Nov 18, 20235 min read

CBDCs 101: What are Central Bank Digital Currencies?

Central Bank Digital Currencies: what are they?

What is a CBDC?

A Central Bank Digital Currency is a digital replica of a country's currency issued by the central bank. Unlike cryptos, CBDCs have the government's backing because the government produces them and can be used for daily transactions.

CBDC = Digital Fiat

CBDCs combine traditional money with digital transactions. While they're still in their premature stages, they have the potential to revolutionize the entire monetary ecosystem alongside blockchain.

Also, unlike cryptos, you can't trade a CBDC - it's not profitable; this would only be possible if and when the forex market starts entertaining multiple CBDCs across their exchanges.

The CBDC's Purpose

A CBDC's uses are similar to its paper counterpart: making payments, storing money (in a digital wallet), investing, and accessing government services.

According to the White House, a US CBDC should:

Boost economic growth
Facilitate efficient and low-cost transitions
Support the continued centrality of the U.S. within the international fiscal system and
Foster greater access to the financial system for people across all economic spectrums and

CBDCs also reduce the risk associated with cryptocurrencies simply because of the federal government's backing. They would also provide financial inclusivity to those without banking mechanisms, i.e., those still using money orders and mail.

The CBDC Chronology

The earliest sign of a CBDC dates back to 1974 when Swedish economist David Langefors proposed one. And while the concept of digital currencies has existed since then, digital currencies have rapidly generated steam in the last five years.

And interestingly enough, more countries are developing them as others have already implemented them.

Year	Event
1993	Assumably the first-ever CBDC, the Bank of Finland launched the Avant smart card; it broke down in the early 2000s.
March 12th, 2019	The Eastern Caribbean Central Bank launched a test pilot of D-Cash.
August 14th, 2020	China released the Digital Renminbi, dubbed their Digital Currency Electronic Project (DCEP.)
October 2nd, 2020	The European Central Bank published a report on the digital euro's potential benefits and risks.
October 20th, 2020	The Bahamas launches the Sand Dollar.
March 31st, 2021	The Eastern Caribbean Central Bank officially launched DCash.
October 25th, 2021	Nigeria releases its e-Naira, the first African CBDC and the world's fifth.
January 20th, 2022	The U.S. Federal Reserve published its report on the potential risks and benefits of a CBDC.
July 11th, 2022	Jamaica releases JamDex.
December 1st, 2022	India launches their test pilot of their retail digital Rupee.
October 18th, 2023	The ECB proceeds to the next phase of the digital Euro project: the preparation phase, starting November 1st, 2023. This phase will pave the way for a future decision towards the digital Euro implementation.

A world map. — Visualized: The State of Central Bank Digital Currencies (visualcapitalist.com)

By the numbers

As of June 2023, there are over 100 countries actively conducting CBDC research.
By June 2023, 130 countries (98% of the world's GDP) are exploring a CBDC - an uptick from May 2020 when only 35 countries were doing it.
79 countries are in an advanced exploration phase - developmental, pilot, or launch.
11 countries have a fully-fledged digital currency: The Bahamas, China, Nigeria, Jamaica, Antigua and Barbuda, Dominica, Grenada, Saint Kitts and Nevis, Saint Lucia, Saint Vicent and the Grenadines, and Ukraine.

What's the big deal if the U.S. launches a CBDC?

Being the superpower that it is and holding the global reserve currency, the U.S. would bring considerable attention to the CBDC space if it digitizes the U.S. Dollar.

Massive adoption - A U.S. CBDC would be monumental in the global adoption of other CBDCs since the U.S. commands the global economy. Interestingly, a US CBDC itself would be catalyzed by the emergence of the Digital Renminbi.
Bank disintermediation - Just like blockchain, a U.S. CBDC would threaten the banks' role of money storage. As quoted from Crowdfund Insider, "Why hold your money at a bank when you can park it directly on the Fed's Balance Sheet?" The same applies to local and international banks where you store your money.
Competition with cryptos. As 4% of 65+-year-olds openly adopt crypto, a U.S. CBDC provides a safer alternative for the majority of the same demographic who want to transact digitally but not through Bitcoin or Dogecoin.
Crypto adoption. Adopting a U.S. CBDC would escalate global crypto adoption as both are digital coins, and the public wants various transaction choices.

Pros and Cons

Pros

Improved security. CBDCs have cryptographic techniques that make hacking, penetrating, or counterfeiting much harder. This also reduces the risks of fraud thanks to preconceived security considerations.
Financial inclusion. CBDCs can reach traditionally underbanked folks through digital wallets. For instance, 33% of the Nigerian population doesn't have a bank account.
Reduced transaction costs. Like blockchain, CBDCs can reduce the costs associated with traditional payment methods, such as bank transfers, withdrawals, and credit card payments, while also eliminating the middleman in some cases. According to the World Bank, remittance costs are currently 6.20% per transaction.
Economic Stimulus. CBDCs can catalyze the economy through rapid stimulus so that central banks can send funds quicker to citizens during financial crises like during COVID.
Enhanced efficiency and payment speed. One can use CBDCs to make instant payments regardless of people's localities. This is a faster way to transact goods and services both locally and globally.

One question that is not answered by the paper is what is the value of a CBDC, and does technology already exist that can capture the desired benefits now? ~Crowdfund Insider

Cons

Financial exclusion. Funny when you think about a pro being a con, but in this case, it may be out of reach for those without internet access or a mobile phone.
Privacy concerns. In increased government surveillance, central banks would have access to your transaction data and spending courtesy of a CBDC.
Cybersecurity risks. Because a CBDC is a digital currency, it opens yet another avenue for cyberwars and unethical hacking.
Monetary policy balancing. The Central Bank must balance the CBDC supply and public demand to avoid economic disruption or monetary shock.

CBDCs can offer extensive benefits as seen, but it's also best to assess their risks before considering further implementation.

Coins on a yellow surface. — Random CBDC Art (DALL.E)

My thoughts

I think CBDCs are a tech worth watching.

It makes sense that governments all over are taking on digital payments and services - 'twas about time they joined the bandwagon.

My only worry is privacy concerns; for instance, imagine the government continuously monitoring your bank account, watching it 24-7, and all the transactions that go through. Assuming you broke the law (please don't) or evaded taxes, you could incur a freeze on your accounts and assets.

From a social standpoint, people might not fancy government surveillance over their finances, hence the switch to crypto, which the government is also trying to break into. I suppose there will be a lot of conflict in digital payment preferences, so probably the government would have to reassure its citizens of their respect and right to privacy over their finances.

Additionally, cyberwars could evolve to become more creative. If they're stealing from banks right now, what's not to say they won't devise new ways to conquer CBDCs?

Conversely, CBDCs could also ease some processes like taxes. I imagine that since the government has e-records of your income, they can then file your taxes for free without you having to do them or meet a tax professional, threatening the existence of some occupations.

Also, this oversight would highly reduce money-related illegalities - if you know you acquired your money legally (e.g., not doing drugs, trafficking, etc.), then you have nothing to worry about.

Exciting times and innovations today, but we'll see more moving forward.

Conclusion

CBDCs are revolutionizing how we see money and banking. From payment transactions to storing value, they are revolutionizing finance as we know it.

It remains to be seen how widely CBDCs will be adopted globally. Striking the balance between convenience, privacy, and security is crucial to focus on during these assessment and implementation stages.

Adopting CBDCs and digital currencies is essential for creating a more digitized world, and as with every new tech, we must proceed with caution and ensure it's implemented in a way that best serves humanity.

Until then, there's a lot left to see about this space.

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