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What does it mean for us when Central Banks issue digital currencies (CBDCs)?

With the surge in popularity of cryptocurrencies, an abundance of bots promising a wealth of riches, and celebrity-endorsed marketing campaigns, many of us are (or tempted to) joining the revolution. While the public is exploring with the use of digital currencies, what is driving the Central Banks to issue their own Central Bank Digital Currencies (CBDCs)? And what does it mean to us?

First, some quick definitions for those unacquainted. A Central Bank is a public financial institution essentially supervising the currency of a nation/group of nations with the primary objective being to achieve price stability (European Central Bank, 2021). Acting as a bank for commercial banks, they directly influence the flow of money in and out of the economy. A digital currency is simply any currency available exclusively in an electronic format. Digital currency can never take a physical form, differentiating it from the electronic currency held in most people's accounts (Rodeck, 2023). The three forms of digital currency are cryptocurrency, stablecoins, and CBDCs. These digital currency transactions are accounted for via the Blockchain, which provides the foundation for cryptocurrency by acting as a ledger detailing every transaction made from wallet to wallet.

So, with those definitions cleared up, it's important to understand why CBDCs are increasingly whetting the appetites of Central Banks across the globe. According to McKinsey, there are four main contributing factors (Denecker et al, 2022):

  1. A rapidly declining European cash usage of around 33% between 2014-2021 has threatened to minimise the impact of the Central Banks' sole source of influence, creating calls for a reassessment of their role in the monetary system.

  2. Retail investors increasing interest in private digital assets across the globe has negated the power of Central Banks as the sole provider of monetary value in sovereign economies. 10% of UK adults have reported holding a crypto asset at some point.

  3. The potential of CBDCs to improve legacy cash use cases, including reducing cross-border transaction costs, increasing visibility on shadow economies and collecting useful data.

  4. A lack of local governance across the global financial payments for Central Banks has led them to seek to establish greater control over digital payments. The introduction of CBDCs can anchor nascent markets.

Simply put, Central Banks are gradually losing the stronghold that they had over their respective economies.

CBDCs vs Bitcoin

Bitcoin, Ethereum and other popularly traded private cryptocurrencies tend to work on a decentralised distributed ledger technology, while the CBDCs, in general, are not fully decentralised nor permissionless which typically means that it is not fully transparent. This would mean that the success of a CBDC will depend highly on the reputation of the issuing Central Bank.

The market landscape for digital currencies is still volatile in its current state. A recent influx of safety concerns regarding exchange liquidity issues and fraudulent activity, alongside a systematic drop in asset prices has brought the fledgling market under much scrutiny. The market is home to a legal and regulatory grey area where consumer protection is weak, and issues will likely persist without some higher regulatory figure to minimise the problems (Barclays, 2023). Online venues enabling users to exchange money and pay for goods and services create shadow economies encompassing a broader shadow financial system, which Central Banks have no influence over. The idea that Central Banks could regulate, tax, or ban private digital money is more a pipedream than a reality. Global crypto products exist outside regulatory jurisdictions, and the decentralised nature of the product makes explicit governance virtually impossible (Barclays, 2023). And with this information in mind, a CBDC could potentially address the issues by offering a protected government backstop.

Now, we need to understand the goals a central bank intends to achieve through the introduction of a CBDC. According to the proposed CBDC currently being explored by the US Federal Reserve, the digital currency would achieve the following (The White House, 2022):

  1. Providing benefits and mitigating risks for consumers, investors, and businesses.

  2. Promoting economic growth and financial stability whilst mitigating systemic risk.

  3. Improving payment systems.

  4. Ensuring the global financial system has transparency, connectivity, and platform and architecture interoperability or transferability.

  5. Advance financial inclusion and equity.

  6. Protect national security

  7. Provide the ability to exercise human rights.

  8. Align with democratic and environmental values.

Other CBDCs share these goals, and at face value, there is no reason for the end consumer to fear their implementation. So, how have Central Banks who've taken the plunge fared so far, and what were the consequences for consumers?

