- stands for Central Bank Digital Currency which means central bank digital currency, i.e. digital form of fiat money. is an electronic record or token of a country's official currency. That is, it will be issued and regulated by the country's central bank or monetary authority. And they are trusted by the government.

The CBDC will simplify the implementation of fiscal and monetary policy and promote financial inclusion in the economy by bringing non-bank funds into the financial system. And since they are a form of fiat currency, they may take away a bit of privacy from citizens. CBDCs are in different stages of development in different countries around the world.

What is CBDC?

How CBDC Works

Fiat money or fiat money is a term for currency issued by the government of a country. It comes in the form of banknotes and coins and is considered a legal form of payment for goods and services. And CBDC is the digital form of fiat money. That is, it is guaranteed by the government just like fiat money.

So, CBDC will work exactly like fiat money. Its goal is to provide convenience and technical security for users as well as regulate circulation and reserves of the traditional banking system. They are designed to act as a bank account, store of value, and means of payment for everyday transactions.

As of October 2011, 83 countries around the world are researching CBDCs for various reasons. Eg:

  • Sweden's Riksbank is working on developing an electronic krona called the e-krona because cash transactions in the country are greatly reduced.
  • The US wants to have CBDC in the monetary system to enhance the nationwide payment system.

Developing countries have many other reasons. India, for example, has a large population of unbanked people. Therefore, it is very expensive to build the physical infrastructure to bring non-bank money into the financial system. But establishing a CBDC can promote financial inclusion for the national economy.

Types of CBDC

There are two types: wholesale (wholesale) and retail (retail).

Wholesale CBDC

Wholesalw CBDC is used by financial institutions and banks to make and pay for transactions. This type of CBDC is like a traditional central bank reserve.

One type of wholesale CBDC transaction is an interbank settlement. This transaction involves the transfer of assets or money between two banks and is subject to a few specific regulations. This transfer comes with counterparty risk (which is the risk in case the counterparty becomes insolvent) in the RTGS (real-time compounding) payment system.

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The digital currency's ledger-based system allows conditions to be set, so the money transfer order cannot be executed if the given conditions are not met. Wholesale CBDC can also expedite and automate cross-border transfers.

RTGSs operate mostly in countries with a common legal background and a common currency. The wholesale CBDC's distributed ledger technology (DLT) can make cross-border money transfers fast.

Retail CBDC

Wholesale CBDC is used in transactions between banks, retail CBDC is used in the consumer community. They eliminate the risk of intermediaries i.e. the risk of the bank becoming illiquid and unable to repay customer deposits.

There are two types of retail CBDCs depending on how they reach the user:

Based on value or cash: This approach is through a fake digital wallet. This wallet is identifiable on one public and similar to cash transactions, transactions on these wallets will also be difficult to identify the parties involved in such transactions. According to Riksbank, it is easier and faster to develop a value- or cash-based CBDC system than a tokenized CBDC.

Based on account or token: This is similar to access to an account provided by a bank. As a result, the intermediary would require the recipient of the transaction to verify their identity and monitor illegal activities and payments between accounts. Private data will not be made available to commercial companies and public authorities through a private authentication process.

Pros and cons of CBDC


CBDC simplifies the process of government implementing monetary policy and its function. They will automate the process between banks through wholesale CBDCs and establish a direct link between the central bank and consumers through retail CBDCs. These digital currencies can also ease the burden and process of other government functions such as distributing resources or calculating and collecting taxes.

Disbursing money through an intermediary will lead to 3rd party risks. For example, the bank runs out of money? What if the bank goes bankrupt due to a rumor or an event? Things like this upset the fragile balance of the monetary system. CBDC can eliminate this 3rd party risk and the only remaining risk is the central bank.

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The CBDC system can customize privacy features. Value-based Retail CBDC functions like cash and pseudonymizes transactions to protect privacy. On the other hand, access to a CBDC account is the same as a regular bank account and it will have security features.

One of the difficulties of financial inclusion for the unbanked, especially in developing and poor countries, is the cost of developing banking infrastructure to provide them with access to the financial system. But CBDCs can establish a direct connection between consumers and central banks without the need to build infrastructure.

CBDCs can prevent illegal transactions because they exist in digital form and do not require a remittance code to track. Cryptographic algorithms and public ledgers will make it easier for the central bank to keep track of money in its jurisdiction. Therefore, CBDCs can be used to prevent illegal activity and transactions.


CBDCs are not free from centralization. The central bank remains in charge and invests with other authorities to make transactions. As a result, the central bank still controls the data and leverages transactions between citizens and banks.

People will have to give up privacy to some extent because administrators will collect identifying information. The provider will be able to cheat on every transaction made. This can spark privacy issues, technology disasters, and Internet service providers. For example, cybercriminals can and get information or the central bank to ban transactions between people.

The regulatory issues surrounding CBDCs are also a concern. What is the role of these currencies and who will regulate them? Should cross-border money transfers be allowed and are there benefits? CBDC is being tested and we will have to wait a long time for answers on these issues.

Currency mobility makes one country's CBDC a substitute for weaker countries' currencies. For example, a digital US dollar can substitute for the local currency of a smaller country or a country with a failing currency. Just like Ecuador used US dollars instead of its sucre in 2000 because high inflation caused people to change all their money into US dollars.

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CBDCs and Cryptocurrencies

The idea of CBDC has its roots in cryptocurrency, which is created and protected by cryptography. Cryptographic algorithms make cryptocurrencies difficult to counterfeit. And cryptocurrencies are technology-based decentralized lazy networks . The invention of a secure and immutable ledger that keeps track of transactions. It also enables seamless and direct transfers between senders and receivers without the need for an intermediary, making monetary policy easier to implement.

The cryptocurrency ecosystem also offers a broader perspective on an alternative currency system where each transaction is not surrounded by a bunch of strict regulations. , founded in 2009, is one of the most popular cryptocurrencies in the world. No copper any physical form that is held but essentially transactions that are performed and recorded in a public ledger that is encrypted and can be accessed by anyone. Transactions are verified through solving cryptographic algorithms called “mining”. And Bitcoin not guaranteed by any bank or government.

Cryptocurrencies have the potential to disrupt and bring down the current financial system. So experts say the move to design and develop a CBDC is a pre-emptive measure for this.

CBDC . projects

No CBDC has yet been officially established, but many central banks have pilot programs and research aimed at determining its viability and usefulness in the national economy. China is the country with the longest study period. Some Asian countries also laid the groundwork and started laying the groundwork and starting the CBDC pilot project.

The plan to create Russia's CryptoRuble was announced by Vladimir Putin in 2017. Speculators say that one of the main reasons Putin is interested in blockchain is the fact that encrypted transactions make it possible to send money privately. Don't worry about legal regulations.

Some of the central banks that have been working on CBDC implementations include:

  • Sweden's Riksbank started exploring CBDCs in 2017 and has published a series of articles on the subject.
  • The Bank of England (BoE) was one of the central banks that pioneered the CBDC proposal.
  • Bank of Canada (BoC)
  • Central banks of Uruguay, Thailand, Venezuela and Singapore.

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