What is a CBDC and What is it Used For?

Numerous countries around the world are developing Central Bank Digital Currencies (CBDCs). This article will teach you all about CBDCs and explain why they are different to cryptocurrencies.

CBDCs are digital tokens issued by a country’s central bank or monetary authority. Central Bank Digital Tokens are pegged to the value of a country’s fiat currency. They are designed to help with the transition between physical and digital money.

What is a CBDC?

A Central Bank Digital Currency is a virtual currency created and issued by a central bank. CBDCs are digital tokens pegged to the traditional fiat currency of the country where they’re issued. A currency peg refers to the fixing of one currency’s value to another. For example, a United States CBDC would be worth the exact same as the US Dollar.

Currently, many central banks are exploring the opportunity to create CBDCs. Which will arguably make the implementation of financial policies easier. Once created, Central Bank Digital Currencies would have the full backing of the issuing country.

What is the purpose of a CBDC?

Central banks are perhaps the biggest proponents of CBDCs. Cryptocurrencies hold many advantages that central banks are interested in, namely instantaneous, affordable and fully digital transactions. However, cryptocurrencies remove the necessity for the banks themselves, which is why central banks and monetary authorities are so quick to promote the benefits of CBDCs.

The International Monetary Foundation (IMF) outlines several key goals of CBDC projects, all of which central banks use to highlight the need for their own digital currencies. In reality, Central Bank Digital Currencies are designed to provide absolute control and power to the monetary authority in question.

Below are some of the proposed benefits of CBDCs:

  • Financial inclusion – CBDCs could potentially allow for additional financial inclusion by increasing access to digital payments and serving as a gateway for additional financial services.
  • Accessibility – Private payment providers might not extend their services to all parts of a population due to profitability reasons. The decline in cash use is also a concern. CBDCs could help to achieve or safeguard universal access to monetary payments.
  • Efficiency – CBDCs could provide a more cost-effective alternative to existing digital payments. Central banks are non-profit by nature, so digital currency could be offered as a low-cost payment method.
  • Resilience – It’s important that individuals and governments can make payments and transfers under any circumstance.
  • Reducing the illicit use of money – The anonymity of cash and cryptocurrencies make them perfect for illicit transactions (tax evasion and money laundering, for example). CBDCs could help to reduce this problem.
  • Monetary sovereignty – In risk-facing countries, currency substitution – using another country’s currency instead of your own – is problematic. Currency substitution has the potential to hinder a country’s ability to carry out crucial central bank functions. CBDCs could encourage the population to remain loyal to its own currency.
  • Competition – CBDCs could increase a country’s competition within the payment sector. They could compete directly with existing payment providers by offering a low barrier of entry for new businesses.

Retail and Wholesale CBDCs

CBDCs are classified into two different types, depending on the proposed user base.

Retail CBDCs

Retail Central Bank Digital Currencies focus specifically on the general public. They are often more available, anonymous and traceable than wholesale CBDCs. Average consumers will potentially be able to conduct daily transactions using retail CBDCs.

Central banks in emerging economies take a greater interest in Retail CBDCs, as they allow monetary authorities to capitalize on opportunities for growth in financial technology. Retail CBDCs also promote financial inclusion and present a faster transition to a cashless society. Finally, retail CBDCs are responsible for taking away intermediary involvement.

Wholesale CBDCs

Wholesale CBDCs are ideal for financial institutions holding reserve deposits in a central bank, as well as central banks in advanced economies. They enable effective retail payments and settlement systems and are suitable for exchanging and trading among central and private banks.

Wholesale Central Bank Digital Currencies are also beneficial in that they provide the opportunity for faster cross-border transactions.

CBDC vs Cryptocurrency: What’s the Difference?

The technology used in CBDCs and cryptocurrency is similar, but in reality, the two are nothing alike.

Cryptocurrencies are digital or virtual currencies that are secured using cryptography. Most cryptocurrencies have no central issuing or regulating authority, although some – like Hedera Hashgraph – are more centralized than others. Cryptocurrencies depend on a decentralized system to log transactions and produce new units of that particular currency. Cryptocurrencies utilize blockchain technology, and transactions can be audited by anybody taking part on the network. The community behind cryptocurrencies, therefore, ensures the network is honest and that coins aren’t just created out of thin air. This places cryptocurrencies in direct contrast with currencies issued by central banks, which can be printed at will.

On the other hand, monetary authorities or central banks regulate Central Bank Digital Currencies. Additionally, unlike privacy coins such as Monero and Pirate Chain, CBDCs lack anonymity, and an individual’s details will remain attached to their CBDC asset.

CBDCs do use blockchain technology to verify and store transactional data, but they do so on a private and permission-only network. As a result, the general population are unable to engage in verification as they can with cryptocurrencies. Transactional data will also remain undisclosed to the public. CBDCs are entirely centralized: cryptocurrencies are created for the benefit of ordinary citizens, whereas Central Bank Digital Currencies are government-backed forms of money, aimed at benefiting those that issue them.

History of Central Bank Digital Currencies

The interest in Central Bank Digital Currencies has ultimately come around because of the increasing popularity of cryptocurrencies and stablecoins. Stablecoins are cryptocurrencies that are pegged to the value of other currencies. For example, Tether (USDT) and Binance USD (BUSD) are both pegged to the US Dollar. Stablecoins are designed to dramatically reduce the volatility of cryptocurrencies. This creates a form of digital money that is better suited to modern business and day-to-day transactions, compared to traditional cryptocurrencies. CBDCs were introduced as an answer to the stablecoin aspect of decentralized finance.

