CBDC’s – Are we on the road to Central Bank Digital Currencies?

The popularity of Central Bank Digital Currencies (CBDC’s) among policymakers, politicians, governments, and central banks is on the rise. The Atlantic Council tracks 119 countries/currency unions around the world, of which 11 have launched CBDC’s, 18 are piloting them and 71 are in R&D.

Currently, 18 countries in the G20 are in an advanced stage of CBDC development, and 7 of those are already in the pilot phase. Over the past year, nearly all G20 countries have made significant progress and invested new resources in these projects.


It’s a virtual money backed and issued by a central bank, so essentially a digital form of a country’s fiat currency that is also a claim on the central bank. Due to the growing awareness and adoption of cryptocurrencies and stablecoins, central banks around the world have realized that they must provide an alternative to cryptocurrencies and stablecoins if they want to remain part of the financial system. In the absence of this, they run the risk of losing out on the future of money.

So why are governments exploring CBDC’s? Among the motivations are promoting financial inclusion through easy and safe access to money for unbanked/underbanked populations, enhancing payment efficiency, lowering transaction costs, improving transparency of the money flow, and facilitating a seamless and easier flow of money from monetary and fiscal policy.

While these motivations may sound appealing, CBDCs also raise concerns about the risks to individual financial privacy, financial freedom, and banking system stability.

In the current financial system, the Central Bank does not know who is spending a particular note or coin today or tomorrow. A CBDC will give the central bank absolute control over the rules and regulations that determine the use of the CBDC, as well as the technology to enforce those rules.


As CBDC’s are programmable, these capabilities could allow governments to enforce certain policy decisions by prohibiting people from buying certain goods and services or limiting how much they can purchase. Programming a CBDC would enable it to target specific things that people can own, can buy, and can do.

In many ways, the risk to financial freedom is closely aligned with the risk to individual privacy. Having access to so much data, a CBDC could offer governments limitless capabilities for controlling citizens’ finances and financial activities. How could this happen? By establishing a direct relationship between governments and their citizens a CBDC could, for example, make the process of freezing an individual’s financial assets quicker and easier for governments.

It has also been argued that CBDCs may also undermine the foundation and future of financial markets. They would reduce credit availability, disintermediate existing banks and challenge the rise of cryptocurrency.

The key challenge of CBDC is control, not just privacy

Ledger Insights

Any CBDC would need to be attractive enough to find a customer base, but not so attractive that it undermined the existing banking system. If CBDC’s were too attractive citizens may pull too much money out of banks, thereby triggering a run on banks — affecting those banks ability to lend and sending a shock to interest rates.

CBDCs may also bring the Central Bank into competition with commercial banks for deposits, while also cooperating with them, given that commercial banks offer front-end services under an intermediated model. Moreover, if a CBDC paid interest, it would have to be managed separately from cash interest rates, which could encourage arbitrage.


Another concern is the central storage of information and the consequent vulnerability to cyber attacks. The breach of a private institution only affects a small fraction of the population, while those of other banks are unaffected.

Consider, however, how a CBDC’s network structure differs from that of a cryptocurrency.

Cryptocurrency networks are decentralised, which means that an attack on one computer/node does not affect the network as a whole. The opposite is true for a CBDC that uses a network where all transactions pass through a central authority. If it is compromised in an attack the entire network will be impacted.

In the last 12 months, the political path towards CBDCs has accelerated. There are, however, many questions left unanswered, not the least of which is whether CBDCs actually solve existing problems or create new problems for society that are greater than the ones they are purporting to address.

Written By:
Penny Sommerfeld