Central Bank Digital Currency
, or CBDCs, are digital versions of fiat currencies
issued by a central bank whose status as legal tender depends on government regulation or law.
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The central bank
is a financial institution with control over both the creation and distribution of money and credit for a nation or economic union of nations. Central banks are also responsible for the monetary policy of the country, as well as overseeing regulation of member banks.
Central banks are able to influence monetary policy through means such as easing or tightening money supply, and thereby influencing interest rates through the cost and availability of credit. Central banks also hold the country’s foreign exchange reserves, which is used to back liabilities or intervene in times of financial crisis.
The most influential central banks in the world are the Federal Reserve of the United States, also known as the Fed, the European Central Bank and the People’s Bank of China. These countries have the largest economies in the world, and their actions greatly shape global monetary policy.
money, or fiat currency, is a legal tender that is backed by the central government. It can take the form of physical cash, or electronic money – such as with bank credit. It is issued by government reserves, treasury and the central bank to be released into the economy.
Money supply is pivotal for central banks as part of their influence over monetary policy, as it allows them to control liquidity and interest rates. Money supply can be classified into four categories, denoted by “Ms”, namely M1 to M4. M1 consists of physical cash and ready-to-use electronic money, while M4 encompasses all money, in cash and bank accounts.
It’s not correct to say that CBDCs are the same as cryptocurrencies — in fact, a lot of the properties of virtual currencies are the direct opposite of everything that most cryptocurrencies stand for.
CBDCs remain fully within the orbit of the traditional, intermediated financial system of fiat currencies
, which are backed by trust in the currency's issuer: a national central bank and ultimately, the sovereign government or political authority behind it.
In simplest terms, this means that CBDCs are backed by governments — which is not something that you’d see in a cryptocurrency project.
have their roots in a cypherpunk
and libertarian challenge to the status quo: they are a critique of an exclusionary monetary system run by independent central bankers and technocrats who are largely immune to democratic pressures and public scrutiny.
, the mysterious and still unknown inventor(s) of Bitcoin, famously embedded the cryptocurrency’s genesis block
with a Times headline about the United Kingdom teetering “on the brink of a second bank bailout” following the 2008 financial crisis.
While Bitcoin intends to create a new financial system from the outside, crypto’s emergence and growing popularity has — perhaps inevitably — spurred on significant innovation within the citadel of traditional finance itself, stemming from the idea of virtual currency.
This is most strikingly shown in the phenomenal growth of interest in central bank digital currencies, or CBDCs for short.
By early 2019, the Bank for International Settlements — a Swiss organization made up of 60 of the world’s central banks — estimated that a significant majority of central banks across the world
were engaged in research into virtual currencies development.
There are two main categories of CBDCs.
The first is a “wholesale” variant, which is limited for use by financial institutions for wholesale settlements — i.e., for interbank payments or securities settlements.
The second is a “retail CBDC” for the general public.
Retail CBDCs are further split into two main types: “general purpose,” “account-based” or “token-based.” Retail CBDCs would in theory extend access to digital central bank money to the general public. They could therefore have much wider reaching implications for banks and the financial system as a whole than their wholesale counterparts.
In the current system, intermediaries
like commercial banks are responsible for dispute resolution, Know Your Customer (KYC
) due diligence, deposit insurance and other services.
Depending on their design, retail CBDCs could alter the existing operational roles taken by central banks and private institutions within the financial system.
For this reason, analysts have closely studied
possible designs and architectures for retail CBDCs and explored their potential consequences for the legal structure of claims on the central bank and private institutions.
A bottom line for these virtual currencies is that whatever design they take, their ultimate issuer and redeemer is the central bank: different designs would, however, affect the nature of claims on an intermediary (where relevant) and the records that are kept by the central bank.
This means that no matter how a CBDC looks, the responsibility for its structure and maintenance is with the central bank.
In an indirect, two-tier CBDC system, the structure of claims would be similar to the existing financial system. Commercial institutions would be mandated to fully back a CBDC-like liability to the consumer with their own CBDC deposits at the central bank.
However, changes to this intermediated model could bring new regulatory and supervisory possibilities for central banks, though this would require a massive extension of their existing operations. For this reason, analysts have also researched hybrid architectures that would combine direct and indirect claims on the central bank.
With cryptocurrency market capitalization reaching almost $2 trillion as of August 2021, governments and national institutions are increasing their scrutiny and regulatory oversight on the crypto industry, as is the case with the recently passed US infrastructure bill. On the other hand, these same countries are also actively engaging in CBDC research and development, partly to keep up with blockchain technology advancements, partly to maintain the status quo. This is being played out in the world’s two largest economies – the United States and China.
