The term central bank digital currency (CBDC) refers to the virtual form of a fiat currency: it’s an electronic record or digital token of a country's official currency; as such, it is issued and regulated by the nation's monetary authority or central bank and backed by the full faith and credit of the issuing government.

CBDCs can simplify the implementation of monetary and fiscal policy and promote financial inclusion in an economy by bringing the unbanked into the financial system.

Because they are a centralized form of currency, they may erode the privacy of citizens. CBDCs are in various stages of development around the world.

KEY TAKEAWAYS (from Investopedia)

  • A central bank digital currency is the virtual form of a country's fiat currency.
  • A CBDC is issued and regulated by a nation's monetary authority or central bank.
  • CBDCs promote financial inclusion and simplify the implementation of monetary and fiscal policy.
  • As a centralized form of currency, they may erode the privacy of citizens.
  • Although they aren't formally being used, many countries are exploring the introduction and use of CBDCs in their economy.

How does CBDC work

Fiat money is the term that refers to currency issued by a country's government, coming in the form of banknotes and coins. I’s considered a form of legal tender that can be used for the sale and purchase of goods and services along with kinds of transactions.

A central bank digital currency is the virtual form of fiat money and, just like fiat money, it has the full faith and backing of the issuing government.

In October 2021, There were 83 countries around the world pursuing CBDC development for various reasons.

For example, a significant number of people in India are unbanked and setting up the physical infrastructure to bring the unbanked into the financial ecosystem is costly; yet, establishing a CBDC can promote financial inclusion in the country's economy.

The two types of CBDCs

Wholesale CBDCs: they use the existing tier of banking and financial institutions to conduct and settle transactions; these types of CBDCs are just like traditional central bank reserves.

One type of wholesale CBDC transaction is the interbank payment: it involves the transfer of assets or money between two banks and is subject to certain conditions. A digital currency's ledger-based system enables the setting of conditions, so a transfer won't occur if these conditions are not satisfied. Wholesale CBDCs can also expedite and automate the process for cross-border transfers.

This transfer comes with considerable counterparty risk, which can be magnified in a real-time gross settlement (RTGS) payment system.

The distributed ledger technology (DLT) available in wholesale CBDCs can extend the concept to cross-border transfers and expedite the process to transfer money across borders.

Retail CBDCs: they involve the transfer of central government-backed digital currency directly to consumers. They eliminate the intermediary risk or the risk that banking institutions might become illiquid and sink depositor funds.

There are two possible variants of retail CBDCs are possible, depending on the type of access they provide:

  • Value- or cash-based access: This system involves CBDCs that are passed onto the recipient through a pseudonymous digital wallet. The wallet will be identifiable on a public blockchain and, much like cash transactions, will be difficult to identify parties in such transactions.
  • Token- or account-based access: This is similar to the access provided by a bank account. Thus, an intermediary will be responsible for verifying the identity of the recipient and monitoring illicit activity and payments between accounts. It provides for more privacy as personal transaction data is shielded from commercial parties and public authorities through a private authentication process.

N.B.: The two types of CBDCs are not mutually exclusive. It is possible to develop a combination of both and have them function in the same economy.

CBDCs: Pros and Counters


CBDCs simplify the process of implementing monetary policy and government functions.

They automate the process between banks through wholesale CBDCs and establish a direct connection between consumers and central banks through retail CBDCs.

They can also minimize the effort and processes for other government functions, such as distribution of benefits or calculation and collection of taxes.

A CBDC eliminates third-party risk - any residual risk that remains in the system rests with the central bank.

A value-based retail CBDC functions like cash and preserves privacy by making transactions pseudonymous.

CBDCs can establish a direct connection between consumers and central banks, thus eliminating the need for expensive infrastructure.

CBDCs can prevent illicit activity because they exist in a digital format and do not require serial numbers for tracking. Cryptography and a public ledger make it easy for a central bank to track money throughout its jurisdiction, thereby preventing illicit activity and illegal transactions using CBDCs.


