The topic of Central Bank Digital Currencies (CBDCs) has recently been a hot and widely explored subject. Central Bank Digital Currencies (CBDCs) have become a global focal point as countries explore ways to revamp their financial systems and introduce the new digital currency in circulation. Still, many central banks are opting out of the use of CBDCs while others have already launched theirs, like China and its digital yuan (e-CNY).

A fact is, that we live in a vastly-digitalized world, which is constantly evolving and changing. Some changes though cannot be predicted and many institutions have to operate in uncertainty. Questions arise such as “How can digital currencies become a government financial standard?”, “Can central banks and governments keep up with the rapidly changing digital world and its consumers?”, “Will CBDCs affect fiat and the economy in a negative way or not?”. Such and more questions come up on a daily basis and very few can be answered at this point. 

So let’s see what we do know about CBDCs, their way into the world of finance, their role as a bridge between conventional and digital currencies, and their connection to cryptocurrencies.

What are CBDCs?

Let’s start at the beginning - what CBDCs actually are.

The abbreviation stands for Central Bank Digital Currencies. These are a type of digital currencies, much like cryptocurrencies (Bitcoin, Ether) but issued and backed by a country’s central bank. These currencies represent a digitalized version of the native fiat currency of the country in question and are fully controlled by the respective government.

In contrast, cryptocurrencies are decentralized in operation from any governing institution or entity, and comply only with external regulations, which can vary depending on market and jurisdiction, as well as the specific policies of individual countries and/or regions.

CBDCs aim at modernization of financial approaches and systems, improve payment efficiency, reduce costs relating to traditional banking processes, increase transaction security with digital payments, and basically - better adopt and popularize digital banking. They are also a great way to expand digital payments and banking services to the part of the population that lacks the use of such.

Moreover, taking into account that the emergence of cryptocurrencies such as Bitcoin and Ether literally posed a direct threat to traditional currency and payment monopolies, CBDCs are, from a different point of view, the banks’ way of staying in control while gradually adapting to the changing and further-digitazing global landscape, as they represent practically a hybrid digital currency between the conventional fiat and digital crypto.

Types of CBDCs

Central Bank Digital Currencies (CBDCs) can be categorized into several types based on various factors such as their intended use, the type of economy they apply to, and the technology behind them. There are two main types of CBDCs:

 1. Wholesale CBDC:

      a) Designed for large-scale transactions between banks and financial institutions;
      b) Goal is to improve the efficiency and security of the used payment system aimed at larger amount transactions;
      c) Example - the Bank of England’s support so far to adopt a wCBDC method, as mentioned most recently in late October by The Governor of the Bank of England (BoE), Andrew Bailey;

 2. Retail CBDC:

      a) These are available to the general public and businesses; used for common retail purposes;
      b) Works similarly to the conventional fiat, only digitally, and can be used for day-to-day purchases;
      c) Example - the Bahamas are the first country to launch and use an rCBDC, called the Sand Dollar, in October 2020;

Other types of CBDCs can include Hybrid CBDCs, Tokenized CBDCs, Mlti-Currency CBDCs, and others.

Traditional finances vs Crypto vs CBDCs

It is important to also explain the differences between traditional finances (TradFi), Cryptocurrencies and Central Bank Digital Currencies (CBDCs), compare them and see how CBDCs fit in the general picture:

 1. Traditional finances:

      a) Centralized in institutions such as banks, insurance companies, and investment firms;
      b) Regulated by governments (e.g. Federal Reserve of U.S. and the European Central Bank of the EU) in order to maintain stability, prevent fraud and provide consumer protection;
      c) Well-established structure;
      d) Slower transaction speeds due to bank processing times and regulatory checks;
      e) Higher fees primarily due to the involvement of intermediaries;
      f) Examples include stock markets, insurance companies, central and commercial banks.

 2. Cryptocurrencies:

      a) Decentralized on blockchain networks with no central authority and instead, consensus mechanisms are in place;
      b) Cryptocurrencies are still difficult to regulate but certain such regulations have been placed by various organizations in order to ensure security and stability in their use, otherwise crypto operates in generally regulatory gray areas;
      c) Crypto is borderless and with global and instantaneous effects;
      d) Higher transaction speed making such transactions much more preferred;
      e) Lower fees in comparison to conventional payment methods;
      f) Examples include Bitcoin, Ether, Litecoin, Solana, etc.

 3. CBDCs:

      a) They are controlled by banks i.e. are centralized but with a digital infrastructure and are backed by the government;
      b) A direct instrument for monetary policies and apply the regulations of the central bank;
      c) Their structure can vary depending on the technology used but CBDCs may or may not require traditional bank accounts;
      d) Faster transaction speeds and more efficient payments;
      e) Lower fees for transactions;
      f) Examples include e-CNY, e-Naira, Digital Ruble, Digital Euro, etc.

