[ENG] Central bank digital currencies – a new era for the financial sector


di Ivelina Dimitrova

National banks all over the world from China to the United States through Russia have pilot projects in progress for implementation of central bank digital currencies known in short as CBDC.

The concept for digitalization of physical money, although not new either in the finance sector, or in the scientific analytical fields worldwide1, has been launched by the European Central Bank in 2020 when public consultations were initiated on the matter. The ECB president Christine Lagarde is also an outspoken supporter of the digital currency2. Now digital Euro seems even more close to be put into practice within the EU as the European Commission has suggested creating a legislative frame for its introduction.

Europe is not the only region that is planning to introduce its digital fiat currency, similar projects are being slowly introduced all over the world. China has been testing the digital Yuan project since 2014. From August 1st 2023 Russia also starts its own project to test the introduction of digital rouble and according to officials from the Russian central bank the introduction of the digital currency in the people’s everyday life could start as early as 2025 as the current plan is that it will be used simultaneously with the cash national currency. Public declarations and engagement that digital currencies will not substitute the conventional payment methods but will be used simultaneously with them have been made also by the ECB and the Federal Reserve.

However, the introduction of CBDC has raised concerns all over the world both among financial specialist and the population itself who see the digital currency as means of complete financial control on behalf of the state.

These concerns require to put some clarity on what the digital national currencies are and how they could change the financial system in which we have been living until now.

The first important clarification is that central bank digital currencies are fiat currency, meaning they are financial instrument declared by the authorities as a legitimate means of payment. This is the main difference between CBDC and the other digital types of currencies known until now as the last ones are private, not issued by the state authorities, hence they are decentralized and not being recognized as a legitimate means of payment with only certain vendors accepting them as means of payment.

Presently, there are three main types of digital currencies– the first and most well known type is the crypto currencies which nowadays have more than nine thousand varieties. The second type is the so called stable currency which is also a digital currency but fixed to the price of another asset, for instance to a national currency or to commodity like the gold, with the purpose to evade fluctuations in value that other crypto currencies often suffer from. However, the meltdown of the stable currency TerraUSD has shown that stable currencies are also vulnerable in value. And the third type of digital currency is the Central Bank Digital Currencies /CBDC/.

CBDC are like the conventional national currencies but digital which means that they exist only in electronic form. This allows the fulfilment of immediate transactions including cross-border ones. This is also the main difference between the digital and the electronic national currencies existing also now as the last one can easily convert in cash money.

On the other side, digital currency unlike the electronic one, could never take a physical form, meaning it never leaves the digital network and it is exchanged exclusively through electronic means. Like the rest of digital currencies (crypto and stable currencies) it will be based on the block chain technology. This makes CBDC very similar to the crypto currencies, for instance to a bit coin, but being controlled and backed by the central banks authorities unlike the crypto, it is a legal means of payment and once introduced it will be accepted by all vendors. CBDC unlike other means of payment, for instance PayPal, will be irrevocable meaning once transfer of CBDC is performed, it can not be revoked without sanction of the central bank operator.

One of the biggest vulnerabilities of CBDC is that they are virtual hence they rely on Internet connection and to avoid dependence on the access to it, central banks are trying to provide also off-line mode of payment for the holders of digital currency3. Otherwise the use of CBDC will be very much dependant on the availability of smart devices and internet connection.

Still in progress is the concept to create two layers ( for the moment) of CBDC – retail and wholesale CBDC. This is an important detail still in process of development as it will differentiate the type of payments the digital currency could be used for. The retail CBDC is supposed to be used for transactions connected to purchase of services and goods. It will be used in the economic life cycle by physical persons and juridical entities just like the physical money is used now. Much more complex is the concept of wholesale CBDC, which is supposed to be used exclusively for transactions between financial institutions and governments. However, for now most of the countries worldwide develop projects and test the launch only of the retail CBDC .

