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What Are CBDCs (Central Bank Digital Currencies)?

Central Bank Digital Currency image


What Are CBDCs (Central Bank Digital Currencies)?

According to Investopedia, central bank digital currencies (CBDCs) are digital tokens, similar to cryptocurrency, issued by a central bank. They are pegged to the value of that country’s fiat currency. Because many countries are developing CBDCs, and some have even implemented them, it is important to understand what they are and what they mean to society and this article does just that.

Physical & Digital Currencies

Traditionally, fiat money came in the form of banknotes and coins, but technology has allowed governments and financial institutions to supplement physical fiat money with a credit-based model in which balances and transactions are recorded digitally.

With the introduction and evolution of cryptocurrency and blockchain technology governments and central banks worldwide are exploring the possibility of using government-backed digital currencies which, if, and when, implemented, would have the full faith and backing of the government that issued them, just like fiat money.

Here’s What the Introduction of CBDCs Would Do

  • Provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security.
  • Decrease the maintenance a complex financial system requires.
  • Reduce cross-border transaction costs.
  • Provide those who currently use alternative money transfer methods with lower-cost options.
  • Reduce the risks of using digital currencies in their current form.
    • Cryptocurrencies are highly volatile, with their value constantly fluctuating and this volatility could cause severe financial stress in many households and affect the overall stability of an economy.
    • CBDCs, backed by a government and controlled by a central bank, would provide households, consumers, and businesses with a stable means of exchanging digital currency.

The Two Types of CBDCs

  1. Wholesale CBDCs are similar to holding reserves in a central bank. The central bank grants an institution an account to deposit funds or use to settle interbank transfers. Central banks can then use monetary policy tools such as reserve requirements or interest on reserve balances to influence lending and set interest rates.
  2. Retail CBDCs are government-backed digital currencies used by consumers and businesses and they eliminate the risk that private digital currency issuers might become bankrupt and lose customers’ assets. There are two types of retail CBDCs. They differ in how individual users access and use their currency:
    • Token-based retail CBDCs are accessible with private/public keys. This method of validation allows users to execute transactions anonymously.
    • Account-based retail CBDCs require digital identification to access an account.

Critical Issues Of CBDCs

The Federal Reserve has published a report on what it believes are critical issues a CBDC meets, and issues that need to be addressed before one can be successfully designed and implemented, as follows:

  • Issues Addressed By CBDCs
    • Free from credit and liquidity risk
    • Cross-border payment improvements
    • Supports the international role of the dollar
    • Financial inclusion
    • Expands access to the general public
  • Issues That Need Addressing
    • Financial structure changes
    • Financial system stability
    • Monetary policy influence
    • Privacy and protection
    • Cybersecurity

Issues a CBDC Addresses Explained

  • A CBDC:
    • Eliminates the third-party risk of events like bank failures or runs. Any residual risk that remains in the system rests with the central bank.
    • Lowers the high cross-border transaction costs by reducing the complex distribution systems and increasing jurisdictional cooperation between governments.
    • Supports and preserves the dominant position of the USD as the most used currency in the world.
    • Removes the cost of implementing a financial structure within a country to bring financial access to the unbanked population.
    • Establish a direct connection between consumers and central banks, thus eliminating the need for expensive infrastructure.

Issues a CBDC Creates Explained

  • The financial structure of the U.S. could drastically change. How a change would affect household expenses, investments, banking reserves, interest rates, the financial services sector, or the economy is unknown.
  • The effects a switch to CBDC would have on a financial system’s stability are unknown. For example, there may not be enough central bank liquidity to facilitate withdrawals during a financial crisis.
  • Central banks implement monetary policy to influence inflation, interest rates, lending, and spending, which in turn affects employment rates. Central banks will need to ensure they have the tools they need to positively influence the economy.
  • Privacy is one of the most significant drivers behind cryptocurrency. CBDCs would require an appropriate amount of intrusion by authorities to monitor for financial crimes; monitoring is also important because it supports efforts to combat money laundering and the financing of terrorism.
  • Cryptocurrencies have been the target of hackers and thieves and a CBDC would likely attract the same crowd of thieves, so efforts to prevent system penetration and theft of assets and information would need to be significant.

CBDCs vs. Cryptocurrencies

  • The cryptocurrency ecosystems provide a glimpse of an alternate currency system in which cumbersome regulations do not dictate the terms of each transaction.
    • They are hard to duplicate or counterfeit and are secured by consensus mechanisms that prevent tampering. Central bank digital currencies are designed to be similar to cryptocurrencies, but they may not require blockchain technology or consensus mechanisms.
  • With cryptocurrencies being unregulated and decentralized with their value being dictated by investor sentiments, usage, and user interest, they are volatile assets more suited for speculation, which makes them unlikely candidates for use in a financial system that requires stability.
    • CBDCs mirror the value of fiat currency and are designed for stability and safety.
  • CBDCs are not cryptocurrencies. CBDCs are controlled by a central bank, whereas cryptocurrencies are almost always decentralized, meaning a single authority cannot regulate them.

CBDCs at a Glance

Many central banks have pilot programs and research projects intending to determine the viability and usability of a CBDC in their economy. As of March 2022, there were nine countries and territories that had launched CBDCs, namely:

  1. The Bahamas
  2. Antigua and Barbuda
  3. St. Kitts and Nevis
  4. Monserrat
  5. Dominica
  6. Saint Lucia
  7. St. Vincent and the Grenadines
  8. Grenada
  9. Nigeria
    and there are 80 other countries with CBDC initiatives and projects underway.
    • As of March 2022, there is no U.S. CBDC but the Federal Reserve and its branches are researching CBDCs and ways to implement them in the U.S. financial system, and President Biden has ordered the development of a national strategy on digital currencies while
    • the Bank of England is still investigating integrating CBDC into its financial system and
    • the Bank of Canada continues to research implementing CDBC.

    Editor’s Note: Much of the content for this article was sourced from in an article by Shobhit Seth which was edited, abridged, and reformatted to provide the reader with a faster and easier read.

    Related Articles:

    1. China’s Launch Of World’s First Government-backed Cryptocurrency (e-Yuan) Puts USD As World’s Reserve Currency At Risk

    China has taken an unprecedented step toward cryptocurrencies and blockchain technology and launched the world’s first government-backed cryptocurrency on November 2nd, 2021, and, if the digital yuan succeeds, and weakens the USD too much, the dollar’s status as the global reserve currency could also be at stake.

    What we’re talking about here is how payments from one party to another are made behind the scenes–debit cards, credit cards, direct deposit, even old-fashioned paper checks, and China is taking the lead in moving to a central bank digital currency.
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    Lorimer Wilson is an economic & financial commentator who has written numerous articles on economics, finance, precious metals, and rare earth metals. He is the Editor of that provides a selection of the internet’s best finance articles in an edited, reformatted and abridged format to ensure a fast and easy read. He is a frequent contributor to

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