China’s Digital Currency Electronic Payment (DCEP) system has been in development since 2014. The digital yuan is, however, not a blockchain project that relies on a decentralized ledger. Instead, it relies upon a centralized database that records and tracks all transactions on the network, as well as controlling access to the network. The e-yuan is backed 1:1 by the physical yuan. China has already rolled out testing of the DCEP and many expect it to be the first country to fully implement a CBDC.
While seemingly behind China, the Federal Reserve has announced
that they are moving towards developing its own digital currency, and will be releasing a research paper in summer 2021. Fed Chair Jerome Powell has said that they are carefully monitoring the situation, and emphasized the importance of ensuring the issuance of the digital currency goes right, instead of being ahead of their global counterparts. Powell also mentioned that technological advancements can offer new possibilities to the central bank, but said that CBDC had to be designed for use by the general public. The Boston Fed leading the project, and working with various groups, such as the Bank for International Settlement.
Analysts have emphasized that for retail virtual currencies to really take off, they would need to provide cash-like safety and convenience for peer-to-peer (and even cross-border) payments. They would also need to take into account provisions for “privacy by default” and universal accessibility.
Distributed ledger technologies
could expand the possibilities for preserving user privacy by replacing the conventional identity frameworks used for bank accounts with a secure, cryptographic identifier framework.
This token-based system, based on digital signatures
, would, however, pose several challenges — notably for AML
/CFT due diligence and private key
management — and would likely need additional safeguards.
However, based on the results of existing proofs-of-concepts by central banks, blockchain technologies are currently unlikely to be implemented for a direct CBDC architecture because of the sheer volume of data throughput that would be required.
However, blockchain architectures have been explored for hybrid or indirect CBDC models, as well as for wholesale CBDCs, given that the number of transactions in many wholesale payment systems is similar to that already handled by existing blockchain platforms.
Several countries have already launched CBDCs or are about to do so. Here is an overview of them:
CBDCs in the Caribbean States
The Caribbean region has been a leader in CBDC adoption, with several countries introducing CBDCs. The Bahamas introduced
its Sand Dollar in October 2020 and the Eastern Caribbean Central Bank (ECCB) launched DCash in March 2021. DCash is a digital version of the Eastern Caribbean dollar for transactions within the eight ECCB member states. Other Caribbean countries, including Antigua and Barbuda, Saint Kitts and Nevis, Saint Lucia, Grenada, Dominica and Saint Vincent and the Grenadines, have adopted DCash as their CBDC under the ECCB's supervision. Barbados launched its own CBDC, mMoney, in December 2021.
The Jamaica Digital Exchange (JAM-DEX
) is the CBDC of Jamaica, launched by the Bank of Jamaica (BOJ) in July 2022. JAM-DEX offers incentives for early adopters, such as a free $16 payment for the first 100,000 users. However, CBDCs in the Caribbean are facing the issue of low adoption
CBDC in China
China's e-CNY, a digital version of the Chinese yuan, is the world's most advanced CBDC. It was introduced in April 2020. As of 2023
, there were $2 billion e-CNY in circulation. They represent 0.13% of all yuan in circulation. The e-CNY facilitated over $14 billion worth of transactions since its launch. It includes smart contract functionality, enabling new use cases like digital red envelopes and loyalty rewards.
However, the e-CNY faces challenges and risks, including privacy concerns, rivalry with existing payment platforms like Alipay and WeChat Pay
, limited international acceptance and geopolitical implications. Some view the e-CNY as a strategic tool for China to challenge the US dollar's dominance and bypass US sanctions or restrictions. It could potentially facilitate cross-border payments and trade with countries aligned with China's interests or policies, such as Iran
, North Korea or Venezuela. Moreover, the uptake of the digital yuan has been slow. Hong Kong residents have been rejecting the e-CNY and regional governments have been airdropping
e-CNY to boost adoption.
CBDC in Nigeria
is the CBDC of Nigeria and launched in October 2021. As of March 2023, there were over 13 million registered e-Naira wallets and over 1,000 merchants accepting e-Naira
However, since its introduction, the e-Naira has battled technical glitches
, public skepticism and competition from other digital payment platforms. Public awareness and trust in the e-Naira remains low, with only 33 percent
of Nigerians saying they would use it if available. Following cash shortages in Nigeria, the value of e-Naira transactions increased
in 2023 to almost $500 million.
CBDC in Russia
Russia plans to join the global CBDC race with the launch of its digital ruble in May 2023. The development of the digital ruble began in 2020, with pilot programs starting in April 2023
. Challenges like complex legal and regulatory frameworks delayed the deployment of the digital ruble.
However, the Russian government hopes the digital ruble also presents potential benefits for Russia's economy and society, such as reducing dependence on foreign payment systems, increasing financial inclusion, and enabling more effective implementation of social transfer programs. The digital ruble should protect Russia's payment system from potential threats of sanctions
, which Russia had to grapple with.