As noticeable, many points regarding the functioning of CBDC remain still unclear and are in process of development. It is highly probable that CBDC may soon be introduced with basic characteristics and functions and with time, new operational functionalities will be added.

However, this is the people’s main concern. Much of the population worldwide fears that with the uncertainties surrounding the CBDC, it may first be introduced to operate in parallel with the cash and electronic money and may later on totally oust the last two, leading to a total digital control on the private finances on behalf of the central banks.

For now the engagement of the national banks and the governments

is that CBDC will not replace the cash money but will be another means of safe payment option4. And although this firm engagement has been declared by both the Federal Reserve and the European Central Bank, the fear that at a certain point it could oust the cash is quite real.

Nevertheless, CBDC has both strong and weak points and possesses advantages and disadvantages that require a closer look to better understand how the project could change the world finances and the everyday life of us all.

Some of the benefits of the digital currency are as following:

  • CBDC is designed to be almost instant way of payment, making the transfers, included the international ones, much faster than the current on-line bank payments.
  • CBDC will alleviate the bank bureaucracy for the users and it is supposed to decrease the bank fees and commissions. However, the decrease in charges for the end users of the digital wallets will be totally in hands of the operators- the national banks.
  • 24/7 availability to perform digital operations out of working banking hours and during public holidays.
  • Much higher transparency in tracking transactions which will decrease the risk of financial frauds to which the end users are often exposed.
  • The higher control on behalf of the state with the introduction of CBDC, will also decrease the risk of money laundering. Eradicating physical money will be a big blow for illegal activities like drugs and arms trafficking which still rely a lot on cash money transactions.
  • More efficiency and rapidness in the performance of governmental payments on all levels.
  • Less corruption as the withdrawal of physical cash will make payments traceable and visible.
  • CBDC will eliminate the risk of physical theft which is a high risk when operating with cash money and is the reason for many other crimes which target the cash theft like assaults, kidnapping, burglaries, robberies and many others.

There are also significant disadvantages based mainly on the uncertainties that are still surrounding the CBDC. Some of the most apparent ones at this point are as following:

