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Central banks around the globe are stepping up efforts towards modernizing the conventional financial landscape and accelerating cross-border payments. Prompted by the massive digital disruptions in the world, such as the emergence of cryptocurrency and blockchain, Central banks are considering adoption of digital currencies. 

Since the development of Central Bank Digital Currency (CBDC) is still in its initial phases, we are yet to discover how far and beyond it will go. However, we are certain that Central Banks are taking notes and gearing up to explore and harness innovative technological advances. 

While no crystal ball can show us the future of CBDC, let’s take a closer look at the potential opportunities, risks and potential implications of these digital currencies.

What are Central Bank Digital Currencies (CBDCs)?

cbdc pyramid

The concept of the Central Bank Digital Currencies or CBDCs comes from the similar principles and technology as leading cryptocurrencies like Bitcoin and Ethereum. 

These virtual currencies are issued and operated by the Central Bank with their values associated with the issuing country’s native currency. These digital forms of currency function to support the financial services, monetary policies and payment rails of a country’s national and commercial-banking systems. 

However, unlike other digital currencies like Bitcoin which are decentralized that work on a public blockchain network, CBCDs will be issued in a permissioned, secure and private blockchain. This means the authority to control and operate CBCDs will be restricted to approved individuals only. In this way, central banks will strengthen their grip over the money supply and maintain economic stability. 

Types of CBDCs

We have two main types of CBDCs: wholesale central bank digital currency and retail central bank digital currency.

Wholesale central bank digital currency:

Wholesale CBDCs refers to digital central bank liabilities primarily established for large transactions between financial institutions like commercial banks, payment providers, and other financial market infrastructures. These virtual currencies are particularly intended for large value and high-volume transactions between financial institutions, central banks and other participants. 

Besides this, Wholesale CBDCs can also be used for multiple purposes, including settlement of interbank transactions, securities and derivatives trading, and cross-border payments. The aim of Wholesale CBDCs is to mitigate counterparts and settlement risks, enhance transparency, and lower transaction costs. 

Currently, international banks across the world including Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan along with several central banks in Asia are exploring the potential implications  of CBDCs

Retail central bank digital currency

Retail CBDCs refer to a virtual form of central bank currency that is specifically designed for use by the general public as a means of payment and store of value. 

Unlike the conventional forms of currency like physical cash or electronic bank deposit, these currencies are backed by the issuing nation’s central bank. This means that individuals could use it as digital cash to make purchases and payments without the need of a middleman like commercial banks or intermediaries like payment providers.  

While Retail CBCDs could potentially cut down the usage of physical cash and reduce the risk of physical cash handling, implementation of these currencies is a complicated process that requires careful consideration of legal, regulatory and technical issues.

What are the possible benefits of CBDCs?

cbdc bank digital

As a digital currency, CBDCs has numerous benefits that will come hand in hand with its adoption into the financial sector. Some of these notable benefits are:

  • It will be faster, affordable and most efficient payment method both locally and across the international borders.
  • The cost of managing and transferring cash is usually high. Therefore the adoption of this technology is likely to reduce expenses incurred while transferring the cash.
  • It will help in the fight against money laundering and corruption in respective countries if adopted. Because of the online presence, authorities will track all the transactions more effectively than it is done today.
  • It will help by painting a picture of the different economic activities taking place in a country or a particular region and provide more precise and timely economic data on the estimates for Gross Domestic Product (GDP) of a given country.

How do cryptocurrencies and CBDCs differ from each other?

The term digital currency is a broad term used when referring to both virtual currencies like bitcoin, altcoins, and CBDC. Some of the differences between cryptocurrencies and CBDC include the following:

  • CBDC is a digital form of the normal hard currency developed and regulated by the central bank. On the other hand, the regulation of cryptocurrencies is not centralized. They are held online by different online communities and startups.
  • CBDCs are likely to be accepted as a legal currency through a legal tender, while cryptocurrencies are yet to be fully accepted in many countries as payment method.

It is important to note that as much as CBDCs and cryptocurrencies differ in terms of adoption and public acceptance, they operate under a similar technology, that is, blockchain ledger system. This system tracks transactions and is linked through a peer-to-peer network.

The rise of CBDCs

According to a 2018 survey by the Bank of Internal Settlement (BIS) shows that most central banks are still researching and looking for proof of concept of how digital currencies work.

Because of this, they are still reluctant to support the launch of digital currency.

