What Are CBDCs?

What Are CBDCs
What Are CBDCs?

Central bank digital currencies, CBDCs, are transforming how we transact under the current global economic order. While governments have been skeptical about adopting decentralized CBDC, regulated digital currencies are possible on decentralized networks. The nature of CBDCs and the current revolution in international finance stirred by CBDCs are discussed in this article.

What Are CBDCs?

An Overview of CBDCs

According to insights from the Atlantic Council, people in Jamaica, the Bahamas, Nigeria, and Eastern Carribeans are the only ones currently in a country where CBDC has been fully launched and recognized. However, 104 other countries have inactive CBDCs or have launched pilot phases of their central bank digital currencies. To get a clearer picture of CBDCs, it is important to look at the preceding events that led to the current state of adoption. 

A new interest in digital currencies grew during the same period of the dotcom boom in the 1990s and 2000s. Central banks decided not to pursue their development due to several inefficiencies, such as security, attacks, and the relatively new nature of the industry. 

Thus, central banks and governments downplayed the need for digital currencies until the creation of Bitcoin following the 2008 global financial crisis. Bitcoin was proposed as an alternative means of payment in a decentralized network which was several times more efficient than traditional financial systems. The system was used for payment by a group known as cypherpunk until it gained mainstream attention around 2011.

Later on, Ethereum, a decentralized blockchain that allowed the programmability of money and any computationally solvable problem, was launched in 2014. The use cases and possibilities with such a limitless decentralized blockchain thus led to the rapid growth of cryptocurrencies as several financial and real-life solutions launched with tokens on Ethereum. 

The importance of Bitcoin and Ethereum as mediums of exchange gathered so much attention because of blockchain technology. Storing transactions on a distributed ledger proved far better than Real-Time Settlement Systems used to settle cross-border bank transactions. 

Additionally, transactions on distributed ledgers do not require reconciliation which is quite expensive, and fees are negligible. Blockchain technology also reduces the risks of attacks and the barrier to entry into the financial system; the speed of execution is pretty remarkable.  

Conversely, cryptocurrencies like Bitcoin failed to serve their purpose due to volatility. Since storing value and making deferred payments are some of the core functions of money, Bitcoin and Ethereum failed in both cases. 

Consequently, Bitfinex launched Tether, the first stablecoin pegged 1:1 with the US dollar, and other stablecoin development followed the creation of USDT. The most remarkable of the private stablecoin launches was Diem, a plan by Facebook that could have left the company with more powers than regulators were willing to tolerate. 

Authorities started to consider the creation of CBDCs, digital representations of the actual legal tender to tackle the risks of having so much power with a private entity. 

An Overview of CBDCs
An Overview of CBDCs

The Nature of CBDCs 

Money in most national economies is created by the central bank through minting or by commercial banks through lending to retail borrowers. These borrowers pay interest based on the current ratio set by the central bank, thus multiplying deposits left by depositors in their fixed deposit, savings, and other bank accounts. 

Central bank digital currencies are a new approach to issuing central bank money. They are digital assets accounted for by a single ledger which can either be distributed or not distributed. The ledger acts as the single source of truth about the state of transactions.

CBDCs represent claims to the central bank just like bank notes, and the central bank determines and controls the supply of CBDCs. They are, therefore, legal tender that can fulfill all the functions of money without drawbacks. Anyone can use CBDCs like their bank note or national currency.

The are two broad types of central bank digital currencies identified according to Consensys research. They are the wholesale CBDCs and the retail CBDCs. The wholesale CBDCs are used to settle transactions between institutions that have accounts with central bank accounts. Retail CBDCs are mostly used to settle transactions between individuals and businesses. 

The Nature of CBDCs

The Current State of CBDCs

Research from the Atlantic Council shows that about 114 countries accounting for 95% of the global GDP are exploring CBDC. In May 2020, 35 countries were working on CBDCs, but 60 more countries joined the race with their CBDCs in the development, pilot, or launch phase. 11 countries, including 8 Caribbean countries, have fully launched CBDCs. At the same time, China, one of the world’s biggest economies, is set to expand its digital Yuan to most of its 1.4 billion population. 

To avoid reliance on the US dollar as the global reserve currency for transactions, Russia has been exploring several retail and wholesale CBDC alternatives. To date, there are 9 cross-border wholesale CBDC tests and 7 retail CBDC projects at various stages of their development. 

