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Introduction to Central Bank Digital Currencies (CBDCs)

The fast-growing popularity of decentralized cryptocurrencies such as bitcoin (BTC) and Ethereum (ETH) have made many central banks and countries consider developing and issuing a digital representation of their fiat currencies or legal tender commonly known as central bank digital currencies (CBDCs). 

This development comes as the number of individuals and businesses patronizing digital payment methods continues to grow.  This is why central banks’ primary goal for CBDCs is to offer a digital form of payment that serves as a trusted alternative to bitcoin and other decentralized cryptocurrencies. Also, through CBDCs, central banks hope to provide a more efficient and secure means of payment, while also providing greater financial inclusion.  Improving access to banking services for the unbanked has been a challenge, especially in developing countries.

A few countries, including China and Nigeria, have rolled out their CBDCs. Some other nations such as Sweden and the Bahamas are reportedly exploring the possibility of launching their own CBDCs with more countries declaring plans to launch theirs. According to PwC, up to 80 percent of central banks across the world are exploring CBDCs. 

What are CBDCs? How do they differ from bitcoin and other cryptocurrencies? What distinguishes CBDCs from stablecoins such as USDT and USDC? And what is the current state of CBDCs? This article provides an in-depth overview of what CBDCs are, how they work, and the potential implications of their introduction. We will also discuss the advantages and disadvantages of CBDCs, as well as their impact on the existing cryptocurrency landscape. So whether you’re a cryptocurrency enthusiast, a traditional finance professional, or just someone curious about the future of money, this article is for you!

Understanding CBDCs

The term ‘central bank digital currency (CBDC)’ is used to describe a digital version of a nation’s fiat currency issued and wholly controlled by the central bank or reserve bank of a country. 

CBDCs may be designed to be interoperable with other digital currencies, as well as traditional payment systems. Particularly, CBDCs have the potential to enhance financial inclusion and enhance transparency, and traceability, while also preventing illicit activities including money laundering, theft, and terrorism financing.

Notably, CBDCs are similar to cryptocurrencies in terms of design and operational technique. Both forms of money are based on blockchain technology which helps them to facilitate secure and efficient peer-to-peer (p2p) transactions. But they differ in terms of consensus mechanism and governance approach. While most cryptocurrencies are decentralized, CBDCs are highly centralized. 

While the issue of centralization associated with CBDCs has been a thing of concern for many and a major challenge for CBDC adoption, it bears noting that CBDCs have several use cases and ways they can make the traditional financial system better and more efficient. 

Related: What is cryptocurrency?

CBDCs characteristics and significances

CBDCs would be a direct and digital liability of central banks or reserve banks to citizens. 

As digital legal tender, CBDCs can be used to settle payments within a particular jurisdiction. They also offer a more convenient way for individuals to make payments while maintaining the stability of the traditional currency. 

CBDCs are more stable than decentralized cryptocurrencies such as bitcoin (BTC), Ethereum (ETH), Cardano (ADA), and Litecoin (LTC) for examples. CBDcs are also subject to government regulations. Unlike cryptocurrencies, CBDCs are not decentralized given that they are issued and regulated by a central authority. This centralization helps CBDCs to maintain relative stability compared to cryptocurrencies which are known for being highly volatile.

The use cases of CBDCs cut across cross-border payments. With CBDCs, cross-border payments can be completed faster. Apart from speed, CBDCs attract lower transaction fees.  This further benefits international trade. 

Also, the adoption of CBDCs by countries eliminates the cost of printing and distributing physical currency. Currently, governments around the world spend a lot of money printing and distributing bank coins and banknotes. This does not include costs for maintaining and destroying these bank notes and coins.

CBDC transactions are recorded on a blockchain. Currently, central banks tend to prefer private blockchains rather than public blockchains. Understandably, this is because private blockchains offer centralization and control. With blockchain as the underlying technology of CBDCs,  it is easier to track the flow of money and detect any suspicious activity. This can help to minimize money laundering, terrorsim financing, and other illegal activities involving fiat currencies.

CBDCs can also provide greater monetary policy tools for central banks. With CBDCs, central banks will be able to more efficiently and effectively control the money supply and better adjust interest rates. This can help to stabilize the economy and prevent financial crises. Though the potential violation of the privacy of CBDC users is one of the major cons of CBDC adoption, the ability of CBDC to offer central banks better control over monetary policy remains a major attraction for central banks and governments.

Risks and threats commonly associated with CBDCs 

First, with CBDCs, central banks will not only now enjoy absolute control over fiat currencies but also will have the technology to enforce absolute control. This poses a threat to freedom and privacy as CBDCs will put more data than ever before in the hands of central banks. In other words, CBDcs can be used or programmed as a control and surveillance tool for citizens’ financial activity. 