The Russian central bank plans to launch the digital ruble in 2024
. It also opposes the rollout of ruble-backed stablecoins
in the country.
A number of countries are working on CBDC pilot programs, which research and test the introduction of CBDCs. Here is an overview of them:
CBDC in Brazil
The digital real is the CBDC of Brazil, developed by the Central Bank of Brazil (BCB). The digital real project started in 2020 as part of the BCB's research on CBDCs and their potential benefits and challenges. The BCB planned to launch
a pilot program in 2022 to test the use of its version of a CBDC for domestic and cross-border payments. The timeline for the implementation of the digital real aims for 2024
as launch date for the currency.
CBDC in Europe
The digital euro is the CBDC of the eurozone, developed by the European Central Bank (ECB). The digital euro project started in 2020 as part of the ECB's research on CBDCs and their potential benefits and challenges
. The ECB launched an investigation phase
in July 2021 to explore the design and technical feasibility of a digital euro.
The ECB has not set a timeline for the full-scale launch of the digital euro, as it will depend on the outcome of the investigation phase and the political decision by the European Commission.
Europe has recently opened a new consultation
on the digital euro to seek input from financial services specialists on various issues concerning the CBDC. The ECB President has admitted the digital euro will be used for control
CBDC in Ghana
is the CBDC of Ghana, developed by the Bank of Ghana. The e-cedi project started in 2021 as a pilot to test the feasibility and impact of a national digital currency in Ghana. The e-cedi aims to promote financial inclusion
, efficiency, and innovation in the Ghanaian economy. The project started prototype development
in September 2021.
CBDC in Hong Kong
is the CBDC of Hong Kong, developed by the Hong Kong Monetary Authority (HKMA). The e-HKD project started in 2019 as a joint initiative with the Central Bank of the United Arab Emirates (CBUAE) to test
the feasibility and impact of a cross-border CBDC in the region. HKMA released a position paper in September 2021 to set out its policy stance on retail CBDC and outline its next steps.
The e-HKD project will adopt a phased and calibrated approach, starting with the technology and legal foundations for supporting the implementation of e-HKD. Specifically, a plan will be formulated for developing the wholesale layer of the two-tier e-HKD system. In addition, HKMA will identify and examine areas to prepare for legislative amendments, to enable the issuance of a digital form of fiat currency with legal tender status in Hong Kong. However, the HKMA has warned
that stablecoins could undermine the Hong Kong dollar if they become widely used as a medium of exchange or store of value.
CBDC in India
The digital rupee is the CBDC of India, developed by the Reserve Bank of India (RBI). The digital rupee project started in 2018 as part of the RBI's research on CBDCs and their potential benefits and challenges. RBI has published a concept note in October 2021, detailing its vision and approach for the digital rupee
. According to the concept note, the digital rupee will be issued by RBI and distributed through authorized intermediaries, such as banks and payment service providers. The digital rupee will be legal tender and will coexist with cash and other digital payment options. It will be based on a two-tiered architecture, where RBI will issue the digital currency to intermediaries, who will then distribute it to end-users.
India faces some unique challenges and opportunities in this field, given its large and diverse population, its dynamic and complex financial system, and its evolving regulatory framework. The country is exploring offline functionality
for the digital rupee and is working on a CBDC bridge
with the United Arab Emirates. Its pilot program has currently onboarded 50,000 users
CBDC in Iran
The crypto-rial is the CBDC of Iran, developed by the Central Bank of Iran. It is a digital version of the Iranian rial that can be used for payments and transfers through a platform called Borna, which is based
on Hyperledger Fabric, an open-source enterprise blockchain platform. The crypto-rial project started in 2018 and completed its pre-pilot phase in March 2023 and is now technically ready to be integrated into banking networks. The CBI is working
to explore offline transactions for the crypto-rial to reach more users who lack access to bank accounts or internet connection.
CBDC in Japan
The digital yen is the CBDC of Japan, developed by the Bank of Japan (BOJ). The digital yen project started in 2019 to test the feasibility and impact of a cross-border CBDC in the region. The BOJ plans
to launch a pilot program in April 2023 to test the CBDC for domestic and cross-border payments. The pilot programs will also provide feedback and inputs for the design and regulation of the digital yen and will trial the currency in cooperation with three Japanese megabanks. The BOJ has not set a timeline for the full-scale launch of the digital yen, as it will depend
on the outcome of the pilot programs and the evolving global landscape of CBDCs. An expert panel
will assess the feasibility of eventually introducing a digital yen.