  • Although the expectations are that the charges and fees for the CBDC transaction will decrease in respect to the commissions that commercial banks charge now, it should be pointed out that the block chain technology is expensive to be developed and maintained. It is still unclear whether the national banks or the users would cover the cost for this infrastructure. The European Central Bank declared that the introduction of CBDC when time comes would not lead to any increase of charges for the clients, but however, the uncertainty for the cost of the block chain technology remains in place.
  • Another disadvantage is that being a total innovation, still too many uncertainties surround the implementation of the digital currencies. Digital currencies have first been developed in a decentralized way by the private sector whilst for the national banks it is still quite a new field. The endless variaty of options that the block chain technologies offer creates uncertainty on what functionalities the authorities will implement. For instance, the multi layer CBDC is a concept that only few countries have embraced so far.
  • CBDC require more expertise in the financial and IT fields. This requires that the national banks develop such technical and human expertise within their structures which supposes larger investment and restructuring. This process also requires time in order to be implemented successfully.
  • Another disadvantage of CBDC is that even if it does not aim it, stronger control on the finances of people and businesses will be exercised. This is the main concern and fear of the society. The institutions that emit and operate the CBDC ( for now, the engagement is that the operators will be only the national banks and the expectations are that they will not outsource any activities surrounding the CBDC) will have the total control on the transactions and operations in the economic life cycle. The massive fear is that since money will not be tangible the state could follow and survail all purchases and financial movements of the digital wallet holder. The main concern here is that at a certain time the bank institutions and state authorities could impose certain restrictions on some kinds of purchases or spendings, for instance such ones contributing to higher carbon footprint or contradicting to the environmental policies. This concern, although seeming less probable now, is not to be neglected as a possible scenario although the European Central Bank who is preparing the project for digital Euro denies such future scenarios. However, the balance between the free will of the CBDC holder and the policies of the state authorities is one of the biggest challenges that has to be addressed so that the society has its guarantees that liberty of choices will be provided with the use of digital wallets.
  • Another considerable challenge for this initiative is to make CBDC accessible for all social and age groups. Elder people face more difficulties when they operate on digital platforms. The same is valid also for socially ousted groups of the societies especially in countries where the illiteracy rate is still high.
  • Another considerable challenge for the CBDC is to make them a valid means of payment also where there is no access to Internet (and eventually to electricity). If payment turns all digital ( with no physical existence of the CBDC) a person should be able to use the digital wallet even in places where there is no Internet access. We presume, based on the present experience, that the digital wallet with access to the personal CBDC account would be accessible through smart phone. However, this is a vulnerability which should be addressed by the CBDC operators as the use of digital currency will be restricted by the access to Internet, electricity and smart devices. Some countries still experience electricity and Internet shortages which would create difficulties for the introduction of CBDC if they do not operate off-line.
  • Vulnerability of the digital environment – digital currencies will possess all vulnerabilities of the digital environment– electricity shortages, protection and storage of information, hacker attacks, software viruses and so on.
  • Another vulnerability is the eventual volatility in value of CBDC. Such volatility is quite typical for the crypto currencies but it is very dangerous for nationally backed currencies. And although it is supposed that digital currencies will not face considerable volatility as they will be backed and regulated by the national banks, it still remains unclear if they will be fixed to a certain asset, what pool reserves of them would be hold and how their exchange rate with other CBDC will be determined. However, since new digital infrastructure will be created by each national bank for the introduction of its own CBDC, this system is supposed to be different from the financial system that we know which is currently quite controlled by the U.S.A. This is also one of the reasons for the Russian authorities to launch the project for digital rouble, they want to create alternative payment modes that evade using the current financial infrastructure and the swift system for payments which falls under sanctions.
  • The holders of electronic wallets may become more “users” or “holders ”of CBDC but not true owners of it. This is due to the fact that at times of financial fluctuations or crises, they will not be able to fully dispose of their digital currency. For instance, they will not be able to withdraw their digital Euro and to invest it in commodity stable in value. The allowed movements and operations with CBDC at times of financial uncertainties or crises is a big concern that still remains unclear both for the society and for the financial world.
  • If CBDC is launched and operated exclusively by the central banks, commercial banks will either diminish significantly their financial operations ( this effect will be felt initially) or with time and at a later stage, they may even become completely redundant if the central banks do not delegate them certain responsibilities within the process of CBDC launching. Such a radical change supposes a wholly new structure of the world financial sector especially if the central banks keep the complete monopoly on the whole process of emission and operation with CBDC . Change in the state monetary policies is expected to happen as well.
  • Last but not least, another reasonable concerns include the cost and availability of credits as the whole contemporary economy is based on the concept of credit. This is a very important aspect on which the economic relations are built nowadays and for this reason every project for introduction of CBDC should clarify and establish how to deal with it.

All above points demonstrate that digital currencies are not unanimously accepted by the society an they possess some advantages but at the same time they hide many disadvantages as well. The biggest concern and disadvantage is that CBDC are still surrounded by many uncertainties which will probably be clarified when the pilot projects for their introduction start to be launched.One thing is for sure, CBDC will bring cardinal changes in the whole financial and economic system worldwide. They will change the way people live and economy operates. And a new era for the world financial sector is just around the corner. It will be decided by the politicians which sides of the CBDC will be arise.


1 In 1983 David Chaum in a research paper named “Blind sigantures for untraceable payment” introduced the concept of digital, non-physical money. In 1996 e-gold was introduced as digital type of money and it functions until 2008.

2 ECB’s Lagarde says digital euro has key role in payment autonomy, Bloomberg, March 21, 2023

3 Taking digital currencies offline, John Kiff, September 2022, www.imf.org

4 Central Bank Digital Currency ( CBDC), Federal Reserve, www.federalreserve.gov

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