CBDCs don't necessarily solve the problem of centralization: a central authority (the central bank) is still responsible for and invested with the authority to conduct transactions. Therefore, it still controls data and the levers of transactions between citizens and banks.

Users would have to give up some degree of privacy since the administrator is responsible to collect and disseminate digital identifications since the provider would become privy to every transaction conducted. This can lead to privacy issues, similar to the ones that plague tech behemoths and internet service providers (ISPs).

The legal and regulatory issues pertaining to CBDCs are a black hole. Experiments in CBDCs are ongoing, and this could translate to a long-term frame.

The portability of these systems means that a strong CBDC issued by a foreign country could end up substituting a weaker country's currency. A digital U.S. dollar could substitute the local currency of a smaller country or a failing state.

CBDCs vs. Cryptocurrencies

The idea for central bank digital currencies owes its origins to the introduction of cryptocurrencies which are digital currencies secured by cryptography. This makes them hard to duplicate or counterfeit since they are decentralized networks that are based on blockchain technology where the invention of a secure and immutable ledger allows transactions to be tracked. It also enables seamless and direct transfers, without intermediaries and between recipients simplifies the implementation of monetary policy in an economy.

The cryptocurrency ecosystem also provides a glimpse of an alternate currency system in which cumbersome regulation does not dictate the terms of each transaction which are traded and recorded on a public, encrypted ledger, accessed by anyone. The process of mining allows all transactions to be verified.

Though the current cryptocurrency ecosystem does not pose a threat to the existing financial infrastructure, it has the potential to disrupt and simplify the existing system. Some experts believe the moves by central banks to design and develop their own digital currencies will act as a measure to pre-empt such an eventuality.

Testified CBDCs:

Central-bank-backed digital currencies haven't been formally established yet. Many central banks have pilot programs and research projects in place that are aimed at determining the viability and usability of a CBDC in their economy.

China is the furthest along this route, having already laid down the groundwork and initiated a pilot project for the introduction of a digital yuan.

Russia's plan to create the CryptoRuble was announced by Vladimir Putin in 2017. Speculators suggest that one of the main reasons for Putin's interest in blockchain is that transactions are encrypted, making it easier to discreetly send money without worrying about sanctions placed on the country by the international community.

A number of other central banks have been researching the implementation of a CBDC, including:

  • Sweden's Riksbank, which began exploring the issuance of a digital currency in its economy in 2017 and has published a series of papers exploring the topic.
  • The Bank of England (BoE), which is among the pioneers to initiate the CBDC proposal.
  • The Bank of Canada (BOC).
  • The central banks of Uruguay, Thailand, Venezuela, and Singapore.


A little insight:

Goals of the CBDC Tracker Project

Numerous countries are investigating and implementing their own versions of CBDC. News and updates in this area arrive every day from different sources. It makes it a hard task for economists or enthusiasts to track the status and analyze historic trends. 3 CBDC Tracker is a web resource that is intended to become a central point to access information about CBDC in different countries. By collecting the information from several sources and presenting it in a structured way, CBDC Tracker makes it easier for a wide audience to stay tuned to the latest news in the world of CBDC. The project also strives to popularize the idea of CBDC and thus make one more step towards the future of money. CBDC Tracker not only depicts the current view of digital currencies status in different countries, but also provides a historical perspective on how the process evolved. The data used by the project is continuously updated, both manually and automatically. Any user can also subscribe to receive news and updates as soon as they arrive. It is worth mentioning that the CBDC Tracker Web App is an open-source project. With this, CBDC Tracker is open for collaboration and contribution to share knowledge and technology for the benefits of the whole community.

Based in Zug, the platform is fully compliant with all Swiss laws related to financial intermediaries, banking, anti-money laundering, and organized trading facilities. Among its core values, there are innovative solutions through blockchain technology, which ensures security and liquidity.

EDSX is the first platform in Europe with primary and secondary markets for both institutional and retails. EDSX is a pioneering platform that employs the world’s leading technology to globally list security tokens in both primary and secondary markets, listing digital securities of real financial instruments to the public with a decentralized peer-to-peer exchange. Our goal is to fully compromise every aspect of the financial revolution.

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