Most G7 economies, including the United States, which launched its CBDC project Cedar, is moving from the research phase to the development phase of a CBDC. 18 of the 20 G20 countries are also in the advanced stages of development of a CBDC, with most investing significantly to build one in the past couple of years.

Over 20 countries, for example, Australia, Thailand, Brazil, India, South Korea, and Russia, will be piloting CBDCs in 2023. The European Central Bank will likely start a pilot program for CBDCs next year. 

The Current State of CBDCs
The Current State of CBDCs

Merits of CBDCs

Encourage Digital Innovation

CBDCs will bring innovation into today’s capital market, increasing the efficiency of payment, issuance of notes, and management of transactions. CBDCs could also form the base for the immediate settlement of transactions which take time and several complicated processes in current financial systems. 

Additionally, CBDCs will also prevent the dominance of a privately issued alternative which could expose users to credit risks should the issuer fail at some point. Privately issued tokens are also less accessible than CBDCs, and fair accessibility is an essential quality of money.

CBDCs also prevent insolvency risks which holders of commercial bank accounts may suffer should a bank become insolvent. They are issued directly by the central bank, and user funds remain intact in the event of bankruptcy. 

Secure The Future of Monetary Policy

Given that privately issued stablecoins will exclude many people from the financial system due to their centralized setup, CBDC remains an essential tool for the future of monetary policy. By providing an accessible digital currency to the broader populace, the continuation of a healthy monetary policy setup can be sealed. 

Moreover, the issuance of cash to the retail market generates interest and is a clear way to maintain the central bank’s control of the money in circulation. Commercial banks can therefore continue their money-creation operations in a CBDC-based payment economy. 

Compliance will also be easy with the creation of CBDC as traceability is made possible through permission blockchains allowing the central bank to track and forestall fraudulent transactions. 

Better Cross-Border Remittances

Existing cross-border payment systems are a real pain in the neck. Cumbersome payment processes are some of the nightmares of migrant and international workers who have to send remittances home. 

The current cross-border payment includes multiple settlement third parties, which slows the process and increases the transaction’s cost. On top of that, payment fees are taken from the sending and receiving end, making it even worse for users. 

A CBDC-based cross-border remittance system built on the blockchain will allow direct settlement of international transactions. It will also create a fair ground for payment providers to compete fairly and offer excellent rates for users. 

Improved Inter-Bank Settlement

The current inter-bank settlement system process runs on Real-Time Gross Settlement Systems (RTGS). Although the system offers the ability to settle transactions individually instead of waiting until the end of the day, it still presents settlement risks. 

RTGS relies on batch processing of transactions overnight and collateral to cover outstanding positions. It also presents operational risks since it runs on outdated programming languages and messaging systems like COBOL and SWIFT. 

With CBDCs based on blockchain technology, the interbank settlement will be similar to cash transfers with no operational or settlement risks. 

Innovating Retail Markets

A growing monopoly that reduced competition and quality of financial services has evolved due to differences in payment terms. Most banks charge customers more than their operating costs in fees and offer unfair benefits for their customers, such as zero fees for intrabank transactions. 

CBDC will reduce these practices by creating a fairer system with new standards driven by the genuine intention to serve retail customers. Such services as improved customer support and better user experience design will significantly increase customer satisfaction and banking experience.

Merits of CBDCs

Demerits of CBDCs

Negative Impact on Commercial Bank Deposits

As more people adopt CBDCs, commercial banks will be left with two critical choices. They must increase the interest they pay out to customers and the interest they charge on the loan they give to retailers. As widespread adoption grows, some banks may be forced out through large-scale bank runs.

Consequently, the central bank will need to help these commercial banks as their balance sheets increase exponentially. Assisting failing banks will expose the central bank to the credit risk of the banks they support.

Overcomplexity of The Financial System

Notably, there are already numerous ways of settling payments, making the current financial system quite complex. Adding CBDC to the available alternative, such as PayPal and Bitcoin, only adds another layer of options and complexity to the system. The delay that could come from this may not be transaction delay but the difficulty in researching to find the best payment option. 

Increased Centralization

Bitcoin and Ethereum were designed on the principles of freedom and decentralization. No one can control the ledger in each case, and transactions are final once completed. 

Despite arguments about the potency of CBDCs in curbing cybercrime such as money laundering, CBDCs also limit the fundaments rights of citizens. There are countless stories of the government unfairly closing or restricting citizens’ accounts simply because they took a contrary path or stand.

