What Is A CBDC?

Sep 24, 2021

If you can sift through the mixed messages about cryptocurrencies like Bitcoin and Dogecoin, you’ll find very legitimate and important information about a relatively new type of digital currency known as the Central Bank Digital Currency, or CBDC. 

Key Takeaways

  • Favored by governments from rich countries.
  • Provides digital versions of widely-used fiat currencies.
  • Makes money laundering easier to prevent and identify.
  • As of June, 2021, only China has operated a CBDC pilot program.



Defining CBDC

In essence, a CBDC is a digital currency issued by a central bank that functions as a digital version of a country’s fiat currency. This isn’t the same as a fiat-backed stablecoin, however. The difference is that rather than being backed by a currency like a stablecoin, the CBDC is the fiat currency itself! 

The same stores of value that ensure the value of a paper currency are what would ensure the value of a country’s digital currency. In the case of China, the Yuan is backed by a basket of major currencies, including USD. USD is backed by the trustworthiness of the US government and Federal Reserve Bank, which oversees the supply of dollars in circulation. The same basket of major currencies that backs the Yuan would therefore back a digital Yuan.

A CBDC, being a digital currency and in essence a type of cryptocurrency, would be built on a blockchain. Although all cryptocurrencies are built on a blockchain, make no mistake: a CBDC is not a cryptocurrency in the strictest sense, just like how a stablecoin is not. 


Uses Of A CBDC

You might presume this section to be fairly short. After all, the uses of a CBDC are the same as the bills in your pocket right now, right? It’s more complicated than that - and you aren’t thinking outside the box!

Sure, a CBDC can theoretically be used to buy a pack of gum, pay your phone bill, or even book a holiday. In fact, if you used a CBDC to do that, you might not notice any difference in your shopping experience because you would use a credit card or mobile app to make those purchases. However, you would benefit from the CBDC without even realizing it.

These days there are a few payment apps that make transferring funds fairly easy - at least easier than going to the bank and registering for a remittance. As they are testing in China, you could use a mobile app or credit card loaded with digital USD or digital Yuan to easily make near-instantaneous money transfers to anyone anywhere in the world. Payment settlements could take less than an hour, rather than several days as the current set-up allows for.

The speed and reliability of remittance and payment settlement with a CBDC comes naturally, thanks to blockchain technology. A blockchain underlies any CBDC. Assuming the system can handle transactions on the scale of Visa (65,000 transactions per second!) and other major credit card companies, fees would be dramatically lower as operating costs would be slashed.


Using blockchain technology to facilitate a CBDC provides the added benefit of greater monitoring power. As it is now, you can only track your money from your account to one recipient. You cannot see what the recipient does with your money. With a CBDC, you can see the entire path of your digital currency from the point when it was created all the way until it is burned. This provides law enforcement officials the power to detect money laundering and catch criminals far more easily than before. 


How Could CBDC Truly Change Our Lives?

This section is meant to be part cautionary tale and part bright vision for the future. As with any new technology, there are benefits and drawbacks - this is something that cannot be avoided, and has not been since the discovery of fire all the way to the proliferation of the Internet across the world. CBDC and blockchain technology is no different.

CBDC’s promise us the further digitalization of our lives. If you don’t already, you will definitely use a smartphone or computer to make monetary transactions. The average person will be far more capable of making transactions with their phone than people today. Checkout lines will therefore be far faster, since you will be able to scan your items, scan a QR code to pay, and then be on your way without fumbling around your wallet. This is music to the ears and eyes of many readers, for sure.


The roughly 1.7 billion unbanked people in this world would gain far greater accessibility to a bank through the use of a CBDC. While this is a promise made by cryptocurrency in general, having governments digitize their own fiat and provide cheaper and more accessible services across the board would greatly benefit society.

Governments could use a CBDC as a one-size-fits-all solution to the money laundering and fraud problems posed by some decentralized finance (DeFi) schemes, which even the CFTC has called illegal after just a cursory review. The sense is that, if left unchecked and “payments, deposits, and loans migrate from banks into privately run digital realms, [like those in DeFi,] central banks will struggle to manage the economy during a crisis,” leading to a Wild West scenario.

There are other troubling issues that will be hotly debated. For instance, the use of a CBDC would give the central authority controlling the blockchain the power to freeze wallets on demand, limit the number of coins in a wallet, or burn them. 



While this piece has focused on the Chinese digital Yuan program since it is the closest to full rollout, other national and regional governments have expressed interest in similar programs for their constituents. The EU’s Christine Lagarde, for example, has set an initial target of 2025 for a digital Euro to be launched. 

The Bank of Korea in South Korea started hiring blockchain experts in 2019, and later announced that they would begin testing their CBDC program by the end of 2021. Other nations such as the Bahamas, Cambodia, Ukraine, Turkey, and Canada are also eyeing full development of their own CBDC’s. Expect to see a CBDC pop up in your locality sooner rather than later.

The deployment of CBDC programs across the globe highlights the importance of blockchain technology as the premier invention of the past 20 years - and perhaps the entire 21st century. It may also put the spotlight on cryptocurrency as a privacy tool, if people’s basest fears about the strict controls of money by governments via CBDC’s are realized.

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