Toppling pillars of a Bank
Central bank's weakening control

CBDCs Use Cases

As of March 2023, eleven countries have fully launched a digital currency, including the likes of China, Sweden, and the Bahamas (Atlantic Council, 2022). China's launch is set to reach over 260MN people this year, expanding to the majority of the country's vast population. Currently, 114 countries, representing 95% of global GDP, are exploring the launch of a CBDC, with over 60 countries positioned in an advanced exploration phase (development, pilot, launch). As of December 2022, all of the G7 economies have now pushed to the development stage of their own CBDC, with every country making significant progress and investing resources into the projects.

The introduction of CBDCs have boasted benefits such as greater financial inclusion, expanded the accessibility of digital cash accounts and payment services for individuals living in remote locations or developing countries, whilst also aiding those with low incomes whose needs are unmet by the traditional banking system. This reduces the barriers to entry to the financial system and provides easier access to banking accounts.

By introducing a CBDC, Central Banks could reduce the public's use and reliance on ungoverned digital currencies a developed by profit-driven corporations and arguably offers a more reliable option for the public. CBDCs also have the potential to improve efficiency amongst payment processes, with benefits recognised such as faster settlements in large values, cross-border payments, and the ability for Central Banks to credit household CBDC accounts.

While none of the Central Banks intend to do away with Cash completely, there are direct cost savings in reducing the use of Cash. Bank of Korea's trial project of a coinless society boasts a USD40M saving.

It all boils down to Data

The accuracy, effectiveness, and productivity of monetary policy could be enhanced by the impact of interest rates and policy shifts being more heavily felt by businesses and households, reducing the dependency placed on banks making loans. All transactions and credit would be traced, with this record of a flow of funds being a significant benefit for the CBDC (Paragon Bank, 2022).

However, there may be negative impacts felt by citizens with a move to introduce a CBDC. The primary cause for concern lies with a reduction in privacy . All transactions and deposits record a digital footprint, reducing privacy levels for citizens making payments, especially using the state's digital currency. The Bank of England (currently heavily exploring the introduction of a CBDC) has noted the same rules apply to any institution regarding privacy and rules regarding GDPR, thus offering a counterbalance to privacy concerns. Yet, citizens may not feel comfortable with the level of detail the Central Bank may have over their transactions. Additionally, financial crime, illegal activity, and online fraud may increase. A CBDC would also increase the direct competition for banks whose account holders may move deposits from commercial banks to CBDC holdings over time. Such moves would place pressure on banks leading to a loss of funding that may have a knock-on effect on businesses and households who struggle to secure loans. Economists would have to carefully analyse the macro impact of a CBDC, as it would be counterproductive to negatively impact the economy in this fashion (Paragon Bank, 2022).

Reference List:

  1. Atlantic Council (2022) Central Bank Digital Currency tracker, Atlantic Council. Available at: (Accessed: March 6, 2023).

  2. Denecker, O. et al. (2022) Central Bank Digital Currencies: An active role for commercial banks, McKinsey & Company. McKinsey & Company. Available at: (Accessed: March 6, 2023).

  3. European Central Bank (2021) What is a central bank?, European Central Bank. Available at: (Accessed: March 6, 2023).

  4. Paragon Bank (2022) Blog, Central Bank Digital Currency Pros and Cons | Paragon Bank. Available at: (Accessed: March 6, 2023).

  5. Rodeck, D. (2023) Digital currency: The Future of Your Money, Forbes. Forbes Magazine. Available at: (Accessed: March 6, 2023).

  6. Should the Federal Reserve create a digital dollar: Barclays Cib Should the Federal Reserve create a digital dollar | Barclays CIB. Available at: (Accessed: March 6, 2023).

  7. The White House (2022) Policy objectives U.S. C digital currency, POLICY OBJECTIVES FOR A U.S. CENTRAL BANK DIGITAL CURRENCY SYSTEM. The White House. Available at: (Accessed: March 6, 2023).

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