As it is obvious, TradFi, Crypto and CBDCs do operate similarly but also have their own limitations and general areas of application. In a debate about CBDCs, a more important point of discussion would be their actual role in both traditional finance and cryptocurrency worlds.

In TradFi (Traditional Finance) CBDCs are expected to play an active role as a digital currency regulated by a central bank. Expectations are that various institutions dealing with frequent and large payments will be adopting payment systems using CBDCs. It is discussed that this type of currency could improve the efficiency of payment systems, make transactions both less expensive and faster, and be ideal for cross-border payments specifically, making the CBDC the next expected stage of a country’s national currency development. 

In the Crypto world CBDCs could serve as a bridge between traditional finance and the decentralized crypto ecosystem. In general, they influence the crypto world in both competitive and opportunistic ways. 

CBDCs effect on the crypto ecosystem

CBDCs, while offering great benefits, raise concerns in the crypto community regarding potential conflicts with the decentralized ethos of the blockchain technology and the entire crypto ecosystem. Here are a few points:

• CBDCs could be seen as direct competitors to cryptocurrencies, especially stablecoins, as they represent a government backed-up stable alternative, and the demand for them could increase in DeFi where users may opt out of stablecoin use;
• Ergo, the trust and security CBDCs provide could attract more users than volatile cryptocurrencies do;
• CBDCs present a more transparent alternative to crypto, as they are fully traceable, raising concerns about crypto currencies being used in money laundering and tax evasion; 
• Some see the introduction of CBDCs as a way to regulate the crypto market more effectively, which directly contradicts the non-regulatory aspect of cryptocurrencies;
• CBDCs, being centralized, counteract the core blockchain principle of decentralization and concentrate power in the hands of governments and central banks, which could undermine this principle of blockchain and crypto technology, creating significant concern;

CBDCs being integrated in the crypto world also offer a lot of advantages:

• It is entirely possible that CBDCs could boost the adoption of cryptocurrencies, as they could ease the less tech-savvy users into the idea of digital money and its everyday use;
• CBDCs could aid the digital currencies to be legitimized in general by showing that digital money can be regulated, stable and secure;
• It is also speculated that if CBDCs get integrated into DeFi platforms and the crypto ecosystem as a whole, that would prompt the blockchain technology to evolve even further and adopt more innovative strategies.

CBDCs adoption across the globe

Since CBDCs are issued by a specific country’s central bank, each such currency would have to follow regulations and processes, specific to the economy, governance and financial state of that country.

In that sense, there are many nations that are currently on the fence of launching their own CBDCs fearing internal economic and financial issues that could potentially develop. Some of these countries include, as of late, Australia, Canada, Colombia, Germany and France. These and other countries, as well, have expressed concerns over potential impacts on their financial systems stating that their regulatory frameworks are still adapting and developing to be introducing new digital currencies. Other reasons include that statistics have shown low interest from the general public, focus is on other areas of potential digitization in the financial, banking and payments systems, or there is just fear of undermining traditional financial institutions and methods. 

The main problem here is that there is no absolute way of predicting how CBDCs will actually impact the economic and monetary systems. When it comes to digital currencies and their application, there are too many variables and uncertainties tangled with rapidly changing developmental, political and even military conditions, each affecting the other. 

Other countries who have already launched their rCBDC and/or wCBDC, or are in the midst of doing so, are claiming the contrary arguments. 

Countries like China, Brazil, India, developing countries like Nigeria and Jamaica, and others, as well as the EU have expressed high hopes and positive attitude towards adopting their own CBDCs. They believe that a digitized national currency controlled by their central bank would have a positive impact on finances, economic growth and digital advancement. 

 1. China - Their e-CNY was launched in 2020 initially across four cities and later on it expanded across more than 20 cities including Beijing, Shanghai and Shenzhen. By 2021 the number of people using it to conduct transactions was over 200 million. An interesting fact is that the e-CNY was officially used for foreigners in the 2022 Winter Olympics. 

 2. Brazil - They are in the process of developing their CBDC - Drex. The first phase was launched in 2023 and it is now undergoing testing and development through its second phase. Drex’s design is of a fully tokenized version of the Brazilian real having the goal to make payments faster and more efficient. Brazil is also a great example of the interconnection between CBDCs and blockchain-based technology. They are exploring the way Drex can integrate decentralized finance (DeFi) principles, aiming to bring tokenization into the banking sector and regulate digital asset transactions. 