CBDCs will perpetuate the complete sovereignty of governments, giving them absolute power to censor and manipulate the lives of citizens. They can also randomly shut down accounts and do whatever pleases them with people’s hard-earned money.

Infringement on Individual Privacy

Regardless of the importance of protecting people from fraud and preventing financial crimes, allowing the government access to all transactions and balances has drawbacks. 

There are several cases, such as the Canadian Truckers Protests, where the government froze citizens’ bank accounts for going against them. The point is civil disobedience is a fundamental human right. However, the government can act arbitrarily by freezing the accounts of those it does not like, which CBDC makes relatively easy. 

Privacy is also a considerable advantage of decentralized blockchain networks over CBDCs. The privacy limitations of CBDCs may catalyze more comprehensive adoption of alternative digital currencies like Bitcoin and Ethereum.

Inaccessible By The Poor and Uneducated

The poor and uneducated who have no clue how to use sophisticated technology devices will be left behind by CBDCs. Bringing CBDCs to their reach will also slow down the rate and increase the cost of adoption. Also, people in this category in developing countries live on a meager income, making it impossible for them to afford the devices needed to use CBDCs.

Attempts to access these digital currencies through third parties could also lead to fraud and related activities that further complicate the process. 

Demerits of CBDC
Demerits of CBDC

The Future of CBDCs

The future of CBDCs will be mostly based on decentralized networks because centralized networks present many drawbacks and risks, like a single point of failure attack. There is a range of possibilities with a CBDC on a decentralized network, and the choice of what network to use will depend on the decision of the issuing financial authority. 

When building CBDCs for the future, the important considerations include issuance control, time, throughput, robustness, privacy, compliance, recovery, and environmental impact.

Similarly, CBDCs will coexist with other digital currencies. It is unclear to what extent this coexistence will continue, but it will likely remain so in the foreseeable future. 

It is also less likely that there will be a universal CBDC. What will exist is a system that empowers existing companies and institutions to build better solutions on new systems. Existing companies and institutions also have advantages over upcoming solutions providers due to their ability to attract the best talent. 

The Future of CBDCs
The Future of CBDCs


In conclusion, CBDCs are a necessary innovation when the global financial system is experiencing some of the biggest disruptions in recent years. With CBDCs, central banks can latch onto the current innovation and remain relevant in future financial systems.

Additionally, the perceived threat from stablecoins issued by private entities will be mitigated with CBDCs. While both can coexist in the new financial era, there will likely be a joint need for both in the future. Fiat onramps and offramps are some of the best examples of this synergetic relevance between CBDCs and stablecoins.

CBDCs pose some risks, but the promise of a better financial system presented by CBDC innovations makes the adoption of CBDC a lesser evil despite its demerits. 

During the bear market, many crypto investors are looking for investment alternatives to keep their portfolios afloat. Interested in investing in stablecoins or stable assets? Pandora, the fast-growing and acclaimed high-yield paying gamified DEX on BNB Chain, has got you. 

Pandora NFT Securities are backed by real-world investments and pay an APY of up to 12% to investors worldwide. Interest is paid every second, and holders can sell their NFT Securities whenever possible. You can join the thousands of NFT Security holders across the globe now to secure your financial future in DeFi. 

These contents are for general information purposes only. They are not investment advice, a recommendation, or solicitation to buy, sell, or hold any digital asset or engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the crypto asset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your crypto assets, and you should seek independent advice on your taxation position.

Stay financially strong with Pandora – your favorite DeFi companion!

*Telegram Group DEX: https://t.me/PandoraCommunity
*Telegram Channel DEX: https://t.me/PandoraDigitalNews
*Telegram Group Launchpad: https://t.me/Pandora_IDO
*Telegram Channel Lauchpad: https://t.me/PandoraIDO
*Twitter: https://twitter.com/Pandora_DEX
*Facebook: https://www.facebook.com/PandoraDigital.DEX/
*Instagram: https://www.instagram.com/pandora_dex/
*Medium: https://medium.com/@pandora_digital
*Discord: https://discord.gg/pandoradigital
*Reddit: https://www.reddit.com/r/pandoradigital/
*Blog: https://news.pandora.digital/
*Partnership: https://partner.pandora.digital/
*Official Dapp: https://pandora.digital/
Leave a Reply

Your email address will not be published. Required fields are marked *

Previous Post
Pandora Weekly Hilights

Pandora Weekly Highlights | 09/01 – 15/01

Next Post
Is It Time to Invest in Crypto And How Much

Is It Time To Invest In Crypto, And How Much?