Second, the direct line that CBDCs offer between central banks and citizens may be abused through the freezing or seizing of citizens’ assets. Though governments already do this in certain instances, CBDCs will make such actions as easy as a click of a button. 

Third, central banks could easily set negative interest rates through CBDCs in order to spur spending. This will result in people losing money.

Also, central banks could use CBDCs to prohibit people from purchasing certain goods. This is easy to achieve since a CBDC is programmable money—it can be used to prohibit citizens from certain goods and services, or limit how much citizens spend on them.

Further, there is the threat of CBDCs disintermediating banks and other financial institutions, and reducing credit availability. This will undermine the foundation of the financial services industry and consequently hurt financial markets.

Though CBDCs present central banks with the ability to combat cryptocurrencies, policymakers may end up destroying private-sector driven competition. Besides, CBDCs will effectively make central banks (in countries where central banks are a major regulator of the banking and financial sector) players in the financial services industry. When a regulator also becomes a player, who regulates? This poses another level of risk in the system. 

Lastly, the centralization of CBDCs makes it susceptible to cybersecurity attacks. In the event of an attack, the entire CBDC network will be affected. This poses a serious risk to all users.

Read also: What is Blockchain Technology? Meaning, Types, and Use Cases

The current state of CBDCs

CBDCs have become a hot topic in the world of finance and technology. This is no surprise. CBDCs are all about money and control. CBDCs are therefore capable of changing the way banks and governments deal with money and citizens.

Presently, many countries are exposing the possibility of launching their own CBDCs. Several countries are testing their CBDCs, such as China, the Bahamas, and Sweden. China’s pilot program has been testing since 2019 and has already completed several tests. 

The Central Bank of the Bahamas has also launched its Sand Dollar digital currency, which is already being used by its citizens in a small-scale pilot project. Similarly, the Swedish Riksbank has been running its e-krona pilot project since 2020. In Nigeria, the central bank launched the eNaira in October 2021, becoming Africa’s first CBDC.

The European Union is considering a digital euro, while the Bank of Japan is researching a digital yen. Other countries such as Canada, Singapore, and South Korea are also researching and developing their digital currencies. On the other hand, the Bank of England is working with Ripple to develop the digital pound. 

Noticeably, the design and features of each CBDC out there today are unique to the real or perceived opportunities and threats peculiar to each country.

How CBDCs differ from stablecoins

CBDCs and stablecoins are both digital forms of money, although they differ significantly.

To begin, a CBDC is issued by a country’s central bank, whereas stablecoins can be created by anybody. In addition, CBDCs are legal tender, which means they are a generally accepted means of payment within a country. In contrast, stablecoins are not legal tender and their acceptance as payment is based on the judgment of the parties engaged in a transaction.

Furthermore, CBDCs are subject to government regulation, including usage limitations. Stablecoins are not generally subject to the same level of regulation. But some governments are starting to develop legal frameworks for stablecoins or taking action against stablecoins. This is understandably so because of the increasing use of stablecoins in cross-border payments and remittances. So although stablecoins are the volatility-resistant type of cryptocurrency, they still present their own risks. Recently, United States regulators took regulatory action against Binance-branded BUSD stablecoin.

Another important distinction between CBDCs and stablecoins is their purpose. CBDCs are primarily intended to provide a digital form of a country’s existing fiat currency.  But stablecoins are commonly used as a bridge between fiat money and cryptocurrencies, as a mode of payment, or as a store of value.

And in terms of technology, while CBDCs are typically deployed on private and permissible blockchains, stablecoins are typically deployed on public and permissionless blockchains. For example, the Central Bank of Nigeria’s (CBN) eNaira is deployed on Hyperledger Fabric, a private and permissible blockchain.

Related: eNaira will be launched by President Buhari on Monday 25 October, announces the Central Bank of Nigeria

Related: Stablecoins for stable markets: Why regulators should put market stability first


CBDCs offer benefits such as transparency, lower costs, and faster payments, but they also raise concerns such as privacy, cybersecurity, and central bank control. Despite these concerns, CBDCs have the potential to impact the financial industry positively, leading to a more efficient and transparent traditional financial system. CBDCs promise greater access to financial services for everyone, depending on the specific goals and priorities of the central bank or reserve bank that issues them.

As the development and implementation of CBDCs continue to progress, policymakers and stakeholders need to work together to ensure that CBDCs are used responsibly and securely. This is vital as most technological innovations are not inherently bad but become threats when used by bad actors.

On the whole, CBDCs represent a significant shift in the financial industry. Their strengths and opportunities should be maximized. And perhaps more importantly, their weaknesses and threats must be minimized. This is where stakeholder engagements become critical.

Read also: Introduction to Stablecoins: USDT, USDC, and BUSD

Credit: Ndianabasi Tom  A crypto journalist and content writer who has been talking about cryptocurrency and blockchain technology since 2018, Ndianabasi is a Writer at Crypto Asset Buyer (CAB).