Central Bank Digital Currencies

Central Bank Digital Currencies (CBDCs) 2023 – An Ultimate guide to the future of money

Money has come a long way since its origins as shells, stones, and beads. From coins to paper banknotes to digital payments, the evolution of money has been driven by advancements in technology and changing economic needs. We now stand at the cusp of another major innovation in the history of money: central bank digital currencies (CBDCs).

CBDCs are digital forms of fiat money issued by central banks as legal tender. While cryptocurrencies like Bitcoin are created and controlled in a decentralized manner, CBDCs would be centralized, regulated digital currencies backed by sovereign states.

Several countries around the world are now exploring and piloting CBDCs, recognizing their potential to improve monetary policy and financial stability, facilitate cross-border payments, counter threats from private cryptocurrencies, and promote financial inclusion.

However, CBDCs also come with risks and implementation challenges. The future of CBDCs is unclear, contingent on a complex interplay of technological feasibility, policy goals, legal frameworks, and public acceptance. This article serves as a primer on CBDCs – their motivation, benefits, risks, design choices, and the key issues central banks will have to grapple with on the road to their potential launch.

130 countries, representing 98 percent of global GDP, are exploring a CBDC. (Source: Atlantic Council)

What Are CBDCs and Why Do We Need Them?

Central bank digital currencies are the digital form of fiat money issued by a nation’s monetary authority or central bank. While fiat money traditionally exists in physical form as banknotes and coins, CBDCs would be digital tokens representing the same value in digital wallets and applications. Like cash, CBDCs would represent a direct liability of the central bank and allow direct access to central bank money.

CBDCs are fundamentally different from the private cryptocurrencies that have proliferated in the past decade. Cryptocurrencies like Bitcoin operate on public blockchains in a decentralized manner, beyond the control of any single entity. CBDCs, in contrast, would be centralized – created, regulated, and supported by sovereign states through their central banks. They combine the digital, borderless nature of cryptocurrencies with the stability and trust of traditional fiat currencies.

Several factors are converging to make CBDCs an idea whose time has come:

  • The decline of cash usage in many countries, with digital payments gaining ground.
  • The emergence of private cryptocurrencies like Bitcoin and stablecoins, necessitated an official digital currency alternative.
  • The need for faster and cheaper cross-border payments and financial inclusion.
  • Technological advancements enable the issuance of digital fiat money.

In response, central banks have begun exploring and trialing CBDCs across both advanced and emerging economies. The next section delves deeper into the motivations behind this growing interest in CBDCs worldwide.

Declining Cash Usage

Cash usage has been declining in many advanced and emerging economies, with digital payment methods like credit cards, online wallets, and mobile money gaining ground. For instance, cash payments accounted for just 15% of consumer transactions in Sweden in 2018, down from 39% in 2010. In South Korea, the share of cash transactions dropped from 20.8% to 12.9% between 2016 and 2020.

As societies progressively shift towards electronic payments, central banks risk losing direct engagement with citizens through cash issuance. CBDCs can allow central banks to be present in the new digital payment sphere, providing access to risk-free central bank money in digital wallets just as they have traditionally done with physical banknotes.

Threat from Cryptocurrencies

Threat from Cryptocurrencies

The launch of Bitcoin in 2008 opened the floodgates for cryptocurrencies that operate outside the traditional financial system. There are now over 10,000 cryptocurrencies in existence with a total market cap of over $1 trillion, with new coins and tokens emerging frequently through initial coin offerings (ICOs).

While early cryptocurrencies were used largely for speculative investment and illicit transactions, recent focus has shifted to “stablecoins” – cryptocurrencies pegged to fiat currencies like the US dollar. Private stablecoins like Tether and USD Coin aim to become digital equivalents of cash, usable for everyday spending and transfers.

The growing use of cryptocurrencies for payments raises concerns for central banks about monetary sovereignty, financial stability, and their ability to execute monetary policy. Issuing CBDCs could be a strategy to counter these threats by providing the public with a regulated digital currency alternative to volatile cryptocurrencies.

Global CBDC projects increased from 86 in 2020 to 108 in 2022. (Source: BIS

Enabling Faster Payments

Existing cross-border payment systems and correspondent banking relationships are often slow, opaque, and costly. Settlement can take days through multiple intermediaries, nostro and vostro accounts, and message-based communication between banks.

CBDCs combined with blockchain technology have the potential to enable real-time international payments and settlements between monetary authorities. Project Dunbar, a collaboration between the Reserve Bank of Australia, Singapore’s monetary authority, and the Bank of International Settlements, recently trialed cross-border transactions using CBDCs on a shared platform. Such initiatives could dramatically improve speed, transparency, and costs in global payments and remittances.

Transaction costs for cross-border payments average around 6.3% of the amount sent. (Source: World Bank

Promoting Financial Inclusion

1.7 billion adults globally lack access to formal financial services and accounts. Financial inclusion is both a moral imperative and an economic necessity for driving development.

As digital forms of central bank money, CBDCs can expand access to the financial system for the underserved. Offline functionality can expand reach to populations without internet connectivity. Programmability features can also be used for customized distribution of government stimulus and social welfare payments to targeted groups.

While CBDCs are no silver bullet, they can be designed as part of a broader strategy to make financial services more accessible to individuals and communities currently left behind.

1.4 billion adults globally remain unbanked, lacking access to basic financial services. (Source: World Bank

How Do CBDCs Work? Design Choices and Models

Central banks face several design choices in developing CBDCs, leading to different potential models:

Token- vs Account-Based

Token-based CBDCs operate like digital cash tokens that can be exchanged directly between parties. Account-based CBDCs rely on segregated accounts at the central bank which users can debit from.

