Digital payments are faster and easier than ever. And thanks to the blockchain, money now has traits we’ve never seen before, like decentralization, immutability, and pseudonymity.

These innovations have demonstrated that global finance is ripe for change—and governments have taken note. In fact, many central banks have already begun the task of remodeling their financial systems for the internet age.

How? With central bank digital currencies (CBDCs).

What is a central bank digital currency (CBDC)?

A CBDC is a virtual form of fiat currency. Like physical cash, it is issued by a central bank and backed by the full faith and credit of the government. But unlike cash, a CBDC is never printed, meaning new systems must be put in place to mint and exchange it.

Could this system resemble the blockchain—the distributed ledger technology that underpins most cryptocurrencies? Let’s compare.

CBDCs vs cryptocurrencies

Forthcoming CBDCs are similar to and distinct from existing cryptocurrencies. They are paperless, like bitcoin, and backed, like stablecoins. But unlike bitcoin, they’re centralized; and unlike stablecoins, they’re government-issued.

A new breed of blockchain

Most countries looking to issue a CBDC will use blockchain technology to do so, but these blockchains will be different from others that have come before. The central banks of Sweden and France, for example, have moved forward with CBDC pilots that use permissioned blockchains—a centralized variation on the technology used by bitcoin and ether.

A permissioned blockchain is a distributed ledger with an additional layer of access control. This means that certain actions—such as issuing tokens, validating blocks, or viewing transactions’ senders, receivers, and amounts—can be performed only by certain participants in the network. For CBDCs, this might be the central bank, commercial banks, payment service providers, or others.

This centralized layer is appealing to bankers that want both the permissioning of traditional payment networks and the cryptographic security of blockchains.

Why create a CBDC?

There are many reasons to embrace CBDCs, but plenty of pitfalls, too.

The Benefits of CBDCs

Compared to existing systems, a well-implemented CBDC could be more:

  • Economical. Since CBDCs are digital, the cost of managing physical cash could be reduced substantially. Furthermore, blockchain-based technological frameworks could potentially reduce both transaction times and transaction costs to fractions of a second and fractions of a penny, respectively.
  • Financially inclusive. In countries with large unbanked populations, CBDCs could provide secure access to savings and credit. Paired with mobile applications and digital identification tools, CBDCs could facilitate more participation in the financial system than ever before.
  • Global. With CBDCs, cross-border payments could be made faster, cheaper, and more accessible by reducing the number of intermediaries needed to complete a transaction. However, this depends on a degree of interoperability between CBDCs—international coordination is needed to achieve this effect.
  • Programmable. A CBDC could provide a direct channel through which central bankers could take actions like distributing stimulus payments or modifying interest rates.
  • Effective against money laundering. Thanks to the centralized nature of a CBDC, central bankers could detect and block suspicious transactions, possibly  seizing and removing illicit funds from circulation entirely.

Privacy concerns

This potentially high degree of government control has led some observers to fear that the motivations for building CBDC are authoritarian in nature. China, the major world economy furthest along on the path to a digital currency, is the most commonly cited country in these criticisms.

Such criticisms are not entirely unfounded. As discussed in our Cryptocurrency and China report, China’s CBDC model could enhance the government’s financial surveillance capabilities substantially. While Chinese citizens already lack financial privacy, the digital yuan would make it even easier for the CCP to view citizens’ financial activity, and give them the ability to exclude individuals or businesses from the payment system for any reason. Further, financial data generated by the digital yuan could be combined with other types of data feeding into China’s controversial social credit system.  While it’s unclear if or to what degree the CCP will elect to use these capabilities, the digital yuan system makes them a distinct possibility.

In democratic countries, on the other hand, politicians and central bankers are expected work together with the public to find an approach that both preserves privacy and prevents criminal activity. Due to existing financial regulations for KYC/AML, some speculate that CBDCs will be identity-based, but exceptions to this rule could include accounts with balance caps and transactions under certain amounts.

Economic concerns

In addition to the privacy concerns stated above, several economic risks play into the development of CBDCs. Three of these stand out in particular: the disintermediation of commercial banks, a lack of global interoperability, and the potential weakening of the U.S. dollar.

Firstly, if CBDCs do not incorporate commercial banks into their system designs, they risk depriving banks of their deposit base, thus destabilizing domestic banking systems. CBDC designs have countered this with mechanisms like balance caps and zero-interest deposits.

Secondly, if CBDC development is not internationally coordinated, the effectiveness of both cross-border payments and economic sanctions could be eroded. The SWIFT transaction system presently supports these functions, but without a CBDC equivalent, illicit international transactions could go unmonitored and ordinary cross-border payments could be inefficient. Fortunately, SWIFT has outlined its plan to address these issues as CBDCs develop.

Thirdly, some fear that a protracted roll-out of CBDCs could weaken domestic currencies. This looms especially large in the United States, as the U.S. dollar is the world’s reserve currency. The thinking goes as follows: If other countries can roll out CBDCs first and perform CBDC-to-CBDC exchanges sans USD, they may not need to maintain their U.S. dollar holdings.