Another survey conducted by the Official Monetary Financial Institution Forum (OMFIF) between July and September 2019 also shows similar results. Most central banks are still very cautious when it comes to the idea of adding digital currency into their financial system.

However, as some countries and central banks are still undecided about CBDCs, others like China have already announced their intention to introduce digital currency into their financial system.

Below is a list of countries that have either implemented or announced the process of developing their digital currency:

Australia: Commonwealth along with New Zealand Banking Group have collaborated with the Reserve Bank of Australia’s pilot program to test their CBDC.

Brazil: The President of the Central Bank of Brazil has also announced the release of their digital currencies CBDC by 2024 after completing a closed pilot program with financial institutions in 2023.

Canada: The Bank of Canada is currently exploring the digital currency implications and business models, while working on its digital currency. In 2023, the bank also issued an analytical note, stressing on the significance of offline payment functionality in these virtual currencies.

China: As of January 2023, China incorporated e-CNY in while calculating their currency circulation. The e-CNY represents 0.13 percent of cash and reserves owned by the central bank.

Japan: Once their proof of concept is completed, the Bank of Japan will initiate a pilot program in April to analyze the feasibility of “digital yen”. The country is also planning to establish a CBDC forum and hold a panel discussion among private retail payment business and other relevant businesses. 

Based on the conclusions of the panel discussion, the bank will determine if they should release their digital currency by 2026 or not.

Russia: The Bank of Russia is all set to release its first consumer pilot for the digital ruble on April 1, 2023.

UAE: The United Arab Emirates has joined hands with the Reserve Bank of India to conduct research on the feasibility and development of CBDCs. The country aims to launch CBDCs to address the loopholes in cross-border payments.

United Kingdom: The Bank of England in February 2023 stated that it is too early for the country to determine whether the country should release digital pounds or not. Nevertheless, the country is still working on the new technology.

United States: Recently, US Secretary of Treasury for Domestic Finance Nellie Liang discussed the future of digital assets and announced the formation of a working group to inspect the development of a CBDC.

Why central banks are pushing for CBDCs?

Owing to the technological advances and massive popularity of crypto which is touted as the future of money, central banks and leading countries are showing increasing interest in the CBDCs. 

Proponents contend that central banks are playing an active role in the development of CBDCs to secure the control over money supply and payment systems. The prevalence of cryptocurrency could weaken the control of government bodies and central financial institutions and impact financial stability on their markets.

In addition to protecting their role in the markets, central banks aim to facilitate hassle-free and cost-friendly cross-border transactions to provide a stable payment system, with minimal to zero surveillance risks or cyber crimes. 

If CBDCs are efficiently designed, they can potentially provide greater accessibility, availability, security, safety and lower costs than decentralized forms of virtual currencies.

Challenges for CBDC

While many of us in the financial sector see CBDCs as a game-changer, for a central bank to introduce it to the economy, it comes with its fair share of challenges as well. Some of the challenges are:

Respective banks must lay a proper foundation when it comes to infrastructure.

For example, frequent power outages and unstable internet connection might delay the transaction process of the CBDCs.

So central banks must invest heavily in the above features to ensure everyone even those from the rural areas get to enjoy the benefits of digital currency.

Requires additional monitoring and compliance; being an online platform, the site might be prevalent to site attacks. Therefore, the banks must incur additional costs in order to keep the site safe and free hackers.

Its introduction might negatively affect the banking system. Some banks are likely to lose on deposits; this might adversely affect the economy of these particular countries.

The currency is likely to face geographical limitations. Hard currencies are easier to work with since they can be exchanged across borders. Conversely, some countries might reject the digital currency coin on the grounds that its use prohibited in that particular country.

Another major challenge that the banks must overcome is the scalability of technology such as blockchain.

Yes, we agree that blockchain is the future technology, but will it process numerous transactions per minute as the Visas do?

For example, in China, where millions of transactions are recorded daily, will blockchain take the load? These are questions that must be answered before it is fully adopted.

Wrap up 

Without a doubt, the digital currency will eventually dominate the future as cash transactions continue to be marginalized. However, central banks must ensure digital currencies are provided with the right infrastructure. Additionally, the right technology should be adopted to ensure a smooth-running system.


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CryptoWhat was created in 2015 and has become one of the most trusted and well-respected sources of information on all things crypto. The blog's authors are dedicated to providing clear, concise, and jargon-free explanations of this complex technology, so that everyone can understand it.