Long reads

What is CBDC? Understanding digital currencies

Dominique Dierks

Dominique Dierks

Content Manager, Finextra

CBDC (central bank digital currency) is a form of digital currency that a country’s central bank can issue alongside cash. Their value is linked to the issuing country’s official currency. For example, if the UK were to release a CBDC, it would be called the digital pound.

While cash is a physical commodity, a CBDC is a digital currency that can be both account- and token-based. In account-based systems, it’s the identity of the payer that requires verification, while token-based systems verify the validity of the object used to pay.

In this way, CBDCs are similar to crypto, which are also digital currencies. The main difference lies in the way both are issued. Cryptocurrencies are privately issued, meaning that, should anything go wrong with the asset, there is no central bank or government that can step in. CBDCs is also less volatile that cryptocurrencies.

Source: Bank of England

How does CBDC work?

Similar to cryptocurrencies, CBDCs are not physical commodities and depend on networked electronic resources to create, track and validate transactions. While crypto resources are distributed and anonymised, CBDCs reside in central databases that are controlled by the issuing central bank. Every CBDC has a unique serial number to identify it.

While today’s digital payments involve multiple actors to enact the transaction, clear the payment and administer millions of accounts, CBDCs, having evolved from both cash and decentralised digital currencies, cut out the middleman and travel from customer to vendor.

Which countries are leading the development of CBDCs?

There’s no one type of CBDC, and different approaches are being piloted and developed in various countries. At the time of writing, 87 countries are exploring CBDCs due to increased consumer demands of paying electronically rather than with cash. While most CBDC projects are still in research and development phases (i.e., USA, UK, Germany, Brazil), some countries have launched or are piloting CBDCs.

Which countries have launched CBDC?

At the time of writing, the following countries have launched a CBDC:

  • The Bahamas became the first country in the world to move past the pilot phase and officially launch a CBDC in October 2020. The Sand Dollar was introduced to improve financial inclusion and strengthen security against money laundering or illicit economic activities.
  • The Eastern Caribbean central bank made its CBDC DCash available to members of the public on March 31, 2021. Participating countries and territories include Anguilla, Antigua and Barbuda, Saint Kitts and Nevis, Monserrat, Dominica, Saint Lucia, Saint Vincent and the Grenadines, and Grenada.
  • Nigeria became the first African country to roll out a CBDC when it launched its eNaira in October 2021. A year later, the country started limiting daily ATM withdrawals to $45 boost digital payments.
  • Jamaica announced the successful completion of its CBDC trial in 2021 and the Jamaican Digital Exchange (or JAM-DEX) was rolled out on the Lynk mobile app in July 2022.

Which countries are piloting CBDCs?

At the time of writing, the following countries are piloting a CBDC:

  • China: Digital yuan
  • Russia: Digital ruble
  • Sweden: E-krona
  • Ukraine: E-hryvnia
  • Kazakhstan: Digital tenge
  • South Korea: Unnamed
  • Japan: Digital yen
  • Hong Kong: e-HKD
  • India: Digital rupee
  • Turkey: Digital Turkish lira
  • Tunisia: Unnamed
  • Ghana: E-cedi
  • South Africa: Unnamed
  • Iran: Crypto rial
  • Saudi Arabia: Unnamed
  • United Arab Emirates: Digital dirham
  • Israel: Digital shekel
  • Thailand: Unnamed
  • Malaysia: Unnamed
  • Singapore: Unnamed
  • Australia: eAUD

Will CBDC replace cash?

While digital payments are increasing, demand for cash remains, so it is unlikely that CBDCs will fully replace cash. In 2023, cash usage in the UK has grown for the first time in a decade. The Bank of England has additionally stated that, as long as demand remains, they will continue to issue cash. The advantages of launching CBDCs alongside cash are that it offers adds increased payment flexibility, increased access for the unbanked, heightened security and improved speed.

Comments: (2)

Whitman Knapp
Whitman Knapp - GTBInsights LLC - Brookline 08 December, 2023, 17:24Be the first to give this comment the thumbs up 0 likes

Good article!

However, please do not conflate crypto with cryptocurrencies. While the crypto world has not done a good job of defining itself, it is akalydiscope of activities including platforms, distributed ledgers, blockchains, fintech based firms all with the same root of using cryptography to insure the movement of digital information is secure and uncorrupted. Other than BTC and ETH, and a small handful of other coins, 99% of cryptocurrencies are pure speculation and have no real world usecases other than speculation. 

It is important to use the correct taxonomy when discussing digital payments.

Souvik Chakraborty
Souvik Chakraborty - kildeQ GmbH - Bielefeld 11 December, 2023, 09:14Be the first to give this comment the thumbs up 0 likes

What is the main purpose of introducing digital currency?We can have digital wallet and use the App based model to avoid the intermediaries and even in CBDC I think we need to have a wallet which is to be linked with your bank account. I really want to understand the difference CBDC will bring and it would be great to have that clarity.