What is CBDC ?

Cross-border payment transactions are now playing a very important role in a worldwide economy. Following World Bank’s report, the global remittances increased 7% in 2017 which was the U.S $617 billion. It also drew a figure that the remittance transfer of $200 costs 7,1% its value, two times greater than the durable development goal of 3%. Even in developed countries, it’s cheaper transferring cash than the digital currencies. However, the subsidies of a financial organization are not allowed for over 2.5 billion unbanked population, not only because of the poor but of the expense, distance, and related papers.


What is CBDC

Central Bank Digital Currency (CBDC) is the digital form of a fiat currency of a nation or territory and is issued and regulated by the competent monetary authority of that country. Theoretically, CBDC creates a new digital mechanism to solve the problem of real-time transferring of money between two parties, thus helping international transactions to happen easily without intermediate steps like in traditional bank transactions.

CBDC is considered to be able to exchange 1:1 with other types of money such as cash, coin, and remittance. It can be issued as a replacement to other fiat currencies held by a central bank and can be paid when the owner required. CBDC can also be issued as a new form of currency supply instead of paper cash issued by traditional central banks.

One of the main purposes of CBDC is to extend access to the central bank’s loans in a digital way. Besides this extension, a CBDC system needs to be designed for practical use (avoid to run on an exclusive network like SWIFT or Fedwire).

CBDC will act as a digital representation of a country’s fiat currency and will be backed by a suitable amount of monetary reserves like gold or forex.

Types of CBDC


This type of CBDC refers to commercial banks for use in the wholesale interbank market, increasing efficiency in domestic or international interbank payment transactions. Today, these processes can be inefficient and entail costs, time, and counterparty risks to banks. By using this type of digital currency, central banks are able to increase efficiency in interbank payments and securities transactions and settlement.


This type of CBDC tends to be public, refers to the ability to increase financial inclusion, or serving as a strategic replacement to paper cash in economies where cash weaken. This type of digital currency could have the possibility to incentivize participation in the banking sector for the under-banked entities.

Benefit of CBDC

Following a report from OMFIF in October 2018 titled “Digital currency of the Central Bank”, that the main motivation to pursue a huge scale CBDC lies in its potential to improve the speed and cost-effectiveness. It can also improve the obstacles of the currently existing systems, especially the security and recovery capability. A big-scale CBDC can reduce operational and running costs when digital assets are tokenized and recorded in a distributed ledger.

Risks of CBDC

The first issue is the possible lack of anonymity and the ability to have a charge on the interest. CBDC could be in a form of token or account-based. While account-based is preferred by institutions, it is possible to replicate the attributes of cash with tokens. Possibly, that could in part refer to anonymity which may be unexpected for central bankers.

One feature that is similar to cash is that the outstanding amount of tokens can be fixed. This feature can raises the risk that a CBDC could arise a valuation premium. It can be solved by offering higher interest rates from the commercial banks, but in times of instability, there will be a problem to safety.

Another significant uncertainty relates to monetary policy management. A CBDC can change the demand for money and interest rates. It can not be foreseen during any transition which makes central bankers worry.

Future of CBDC

Policy-makers at central banks around the world are concentrating on developing and issuing CBDC, with a vision of the next five years for consumer-ready CBDC.
A report conducted by IBM encompasses an in-depth survey of officials from 23 central banks in developed and emerging economies. The survey showed an overview picture of policy-makers’ approaches to setting up a retail CBDC. The first CBDC would be produced within five years in a small economy and respond to a specific policy objective with a well-defined use.

A consumer-ready CBDC may require some form of public-private partnership (PPP). Central banks are limited in their ability to offer financial services, thus private companies will probably fill the gap. However, without regulation, private-sector digital currencies could possibly harm central banks’ monetary sovereignty and threaten financial stability.

In order to control digital currencies, policy objectives will retain central bankers’ pre-eminent concern. Advances in technology alone will not ensure how CBDCs are designed or whether they will be issued.

Following the IBM and OMFIF findings:

  • 73% of central bank survey respondents would require retail CBDCs to be available under all circumstances and for all types of payments where cash is currently used.
  • 82% of those responding said their greatest financial stability concern from CBDC implementation was the risk of digital bank ‘runs’ which could damage stability and confidence.
  • 64% of respondents said outsourceable ‘intermediation’ functions, such as customer onboarding, would be important for CBDC implementation.

“The concept of retail CDBCs has moved rapidly from being the thought experiment of technical experts and philosophers to the subject of boardroom debates focused on tangible, near-term reforms,” said Philip Middleton, OMFIF deputy chairman. “When senior central bankers speculate publicly about the possibility of a universal digital currency, it is a happy endorsement of the reports’ timeliness.”

“Central banks surveyed are interested in positioning themselves to launch their own retail CBDCs, as the findings of this report make clear,” said Saket Sinha, global vice president, IBM Blockchain Financial Services. “Large banks and technology companies will have a major role to play as new public-private partnerships are formed to promote interoperability, create services, and extend financial inclusion.”

Read more

Follow us on Telegram

Follow us on Twitter

Follow us on Facebook

You might also like