A 2020 Report by the Bank for International Settlements showed that 80% of the surveyed countries were working on some form of a central bank digital currency, with 10% already progressing to the development of a pilot program.

Central bank digital currencies are a recent buzzword in the finance sector. What does it mean, and why is it relevant in today’s economy?


What is a Central Bank Digital Currency?

A central bank digital currency (CBDC) is a digital token of a country’s official fiat currency. These digital tokens are issued and regulated by the country’s central bank or official monetary authority.

CBDCs have the full faith backing of the issuing government and are designed as an electronic form of money for citizens to use in digital payments and as a store of value.

The adoption of cryptocurrencies served as a wake-up call for many governments, which are used to being in full control of their country’s currencies. With cryptocurrencies, users have adopted a new form of digital currency, one that’s designed to be free from the interference and control of a central authority.

This decentralization of currencies is a driving factor behind the ongoing interest in developing central bank digital currencies as central governments want to control digital currencies in their jurisdictions.

Different countries have different reasons for developing CBDCs. For developed countries, the goal may be to improve the domestic payments systems, regulate taxes, or provide support as their societies shift to a cashless society.

In developing countries, the establishment of CBDCs may encourage the unbanked population to join the financial ecosystem and promote financial inclusion within that country.

Regulatory bodies such as the IMF have encouraged the adoption of CBDCs. In fact, according to IMF’s Managing Director Christine Lagarde, central banks can meet payment privacy, consumer protection, and financial inclusion goals by adopting CBDCs.

Unsurprisingly, The People’s Bank of China views the introduction of CBDCs as a means to improve the payment systems and make a country’s monetary policy more efficient by providing a way to track its citizen’s financial activities. As part of introducing its digital currency, China banned other cryptocurrencies in the country.

How do Central Bank Digital Currencies Work?

People haven’t really been using cash for quite a while. Our money is already digital, and to point out that your phone is your wallet is nothing new by 2022. Central bank digital currencies aim to provide faster and cheaper access to financial systems for citizens.

These wallets would be stored by the country’s central bank, thus eliminating the need for third parties currently involved in financial transactions.

CBDCs have the full backing of the issuing government, therefore, are recognized as the country’s legal tender.

In addition to providing citizens with the security and flexibility of digital currencies, governments are developing CBDCs to allow their central banks to monitor and regulate digital currency.

Difference Between Central Bank Digital Currencies and Cryptocurrencies

Both cryptocurrencies and CBDCs are built on blockchain technology, but what makes them different from each other?

From their name, you can tell that the major difference between CBDCs and cryptocurrencies is that CBDCs are issued and are the direct liability of the issuing central bank. Most cryptocurrencies are decentralized and therefore not the government’s liability; neither are they backed by the government.

Since CBDCs are created and owned by the government, other parties cannot create them. This creates a monopoly in money creation that does not exist with cryptocurrencies.

Any institution or individual with the right tools, resources and technology can launch a cryptocurrency.

Cryptocurrencies are built on decentralized ledger technology. In Bitcoin, for example, computers on the bitcoin blockchain network must agree on the validity of transactions for them to be added to the blockchain. Bitcoin’s Proof-of-work consensus algorithm controls the creation of new coins.

Types of Central Bank Digital Currencies

Countries can develop one or both of these types of central bank digital currencies:

  1. Wholesale CBDCs
  2. Retail CBDCs
  3. Wholesale CBDCs

Wholesale central bank digital currencies are strictly available to banks that have a reserve with a country’s central bank. These CBDCs are designed to improve payments and the efficiency of securities settlement while reducing counterparty liquidity and credit risks.

A majority of the countries considering CBDCs are more inclined to wholesale CBDCs as opposed to retail CBDCs as they introduce affordability, safety, and speed to existing wholesale financial systems. Wholesale CBDCs are more favorable to developed economies. Some popular examples of wholesale CBDCs include CADcoin (Canada), Project Ubin (Singapore), and Project Stella (Japan).

  1. Retail CBDCs

Retail CBDCs are those issued to the general public. They are based on DLT, which gives them anonymity, constant availability, and traceability. Most emerging economies considering CBDCs are more likely to adopt retail CBDCs as they promote financial inclusion and accelerate the shift to a cashless society.

Shifting to a cashless economy for these economies presents major benefits as they minimize the costs associated with printing and handling paper money and coins. Another benefit of retail CBDCs is the ease of charging interest.

Retail CBDCs would work in the following ways:

  • An originator initiates the transaction, which is verified and validated between the originator and the receiver
  • Once validated, the payment data is matched and processed in the clearance process
  • Finally, the funds are transferred between the transacting parties, and the transaction is settled

However, the anonymity that comes with retail CBDCs opens up opportunities for fraudulent transactions to flourish.

Advantages of Central Bank Digital Currencies 

Some of the potential advantages of adopting a central bank digital currency include:

  • Lower transaction costs
  • Increased technological efficiency by removing the need for third parties such as banks. Such efficiency allows users to send and receive money in real-time. It also reduces risks associated with working with these third parties, such as failed transactions and the problem of payment verification.
  • CBDCs will foster financial inclusion allowing citizens of all economic statuses to access free or low-cost accounts.
  • Using CBDCs allows a central bank to track the location of every unit of the currency thus reducing the occurrence of illicit activity. Such tracking measures are important in dealing with tax collection issues as well as financial criminal activity.
  • Since proposed CBDCs will be based on blockchain technology, a transaction can be verified, thus preventing short-changing issues inherent with cash transactions.
  • CBDCs could provide a new tool for monetary policy transmission thus allowing more direct control of a country’s monetary supply.
  • The adoption of CBDCs would encourage competition and innovation by making it easier for new establishments in the financial industry to provide payment accounts.

