regulation or law. Therefore, the digital currency would be issued and managed by the central bank.

Many central banks have explored the projects to study the potential for issuing Central Bank Digital Currencies. Here are countries that have advanced their digital currency projects. Cambodia’s central bank is readying to launch its blockchain-based, peer-to-peer money platform within the next few months, Phnom Penh Post reports.[1] The Bank of England has officially announced that it will examine the potential benefits of implementing a digital currency.[2] Indian non-for-profit organization, the National Institute for Smart Government (NISG), has proposed a digital rupee in its draft National Strategy on Blockchain.[3] The Monetary Authority of Singapore (MAS) and the Bank of Canada have jointly conducted an experiment on cross-border and cross-currency payments using CBDCs.[4] 


What is Central Bank Digital Currencies?

CBDC is a digital extension of a central bank’s medium of exchangeable to instantaneously and permanently settle transactions between parties tied to the central bank on the network. Unlike volatile cryptocurrency, the central bank is able to remove credit risk and ensure stability by guaranteeing the value of the CBDC, exactly like paper money.[5] CBDC can be characterized by the following:

Digital assets. CBDC is a digital asset, meaning that it is accounted for in a single ledger (distributed or not) that acts as the single source of truth.

Central bank-backed and managed. CBDC represents a claim against the central bank, just as banknotes do. The supply of CBDC is fully controlled and determined by the central bank.

When discussing options of usages of CBDC, we can segregate CBDC into retail - meaning payment between non-financial institutions, corporations or individuals like banknotes; and wholesale CBDC - meaning payments between banks and other entities that have accounts at the central bank itself like settlement systems. According to the IBM Blockchain World Wire report, in the wholesale domain, the prospects for digital payment or electronic token exchange appear capable of delivering significant benefits while avoiding most of the difficulties inherent in consumer-focused retail CBDCs.[6]

At Davos in 2020, ConsenSys published a whitepaper that presents a practical proposal for central bank digital currencies on the Ethereum blockchain: “Central Banks and the Future of Money.” [7] We still have to see CBDC projects’ real-world implications. In 2020, dozens of projects are going into production and many believe CBDC can offer benefits for central banks and the financial ecosystem. The developing countries with poor infrastructure might find a CBDC useful to improve inclusion and lower costs associated with the handling of cash.


  1. In Nepal, the situation of financial exclusion is alarming. Nearly 60 percent of the total population are still unbanked and financially excluded.[8] But, the mobile penetration has crossed the 100 percent mark, the number of mobile distributions surpassed the population of the country.[9] CBDC may provide a safe and liquid government-backed means of payment to the public that does not require individuals to even hold a bank account. If implemented appropriately, CBDC can encourage trust in mobile financial services and ease the liquidity constraints of mobile-money agents. If implemented incorrectly, CBDC risks not only exacerbating contextual inequalities like digital, financial and economic disparities but also intensifying the perceived complexity of mobile money and exposing certain unstructured supplementary service data (USSD) providers to cyber-security threats.[10] This could potentially be most meaningful for the unbanked, underbanked, and underserved and help in SDG 1: end poverty by 2030.


  1. Digital tokens have transformed the financial ecosystem by bringing massive efficiencies and cost savings to financial systems. For example, central banks will find it easier and efficient  to issue digital cash compared to physical cash. The CBDC could easily be distributed on mobile phones to include the unbanked population. CBDC would make large inter banking settlements faster, secure and real-time with no settlement risk because unlike Real-Time Gross Settlement (RTGS) systems, they don’t have to rely on batch processing overnight and require collateral to cover the outstanding positions.
  1. Central banks could save costs associated with minting, issuing and logistics involved in physical notes and coins. This has the potential to increase the central bank’s seigniorage income.  
  1. Developing nations are more likely to favor faster transactions compared to developed nations. In Nepal, migrant workers find informal channels more convenient to send their earnings back home as the levied charges are comparatively low, faster and their earnings are directly delivered at the homes of their families. Similarly, workers get higher exchange rates while sending money through informal channels.[11]  Digital currency payments have the ability to be sent almost instantly from a sender to a receiver at a fraction of the cost of a regular (international) bank payment. The implementation of CBDC would facilitate more cost and time-efficient settlements of cross-border financial transactions.
  1. The central banks are concerned with the use of cryptocurrencies in capital flight and tax evasion. This is a valid point as cryptocurrencies are unregulated. A CBDC makes it feasible for a central bank to keep track of the exact location of every unit of the currency. This makes tax avoidance and tax evasion much more difficult, since it would become impossible to use methods such as offshore banking and unreported employment to hide financial activity from the central bank or government. It can also make it much easier to trace criminal activities (by observing financial transactions and activities). This can make money laundering harder, and it would often be straightforward to instantly reverse a transaction and return money to the victim of the crime.
  1. If central banks do not issue their own digital currency, privately issued payment tokens will be the only choice for payments. Then they will risk losing some of their ability to manage their monetary and financial policy.  CBDC would mitigate this risk by giving central banks direct influence over all or a portion of the money supply in digital markets. CBDC would open new tools for central banks to implement retail-oriented interventions like tax breaks. It could be made more efficient in AML enforcement.


While there are many benefits to CBDCs, many technological and policy challenges need to be tackled and risks need to be addressed. But, the idea of a central bank digital currency has been increasing worldwide to help improve payment systems and cross-border transactions.














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