 3. India - They launched their e-Rupee in late 2022, focusing on both wholesale and retail transactions, and faced difficulties where there was an initial surge in transaction count, but by December 2023 it had significantly declined. Since then the Reserve Bank of India (RBI) has been putting effort into improving the e-Rupee’s characteristics such as programmability and offline capabilities. The enhancements are aimed at addressing issues common for the country, such as slow Internet connection. As of 2024 India has integrated over 4 million users and more than 400k merchants. 

 4. EU - The European Union has been working towards adopting the Digital Euro under the leadership of the European Central Bank (ECB). The aim is for the eurozone to remain competitive and financially independent having examples of other global powers, such as China. The ECB emphasizes that “The Digital Euro will not replace cash, but serve as an additional tool within the broader payment system”.It is known that its distribution will involve supervised service providers. The EU’s CBDC is expected to launch by 2027, though the ECB is currently addressing legal, technical, and privacy concerns related to implementation. Critics have expressed concerns over the Digital Euro’s potential of disrupting the banking structures at use and complicating the European payment ecosystem​ rather than improving it.

 5. Nigeria - They launched their eNaira back in October 2021 becoming the first African country to do so. The goal is for their CBDC to modernize their payment system and reduce reliance on cash. It was introduced right after a ban on cryptocurrency transactions was placed by Nigerian banks, with the Central Bank of Nigeria (CBN) stating the eNaira to be “an alternative digital payment option”. By 2023, the number of eNaira wallets expanded to over 13 million.

 6. Jamaica - Jamaica are advancing in launching their Jam-Dex. What is interesting about the Jam-Dex is it doesn’t need a traditional bank account. Instead users can access their digital currency through a CBDC wallet issued by banks or authorized payment service providers. The pilot of Jamaica’s CBDC has already been launched, providing positive results. 

Benefits and disadvantages of CBDCs

The benefits of CBDCs and their rollout include:

 1. Enhanced payment efficiency:
      a) Faster transactions;
      b) Lower transaction costs;

 2. Financial inclusion: Access to digitized currency and payments to the underbanked;

 3. Monetary Policy Control:
      a) Implementation of more effective monetary policies by banks;

      b) Banks could introduce negative interest by imposing fees on CBDC balances promoting investment and spending;

 4. Reduced Fraud:
      a) CBDCs are encrypted and digital making it hard to be counterfeit compared to physical cash;
      b) CBDCs can be more effectively tracked and monitored, reducing the possibilities for money laundering, illegal transactions, or tax evasion;

 5. Stability: A more stable government-issued digital alternative to cash;

 6. Development of digital economy:
      a) The introduction of CBDCs can stimulate and accelerate the development of new financial technologies and blockchain-based apps;
      b) CBDCs can coexist with cryptocurrencies, offering complementary benefits;

The disadvantages of CBDCs and their rollout include:

 1. Privacy concerns:
      a) The centralization of CBDCs gives governments access to detailed records of users’ transactions, which is e.g. in high contrast to the decentralization principle on which cryptocurrencies operate.

      b) Potential tracking and control on citizens’ spending;

 2. Cybersecurity risks: The centralization of CBDCs also makes them a target for hackers;

 3. Disruption of the Banking system: CBDCs could reduce the role of commercial banks in the financial system and even make it easier for people to withdraw all their money from banks;

 4. Impact on monetary policy:
      a) Risk of inflation if CBDC supply is incorrectly managed;
      b) Potential for overreach and mismanagement of economic policies;

 5. Technological challenges:
      a) Digital divide between tech-savvy and non tech-savvy citizens, requires the use of smart devices;
      b) Implementation is complex as developing, deploying, and maintaining a CBDC system requires significant investment in technology, cybersecurity, and regulatory frameworks;

 6. Economic disruption: Could lead to market instability and economic issues;

Conclusion

Central Bank Digital Currencies (CBDCs) do represent a significant evolution in the global financial landscape, offering a government-backed digital alternative to traditional fiat currencies. By leveraging the advantages of digital technology, CBDCs have the potential to enhance payment efficiency, drive financial inclusion, and provide central banks with more direct control over monetary policy. However, their centralized nature also raises important concerns regarding privacy, security, and the potential for governmental overreach. CBDCs could also coexist with decentralized cryptocurrencies, offering stability and regulation while cryptocurrencies continue to thrive, despite the concerns many from the blockchain community have.

As governments around the world explore or roll out their own CBDCs, the balance between central control and decentralized freedom will be crucial in shaping the future of money. Ultimately, the role of CBDCs in the global economy will depend on how they are designed and implemented to address both opportunities and challenges in this rapidly evolving digital age.