Central Bank Digital Currency (CBDC) Explained

William M. Peaster on 27 Oct 2020

Central bank digital currencies (CBDCs) are fiat money issued digitally by states’ central bank institutions.

Governments have been exploring e-money projects for decades now, but the recent rise of Bitcoin, Ethereum, and other popular blockchain projects toward mainstream finance has inspired some of the world’s top bankers to seriously study, and in some cases even start developing, CBDCs.

While Bitcoin is decentralized, a central bank needs to centrally control a CBDC, which has led to some institutions exploring digital fiat implementations that aren’t based on distributed ledger technology at all. But regardless of whether these banks ultimately opt for distributed ledger tech or not, there’s no question that they’re taking the prospects of CBDCs more seriously than ever before. Indeed, the Bank of International Settlements (BIS), a bank for central banks, noted back in January that roughly 80% of the world’s central banks were already engaged in some type of CBDC work.

Additionally, we’re also at the point now where CBDCs are no longer just hypothetical: this month alone we’ve seen the People’s Bank of China (PBoC) start distributing its highly-anticipated digital yuan and the Central Bank of The Bahamas (CBOB) release its digital Sand Dollar. So with CBDCs now decisively entering into the international limelight, here’s a primer on these new assets and a rundown on the world’s biggest CBDC headlines right now.

What Is a CBDC?

A central bank digital currency is issued digitally by a central bank. So just how paper banknotes are legal tender that represent claims against a central bank, a CBDC works the same way. The big difference, of course, is that it’s digital and underpinned by technology like a distributed ledger rather than by paper.

As for specifics, there are two predominant models of CBDCs: retail and wholesale. Retail CBDCs are best understood as digital cash and are designed for peer-to-peer (P2P payments) and transactions between consumers and businesses. Wholesale CBDCs are for interbank settlements and offer a novel way for central banks to facilitate fast and cheap transactions among their clients.

Advantages of CBDCs

CBDCs represent a new tool for central banks to conduct direct, programmable monetary policy.

These institutions also currently face a whole host of inefficiencies when it comes to mainstream banking’s reigning clearing, settling, and payments practices, and CBDCs can effectively address many of these inefficiencies.

For example, retail CBDCs give central banks the ability to totally manage their money supply and implement policies like negative interest rates directly. Retail CBDCs can also make accounting drastically cheaper and be readily distributed far and wide via mobile phones and so forth. Wholesale CBDCs, on the other hand, can automate and optimize interbank settlements while mitigating counterparty risk.

There would be even more advantages to a blockchain-based CBDC, for instance one that was built atop Ethereum. Such a CBDC would be highly customizable, programmable, and interoperable with a growing ecosystem of tokenized assets. It would also be resilient and transparent.

CBDCs in the News

2020 has seen a series of major CBDC developments that have the potential to significantly shape the international payments arena for decades to come. Some include:

  • The acceleration of PBoC’s digital yuan development work, which led to a trial of the new digital fiat money in Shenzhen earlier this month.
  • The U.S. Federal Reserve and its regional member banks are currently researching CBDCs and collaborating with other international central banks on the tech.
  • The European Central Bank (ECN) recently published a report declaring that the institution must be prepared to issue a digital euro CBDC.
  • The BIS is developing a proof-of-concept retail CBDC trial that will explore how a blockchain-based CBDC can interact with traditional payments systems.

China’s progress on its DCEP (“digital currency / electronic payments”) yuan project did more to warm up other central banks to CBDCs in recent months than arguably anything else has. It certainly influenced the U.S. Fed and the ECN to start ramping up their own CBDC research, which will likely result in digital dollar and digital euro CBDC implementations.

Nations around the world already feel like they’re playing catch up with China’s central bank, so expect to see more states prioritizing bringing their own CBDCs to market in the years ahead. For its part, the PBoC is now prioritizing the dominance of the digital yuan: the institution is currently seeking to formally legalize the asset in China and to ban any other yuan-pegged tokens domestically.

The Synthetic CBDC (sCBDC)

In 2019, officials at the International Monetary Fund published a post titled “From Stablecoins to Central Bank Digital Currencies.” Therein, the officials outlined how stablecoin enterprises in the private sector could become safer and regulated if they were allowed to use central bank reserves to back their tokens.

The authors dubbed this concept a synthetic central bank digital currency, or sCBDC, because it wouldn’t be a pure stablecoin or a pure CBDC as we’ve understood and seen them to date but rather a new kind of public-private hybrid. They noted:

“Clearly, [using central bank reserves] would enhance the attractiveness of stablecoins as a store of value. It would essentially transform stablecoin providers into narrow banks—institutions that do not lend, but only hold central bank reserves. Competition with commercial banks for customer deposits would grow stronger, raising questions about the social price tag.”

To be sure, sCBDCs are still just a theoretical concept for now. But it illustrates well how central banks can lean into new technologies around digital currency to create unprecedented services.


CBDCs may very well be the future of mainstream finance around the world. At present, most central banks are still wrapping their heads around the tech and getting their hands on proof-of-concept systems for the first time. So there’s still plenty of work to do, and it’ll be years before CBDCs can really start to dominate accordingly. But as the world continues to steer into hyperdigitalization, the further digitization of our fiat currencies seems all but inevitable. CBDCs are an avenue to do that while offering fast and efficient transactions, and the biggest banks in the world have taken notice.


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About the author
William M. Peaster
William M. Peaster is a writer and curator of the DeFi Arts Intelligencer, a newsletter tracking Ethereum’s digital collectibles arena. He is not a financial advisor. The thoughts shared in this guest post are his opinions and reflect his personal experiences and personal optimism around Ethereum. He currently owns some cryptoart and ETH.

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