CBDC in Kazakhstan
The digital tenge
is the CBDC of Kazakhstan, developed by the National Bank of Kazakhstan. The digital tenge project started in 2021 as a pilot to test the feasibility and impact of a national digital currency in Kazakhstan. The project completed its prototype development in December 2021 and is now technically ready to be integrated into banking networks. The NBK recommended
a rollout between 2023 and 2025.
CBDC in The Philippines
The digital peso is the CBDC of the Philippines, developed by the Bangko Sentral ng Pilipinas (BSP). The BSP planned to launch a pilot program in 2022
to test the use of its version of a CBDC for domestic and cross-border payments. The BSP has stated that it has not made a final decision regarding issuing the digital peso and will continue to consult
with relevant stakeholders and conduct comprehensive evaluations.
CBDC in Saudi Arabia
The Aber is the CBDC of Saudi Arabia, developed by the Saudi Central Bank (SAMA). It is a digital version of the Saudi riyal that can be used for payments and transfers through a platform based on blockchain technology. The Aber project started
in 2019 as a joint initiative with the Central Bank of the United Arab Emirates (CBUAE) to test the feasibility and impact of a cross-border CBDC in the region. SAMA continues researching use cases of the Aber and has made no final decision
on when to launch the digital currency.
CBDC in Singapore
The digital Singapore dollar
is the CBDC of Singapore, developed by the Monetary Authority of Singapore (MAS). The digital Singapore dollar project started in 2016 as part of Project Ubin, a joint initiative with the Association of Banks in Singapore to test the feasibility and impact of a CBDC in the country. MAS continues researching use cases of the digital Singapore dollar and has not made a final decision on when to launch the digital currency.
The digital Singapore dollar project has achieved several milestones, such as completing five phases of experimentation covering various aspects of clearing and settlement of payments and securities. The MAS has said
there is no urgent case for the launch of a retail CBDC.
CBDC in South Korea
The digital won is the CBDC of South Korea, developed by the Bank of Korea (BoK). It is a digital version of the South Korean won that can be used for payments and transfers through a platform based
on blockchain technology. The digital won project started in 2020 and completed its first phase of testing in January 2022. The second phase, which involved real-world functionalities such as cross-border remittance, retail payments and offline payments was expected
to complete by June 2022.
CBDC in Sweden
is the CBDC of Sweden, developed by the Riksbank, the country's central bank. It is a digital version of the Swedish krona that can be used for payments and transfers through a mobile app or a card. The e-krona project started in 2017 as a response to the declining use of cash in Sweden, which fell
from 40% to less than 10% of point-of-sale payments between 2020 and 2021. The project completed its second phase of testing in April 2022 and is now technically ready to be integrated into banking networks.
CBDC in Turkey
The digital lira is the CBDC of Turkey, developed by the Central Bank of the Republic of Turkey (CBRT). The digital lira project started in 2021
as part of the CBRT's research on CBDCs and their potential benefits and challenges. The CBRT completed its first payment transactions using the digital lira in December 2022 and planned to launch a pilot program in 2023 to test domestic and cross-border payments. The timeline for the implementation of the digital lira is targeted for 2024
The CBRT has launched a Digital Turkish Lira Collaboration Platform to research the benefits of introducing a CBDC. It aims to integrate the digital lira with instant payment systems and explore the use of distributed ledger technologies in payment systems. The CBRT has stated that it will continue to consult
with relevant stakeholders and conduct comprehensive evaluations.
CBDC in the UAE
The digital dirham is the CBDC of the United Arab Emirates (UAE). As of March 2023, the Central Bank of the United Arab Emirates (CBUAE) has signed agreements with technology providers and conducted proof-of-concept work for bilateral CBDC bridges with India.
The digital dirham project is part of the CBUAE's financial infrastructure transformation (FIT) program
, launched in February 2023. The FIT program consists of nine initiatives that cover various aspects of digital finance, such as e-Know Your Customer, unified card payment platform, instant payments platform and innovation hub. The first stage of the FIT program includes the soft launch of "mBridge", which facilitates CBDC transactions for international trade, along with domestic CBDC issuance for wholesale and retail use.
The CBUAE governor Khaled Mohamed Balama said that the launch of the CBDC strategy marks a key step in the evolution of money and payments in the country. He added
that the CBDC will accelerate the country's digitalization journey and promote financial inclusion.
CBDC in Venezuela
The digital bolivar is the CBDC of Venezuela, developed by the Central Bank of Venezuela (BCV). The digital bolivar project started in 2018
with the introduction of the Petro coin. The BCV completed its first payment transactions using the digital bolivar in December 2022 and planned to launch a pilot program in 2023 to test the use of its version of a CBDC for domestic and cross-border payments. The planned launch date of the digital bolivar is 2024
. The digital bolivar will be accompanied by an SMS-based exchange system to facilitate payments and transfers among its users.