After a successful pilot in 2019, the Central Bank of the Bahamas introduced the Sand Dollar (B$) in October 2020. The Sand Dollar is a digital legal currency that was, and is, equivalent to the Bahamian dollar. The Bahamas were the first to release a nationwide Central Bank Digital Currency.

In May 2020, 35 countries were considering implementing a CBDC. In 2022, it’s believed that over 100 countries are exploring the possibility of creating and issuing a CBDC.

Examples of CBDCs

Many countries are looking into the idea of CBDC. However, some countries are further ahead than others. Below are some of the most interesting examples of Central Bank Digital Currencies, although this is a small percentage of those currently in production.


China is poised to be the first major economy to launch an official CBDC. Having explored the potential of a digital currency since 2014. The project is titled Digital Currency Electronic Payment (DCEP), also referred to as the ‘digital yuan’.

By the end of 2017, China’s central bank had onboarded a number of banks and financial institutions to help develop the DCEP system. The first test of the CBDC began in 2020, with an initial trial launch in Shenzhen, Suzhou, Chengdu and Xiong’an. In 2021, China expanded its tests to Hainan province and Shanghai, amongst other cities. 2022 should see further expansion to other Chinese cities and Hong Kong.

The People’s Bank of China joined the Multiple Central Bank Digital Currency Bridge in 2021. The purpose of this unison was to explore the potential for cross-border payments using distributed ledgers. This follows Beijing’s goal to increase the yuan’s use outside of the Chinese domestic market.


In February 2022, India’s Finance Minister Nirmala Sitharaman suggested that the Reserve Bank of India’s digital rupee would launch in the 2022-23 financial year. It’s believed that the Indian CBDC will be introduced in phases, beginning with wholesale businesses.

The Reserve Bank of India originally proposed amendments to the Reserve Bank of India Act, 1934, which would allow it to launch a Central Bank Digital Currency. The amendment to the legislation would enhance the scope of the definition of ‘bank note’ to incorporate currency in its digital form.

India has historically been cautious about cryptocurrencies. This concern is due to fears about alleged money laundering, terror financing and tax evasion. The CBDC was introduced as a way to bridge the advantages and risks of digital currencies, and allow authorities to monitor financial transactions more closely.


Nigeria, Africa’s largest economy, was the second country to introduce a CBDC. The Central Bank of Nigeria issues eNaira as legal tender and utilizes the eNaira wallet. The Nigerian CBDC was released in October 2021 and saw 4 billion naira (US$9.3 million) worth of transactions in its first eleven months.

Despite its economic size, 40% of Nigerians are believed not to have a bank account. This figure suggests that 59 million adults in Nigeria are unbanked. The country’s CBDC looks to provide financial inclusion to the entirety of the population. Nigeria’s central bank has previously attempted to limit cryptocurrency use among the public by ordering banks to close accounts showing cryptocurrency transactions.

The Problem With CBDCs

Despite there being a number of positives in favour of the widespread use of CBDCs, there are some problematic factors to take into consideration.

Unlike cryptocurrencies, CBDCs are introduced by a country’s central bank. This monetary authority would have complete control over the CBDC, making it incredibly centralized. The central bank could, theoretically, put restrictions on the types of transactions that users are able to make with its digital currency.

Cash and cryptocurrencies both have the potential for anonymity. One of the main purposes of CBDCs is to avoid the illicit use of money. Although a positive at first glance, this means that the central bank would have data on every CBDC transaction, as well as its users. This raises numerous issues regarding privacy. Privacy is incredibly important as it makes a currency fungible – the knowledge that one unit is exactly equal to another unit of the same currency. This privacy gives people the confidence to use a currency.

Finally, CBDCs don’t really solve many issues faced by fiat currencies. Cryptocurrencies were introduced to create a brand-new monetary system, whereas it’s been argued that CBDCs are designed to primarily benefit the central bank itself, rather than the general public.

Frequently Asked Questions

What is a CBDC?

A CBDC is a Central Bank Digital Currency. CBDCs are digital tokens that are issued by a country’s central bank. CBDCs are pegged to the value of the country’s fiat currency. CBDCs are designed to help with the inevitable transition from cash to digital money.

Are CBDCs Cryptocurrency?

CBDCs are not the same as cryptocurrencies, although they share some of the same technology. Cryptocurrencies are decentralized, whereas CBDCs are owned, issued and operated by a centralized monetary authority. CBDC transactions are recorded on the blockchain, but these are not verified by the network’s users, as is the case with most cryptocurrencies.

Which Countries Have Their Own CBDC?

As of 2022, it’s believed that over 105 countries are exploring the possibility of introducing and issuing their own Central Bank Digital Currency. In September 2022, only 11 countries have launched a CBDC: The Bahamas, Jamaica, Nigeria, Anguilla, Saint Kitts and Nevis, Antigua and Barbuda, Montserrat, Dominica, Saint Lucia, Saint Vincent and the Grenadines, and Grenada.

Will Central Bank Digital Currencies Replace Cash?

It’s impossible to know whether CBDCs will eventually replace cash entirely. The transition between cash and digital money has been taking place over the last couple of decades, and this process was sped up drastically following the Covid-19 pandemic and subsequent lockdowns. There are a number of advantages to cash, although it also has its drawbacks. CBDCs look to improve on some of these issues, but it’s unclear whether cash will ever be phased out completely.