Token-based systems prioritize privacy but may face challenges in compliance, security, and transfer limits. Account-based models enable better monitoring for compliance but compromise on privacy.

Interest-bearing vs. Non-Interest-Bearing

Interest-bearing CBDCs pay interest to holders, while non-interest-bearing do not. Interest can incentivize adoption and steer usage away from cash, but may disrupt bank funding models.

Universal vs Wholesale

Universal CBDCs are available widely to the general public for retail transactions. Wholesale CBDCs are restricted to select financial institutions for interbank payments and settlements.

Most central banks are focusing on wholesale CBDCs currently, with only a few considering direct issuance to consumers. Wholesale CBDCs involve less disruption but provide fewer benefits to end-users.

Hybrid Models

Hybrid CBDC models blend aspects of the above design choices. For instance, a two-tiered model may combine a wholesale CBDC for banks with intermediary financial institutions issuing a retail token to consumers.

Such hybrid models balance efficiency and innovation from the private sector with strong oversight from central banks.

Benefits and Use Cases of CBDCs For:

CBDCs have a range of potential benefits for various stakeholders:

Central Banks

  • Preserve monetary sovereignty in the face of cryptocurrency adoption
  • Execute monetary policy more effectively with programmable CBDCs
  • Gain real-time economic data through analysis of CBDC transactions
  • Reduce settlement risks and costs in interbank payments
  • Enable cross-border payments and remittance transfers

Commercial Banks

  • Access central bank money for improved liquidity management
  • Faster retail and international payment settlement
  • Cost savings from streamlined processes
  • New revenue opportunities as intermediaries and service providers


  • Convenient digital payment instrument usable anywhere
  • Lower transaction fees compared to cards and wallets
  • Access to central bank-backed digital money
  • Financial inclusion of the unbanked or underserved


  • Direct disbursement of government transfers and stimulus
  • Reduced costs of cash printing, storage, and handling
  • Better traceability for tax purposes and law enforcement
  • New monetary policy levers to stabilize the economy


  • Faster invoice generation, payment, and reconciliation
  • Potential smart contract automation of business processes
  • New customer base among underbanked demographics
  • Enhanced cross-border commerce and supply chain integration

CBDCs can enable a broad range of new applications and use cases beyond peer-to-peer payments, including programmable money, embedded finance, automated tax filing, autonomous transactions, and more.

Risks and Challenges With CBDCs

Despite their promise, CBDCs also come with considerable risks and implementation challenges:

Disintermediating Banks

If businesses and households can hold central bank money directly, commercial banks may see significant outflows of deposits into CBDCs. This can restrict their ability to lend and generate profits.

Financial Stability Risks

Easy conversion between commercial bank money and CBDC could facilitate bank runs during periods of stress. Placing limits on CBDC convertibility could mitigate this.

Privacy Concerns

The central bank has access to all transaction data on CBDCs. Appropriate legal safeguards need to be in place to protect privacy.

Cybersecurity and Operational Risks

As critical digital infrastructure, CBDC systems could face cyberattacks, hacking, and operational failures. Robust security protocols are essential.

Global Standards and Interoperability

Effective cross-border use of CBDCs requires common standards and seamless interoperability between CBDC systems of different nations.

Monetary Implications

Depending on design choices, CBDCs can have complex effects on the broader money supply, bank reserves, and monetary policy transmission.

Careful technical, economic, and policy analysis is vital for central banks to harness the benefits of CBDCs while mitigating the attendant risks.

The Road Ahead for CBDCs

While global interest in CBDCs is rising, many open questions remain about if and how they will be implemented. Some key factors that will shape the CBDC landscape moving forward are:

Technological Maturity

Most CBDC pilots have been limited in scope and scale. Production-grade systems will need to meet high throughput, security, and performance requirements. Central banks may collaborate with technology partners and digital currency experts to develop robust CBDC platforms.

Policy Objectives

The design priorities for CBDCs will depend on the specific policy goals of central banks. Monetary sovereignty, financial inclusion, payment efficiency, or other aims will drive technical architecture and access considerations.

Legal Frameworks

The legal status of CBDCs needs to be established, including implications for commercial banking regulation, privacy laws, consumer protection, and contracts. Appropriate legislation will need to accompany CBDC rollout.

User Acceptance

Mainstream consumer adoption depends on secure and convenient access to CBDCs through interfaces they are familiar with, like mobile apps and wallets. User education and onboarding will be crucial.

Global Cooperation

Collaboration between central banks, multilateral institutions, and standard-setting bodies for interoperable CBDCs and seamless cross-border flows will determine the future of international payments.

While CBDCs hold substantial promise, they require careful analysis, design, and governance. Their eventual impact will depend on how these uncertainties are navigated by central banks and policymakers in the years ahead.


Central bank digital currencies represent a historic opportunity to shape the next chapter of money by harnessing novel technologies for the public good. Mindfully leveraged, CBDCs could make monetary policy more precise and effective, transform payments globally, safeguard financial stability, protect consumer privacy, enhance operational efficiency, and drive financial inclusion.

Yet CBDCs also come with sizeable challenges and open questions. Their design demands careful balancing of complex tradeoffs across multiple dimensions. Thoughtful regulation and governance frameworks are needed to manage risks and steer adoption. Ultimately, the promise of CBDCs can only be realized through considered and coordinated efforts between central banks, governments, technology partners, and other stakeholders.

Money has evolved across millennia from physical to digital forms. As it stands on the cusp of another metamorphosis, the potential of CBDCs represents both opportunity and responsibility. When approached with wisdom, purpose, and collaboration, CBDCs could profoundly enrich how money is used worldwide for generations to come.



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