But Danny Li, a research fellow at the Asia Society Policy Institute, disagrees. Given the stability of the U.S. dollar relative to other currencies, Lee observes that even multinational projects like the Belt and Road Initiative have been financed with USD. Lee also finds that the most advanced CBDCs, particularly China’s digital yuan, are optimized largely for domestic retail payments, with aims like improving financial inclusion, lowering costs, and eliminating cash. In other words, CBDCs—while rich with economic and technological promise—are unlikely to significantly disrupt the existing financial order.

CBDCs in the making

Today, countries representing over 90 percent of global GDP have begun to explore a central bank digital currency. While the vast majority of these countries are years away from implementation, central banks in Asia, Africa, and the Caribbean have already paved the way.


Eight countries have already launched some form of CBDC. This list includes the Bahamas, which introduced its Sand Dollar in October of 2020; five other Caribbean nations, which quickly followed; Cambodia, which unveiled a cross-border, remittance-focused CBDC; and Nigeria, which launched its e-Naira last month.

The Caribbean and Cambodian central banks used blockchain technology for their CBDCs, while Nigeria opted for a more conventional database architecture.

All of the CBDCs launched thus far have been developed for retail purposes, to be held and exchanged between individuals and businesses. Wholesale CBDCs— digital currencies designed to be held and exchanged between financial institutions—have yet to see an official launch, though many wholesale and retail CBDCs are developing at a brisk pace in the pilot stage.


Several dozen more countries are currently piloting CBDCs. Among these, partnerships between central banks, commercial banks, and IT consultancies are the most common, and wholesale, cross-border CBDCs are the most advanced.

Retail CBDC pilots

Let’s begin with retail CBDCs. Of these, China’s digital yuan project is the most advanced pilot, with more than 70 million transactions facilitated thus far according to a recent PBoC white paper. In other words, it’s already widely used: Mu Changchun, the PBoC’s Digital Currency Institute head, stated just last month that the number of individual digital yuan bank accounts is over 140 million, while corporations have created another 10 million.

The payment system, dubbed DC/EP (Digital Currency/Electronic Payments), is issued by the central bank, provided to customers via commercial banks accounts, and managed with a conventional ledger—not a blockchain. Its official launch is anticipated for the Beijing Winter Olympics in early 2022.

Sweden, Ukraine, Uruguay, and multiple other countries have completed retail pilots as well. While most of these pilots were successful, tests were typically performed on a small-scale and without the involvement of commercial banks, which are critical stakeholders in the roll-out of CBDCs. Sweden intends to remedy this by involving banks in its next phase of testing, but for other nations piloting retail CBDCs, the path to widespread implementation remains unclear.

Wholesale CBDC pilots

Wholesale CBDCs have been even more active in the pilot stage: nearly 70% of declared wholesale projects are already running pilots. These pilots are taking place predominantly among advanced economies and across continental borders.

The first of such experiments, Project Jasper-Ubin, conducted by the Bank of Canada and the Monetary Authority of Singapore, successfully linked the two banks’ experimental payment networks. The networks themselves were built on distributed ledger technologies (DLTs) developed by the R3 consortium and ConsenSys—Corda and Quorum, respectively. The Hyperledger and Ethereum protocols are also being considered for CBDC implementation.

The mBridge project, a cross-border collaboration between Hong Kong, UAE, Thailand, and China’s central banks, has been similarly successful. According to the report, the prototype platform was able to complete international transfers and foreign exchange operations in seconds as opposed to several days under the existing framework, with the cost of such operations reduced by up to half. As these projects continue, privacy controls and the performance of DLTs in handling large transaction volumes are being closely observed.

The central banks of England, France, and South Africa, among others, are also independently testing the use-cases of wholesale CBDCs.


Some central banks, unsure of how to proceed, are still weighing the costs, benefits, and risks of creating CBDCs.

In the United States, political considerations still weigh heavily on the debate. In April 2021, Federal Reserve Chair Jerome Powell said of central bank digital currencies that it is “better to get it right than be first,” and on January 20th the Fed released its long-anticipated Digital Dollar Report. This report discussed CBDCs potential impacts on monetary policy, financial services, and commercial banks, but took no position on “the ultimate desirability of a U.S. CBDC.”

In the meantime, American universities, financial institutions, and IT consultancies have begun to innovate. Last year, the Boston Fed announced a multiyear collaboration with MIT’s Digital Currency Initiative on CBDCs. And earlier this year, the Digital Dollar Foundation and Accenture formed the Digital Dollar Project to spearhead five U.S.-based CBDC pilots in the next twelve months.

Other major economies’ explorations with CBDCs are also worth following. The European Central Bank (ECB) launched the investigation phase of a digital euro project this July, which aims to address key issues regarding design and distribution, and the central banks of Japan, England, and many other countries have announced similarly structured approaches to CBDC R&D.

The future of central bank digital currencies

The  benefits of CBDCs are manifold: lower-cost transactions, higher-speed settlements, and an improvement in the ways in which billions of people pay. So while CBDCs may be years away, research is moving at a brisk pace. And with China’s digital yuan making its debut at the Winter Olympics in 2022, open questions about CBDCs’ powers and problems may soon be answered.