Central Bank Digital Currency: A New Era of Money

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Central Bank Digital Currency: A New Era of Money

Money is one of the most important inventions in human history. It facilitates exchange, store of value, and unit of account. However, money is also constantly evolving, adapting to the changing needs and preferences of society. From metal coins to paper notes, from bank deposits to electronic payments, money has undergone several transformations over time. The latest innovation in money is central bank digital currency (CBDC), a new form of money that is issued and regulated by a central bank, and that has the same legal status as fiat currency.



What is CBDC and how does it work?

CBDC is the digital form of a country’s sovereign currency. It is not a cryptocurrency, nor a virtual currency, nor a stablecoin. It is a digital token that represents legal tender. It can be used to make payments, store value, and perform other functions of money, both online and offline. CBDC can be designed in different ways, depending on the objectives and preferences of the issuing central bank. However, some common features of CBDC are:

  • It is issued and backed by the central bank, and thus carries no credit or liquidity risk.
  • It is denominated in the same unit as the existing fiat currency, and thus maintains price stability and monetary sovereignty.
  • It is accessible to all eligible users, and thus promotes financial inclusion and digital literacy.
  • It is interoperable with other forms of money and payment systems, and thus enhances efficiency and competition.
  • It is secure and resilient, and thus protects users from fraud, cyberattacks, and system failures.


CBDC can be implemented using various technologies, such as distributed ledger technology (DLT), centralized database, or a hybrid approach. The choice of technology depends on the trade-offs between scalability, privacy, and security. CBDC can also be issued in different forms, such as account-based or token-based, wholesale or retail, and general purpose or specific purpose. The choice of form depends on the trade-offs between convenience, anonymity, and regulation.



Why do central banks want to issue CBDC?

Central banks have various motivations for issuing CBDC, depending on their specific circumstances and policy goals. Some of the potential benefits of CBDC are:

  • It can provide a safe, reliable, and universal means of payment, especially in the context of declining cash usage, increasing digitalization, and growing demand for online and cross-border transactions.
  • It can enhance the effectiveness of monetary policy, by enabling direct transmission of interest rates, providing a new policy tool, and facilitating negative interest rates.
  • It can support financial stability, by reducing the reliance on private intermediaries, diversifying the payment landscape, and mitigating systemic risks.
  • It can foster innovation and competition, by creating a level playing field for new entrants, lowering the barriers to entry, and stimulating the development of new products and services.
  • It can improve financial integrity, by strengthening anti-money laundering and counter-terrorism financing measures, increasing transparency and traceability, and reducing tax evasion and illicit activities.



What are the challenges and risks of CBDC?

CBDC is not a panacea, and it also entails significant challenges and risks, both for central banks and for society. Some of the potential drawbacks of CBDC are:

  • It can pose operational and technical challenges, such as designing and testing the CBDC system, ensuring interoperability and compatibility, and managing cyber resilience and data protection.
  • It can have unintended consequences for financial intermediation, such as disintermediating banks, disrupting the deposit and lending markets, and affecting the profitability and liquidity of financial institutions.
  • It can raise legal and regulatory issues, such as defining the legal tender status, establishing the eligibility and identity criteria, and harmonizing the cross-border and cross-jurisdictional frameworks.
  • It can have social and behavioral implications, such as affecting the public trust and confidence in money, influencing the preferences and expectations of users, and impacting the privacy and inclusion of individuals.



What is the current status and future outlook of CBDC?

CBDC is a rapidly evolving and complex topic, and there is no one-size-fits-all solution. Different central banks have different approaches and perspectives on CBDC, depending on their specific contexts and objectives. According to a survey by the Bank for International Settlements (BIS), as of 2022, 86% of central banks were actively researching CBDC, 60% were experimenting with CBDC, and 14% were deploying CBDC. Some of the leading examples of CBDC projects are:

  • The e-CNY in China, which is the first major economy to launch a retail CBDC, and which aims to provide a convenient, low-cost, and inclusive alternative to cash and other payment methods.
  • The e-Krona in Sweden, which is motivated by the rapid decline of cash usage, and which seeks to preserve the public access to central bank money in a digital form.
  • The Sand Dollar in the Bahamas, which is driven by the need to improve financial inclusion and resilience, and which offers a digital equivalent of the Bahamian dollar that can be used across the archipelago.

The future of CBDC is uncertain and depends on various factors, such as the technological developments, the market dynamics, the policy objectives, and the user preferences. However, CBDC is likely to play an important role in the future of money, as it represents a new paradigm of central bank money that is digital, accessible, and innovative. CBDC is not only a technical innovation, but also a policy innovation, that has the potential to transform the way people and businesses interact with money.



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