Disadvantages of Central Bank Digital Currencies 

The adoption of central bank digital currencies, however, raises several concerns. These include:

  • Using CBDCs allows a central bank to track the location of every unit of the currency, thus gaining unprecedented access to personal financial data.
  • The use of CBDCs is restricted to the country issuing the currency unless countries agree on recognizing each other’s CBDCs.
  • CBDCs will become direct competitors of payment service providers and banks.

Examples of Central Bank Digital Currencies

Digital Renminbi (China)

Digital Renminbi or digital RMB (Digital Currency Electronic Payment) is China’s central bank digital currency. It is the world’s first digital currency to be issued by a major economy.

The digital RMB is recognized as legal tender in China and has the same value as other Chinese Yuan. This CBDC is designed to be used as an instantaneous means of payment domestically and internationally. It is designed to be cheaper and faster than existing financial systems.

In addition to launching the currency, the country also released an e-CNY wallet on Apple and Xiaomi app stores.

China began working on its CBDC in 2014 to replace currently circulating coins and banknotes. The CBDC is currently in circulation in select cities in China, with the release date for the entire country not yet known.

Tech giants like Tencent and Alibaba have already jumped on board, with WeChat supporting the digital Yuan. Alipay, Alibaba’s payment system is also a partner of the digital yuan.

The Sand Dollar

The Central Bank of The Bahamas issued the country’s CBDC in October 2020 as a digital iteration of the Bahamian Dollar. The Sand Dollar is recognized as a legal tender with the same legal status as the Bahamian Dollar.

Citizens can access their Sand Dollar via a mobile application or a physical payment card. The Central Bank of the Bahamas launched the Sand Dollar Pilot program in 2019 to create speed, efficiency, and security of payment while reducing counterfeiting, money laundering, and other forms of fraud prevalent with cash.


In the UK, the Bank of England and the Treasury have plans to launch a CBDC, with the earliest possible launch date likely to be somewhere in the second half of the decade.

Currently, the House of Lords Committee does not see a convincing case for the development of a CBDC, citing that the establishment of one at present could create challenges to the protection of –privacy and the country’s financial stability.

According to the House of Lords committee, a CBDC would be inevitable, but the safeguards required to protect the privacy of users and prevent financial instability would need to be installed before launching a CBDC.

E-Krona (Sweden)

Sweden began its e-krona project in 2017. The country began with reviewing the need for a digital currency and an evaluation of proposals to identify the most suitable technology and the legal considerations that the Riksbank would need to consider to issue an e-krona.

The Riksbank began more work on the e-krona project in 2020 to test the functionality of the e-krona in a pilot project. The work is in collaboration with Accenture. The project aims to understand how the e-krona would work and the possibilities.

The Riksbank completed the first phase of the project in April 2021 with plans in place to continue working on the project in 2022, focusing on:

  • Investigating the need and effects of an e-krona on Sweden’s economy
  • Testing the technical solution for the e-krona
  • Investigating the effects of e-krona on Swedish legislation and the Riksbank role
  • Comparing various technical solutions and models for an e-krona
  • Preparing for the possible procurement of an issuable e-krona

Digital Euro (European Union)

The Governing Council of the European Central Bank (ECB) launched the digital euro project in 2021. The project began with the investigation phase, which is expected to last 24 months. According to ECB President Christine Lagarde, “is to ensure that in the digital age citizens and firms continue to have access to the safest form of money, central bank money.”

During the investigation phase, the project will address issues regarding the design and distribution of a CBDC. This includes:

  • Meeting the need of Europeans
  • Preventing illicit activity
  • Preventing undesirable impact on financial stability and monetary policy
  • Identify changes needed to the EU legislative framework to support the digital euro
  • Assess the impact of the digital euro on the market, privacy, and overall economy
  • Define a business model for intermediaries in the digital euro ecosystem

The investigation phase of the digital euro will involve focus groups, prototyping, and conceptual work to create a functional system based on user needs.


Jamaica recently completed the pilot program for its CBDC. Following the successful pilot, the Bank of Jamaica expects to roll out its CBDC in Q1 2022.

In the pilot program, the Bank of Jamaica minted J$230 million (approximately US$1.5million) and issued them to deposit-taking financial institutions and authorized payment providers. The bank worked with Ireland-based technology firm eCurrency Mint on the CBDC project.


The Central Bank of Mexico announced plans to issue a CBDC by 2024 to improve financial inclusion. Banxico announced its plans in a tweet. Earlier in December 2021, the governor of Banxico had said that the central bank was analyzing the launch of a central bank digital currency.

Other countries working on central bank digital currencies include:

  • The Marshall Islands
  • Singapore
  • Thailand
  • South Korea
  • Japan
  • Canada

Key Takeaways

As the world becomes increasingly digital, countries are launching or considering the launch of digital currencies that would provide their citizens with a digital legal tender. Countries like The Bahamas and China have already launched their CBDCs with others still investigating the need and requirements for such CBDCs to become successful while improving their economies.

Depending on the country, the adoption of a CBDC might affect your ability to invest in crypto. For instance, China banned cryptocurrencies in 2021, months before officially launching its CBDCs. In countries where cryptocurrencies are still legal, CBDCs and crypto tokens can co-exist.