The intersection of decentralized crypto and traditional finance is deepening, with billions in institutional money flowing into cryptocurrency and blockchain infrastructure. This trend has prompted governments globally to adopt two main strategies: bring in a clear set of rules for cryptocurrencies and actively develop their own Central Bank Digital Currencies (CBDCs). This article explains how CBDCs work, why they matter, and what their global rollout could mean for finance and individual privacy.
Table of contents
- What Is a Central Bank Digital Currency (CBDC)?
- Is CBDC A Cryptocurrency?
- Does CBDC Use Blockchain Technology?
- Types of CBDCs
- Why Central Banks Are Exploring CBDC Benefits
- CBDC Adoption Around the World
- What Countries Are Against CBDC?
- Will CBDCs Increase Government Control Over People’s Lives?
- CBDC Benefits and Risks
- Conclusion
What Is a Central Bank Digital Currency (CBDC)?
Central Bank Digital Currency (CBDC) is a digital form of fiat currency issued by the central bank. Different from cryptocurrencies, CBDCs are centralized and backed by the government, making them a trusted payment method. Like fiat currencies, the value of CBDCs stays near-constant, but their purchasing power can change due to inflation, deflation, and monetary policies.
Is CBDC A Cryptocurrency?
CBDCs are government-issued digital cash that shares some features with crypto, but unlike decentralized cryptocurrencies, they are centrally controlled by a government authority.
Does CBDC Use Blockchain Technology?
While some countries experiment with permissioned blockchains or distributed ledger technology (DLT), others skip the tech entirely, opting for traditional centralized systems. Even when blockchain is used, it’s not always smooth sailing. A MIT and Boston Fed study found distributed ledgers can actually slow CBDCs down, creating unnecessary complexity when a simple centralized system would work better. They stated,
“It creates performance bottlenecks and requires the central transaction processor to maintain transaction history, which one of our designs does not, resulting in significantly improved transaction throughput scalability properties.”
Types of CBDCs
Wholesale CBDCs
Wholesale CBDCs were designed to be used by financial institutions like banks in order to settle high-value transactions more efficiently. These digital currencies improve payment system security while streamlining and automating processes. They also accelerate interbank and cross-border transfers. The Central Bank of Australia has given more preference towards Wholesale CBDCs than Retail due to their clear functionality.
Retail CBDCs
Unlike wholesale CBDCs, Retail CBDCs are for individuals and businesses, meaning they were designed with general-purpose use in mind (i.e., everyday purchases, bill payments, subscriptions). They are the digital equivalent of cash and can be used in everyday transactions and payments. There are two types of retail CBDCs, and they are,
- Token-Based Retail CBDC: Its ownership is linked to cryptographic proof, meaning the token used for payment must be verified. The proof of ownership can be verified using cryptographic techniques, and thereby, a transaction means the change of ownership.
- Account-Based Retail CBDC: Here, the ownership of the CBDC is linked to the identity, requiring users to provide digital identification to access their accounts. For a transaction, the identity of the payer is verified, and the process updates the balances of both the payee and payer.
Why Central Banks Are Exploring CBDC Benefits
Support Digitization of Economies
CBDCs can support the central bank’s role by providing a state-backed electronic currency, ensuring broader access to digital payments at little to no cost. These assets enable central banks to offer a secure and efficient payment medium, connecting traditional cash and modern financial technology.
Streamline Current Payment Systems
These digital tokens could help central banks compete better in the payment landscape, as they involve lower operational costs and reduced risks involved with handling currency. They encourage innovation and private-sector participation by lowering entry barriers and facilitating faster payment settlements.
Enhance Monetary and Fiscal Policy
CBDCs improve the distribution of government benefits like pension payments, grants, and subsidies, provide better transaction oversight for tax compliance, and contribute to financial stability. They also help manage liquidity squeezes by offering a public alternative to private digital currencies.
CBDC Adoption Around the World
As cryptocurrencies gain global traction, many countries are introducing regulations to promote their secure and stable growth. The following countries have launched or are piloting CBDCs
Nigeria
Nigeria launched its Central Bank Digital Currency, the e-Naira, back in October 2021. At the time of launch, the initiative generated significant interest, with then-central bank governor Godwin Emefiele announcing that over 2,000 customers, 33 banks, and 120 merchants had registered with the platform. The main reason behind the launch of the currency was to improve financial inclusion, reduce transaction costs, improve payment efficiency, and more in Nigeria. In December 2022, to boost e-Naira transactions, the Central Bank of Nigeria (CBN) announced that they would be limiting the amount of withdrawal from ATMs to 20,000 Naira per customer per day. Also, weekly withdrawal limits for over-the-counter (OTC) transactions were also imposed for individuals ( max 100,000 Naira) and businesses (max 500,000 Naira). Any withdrawal above these limits will include processing fees of 5% and 10%.
China
China is one of the earliest countries that started developing a Central Bank Digital Currency. The journey to develop Digital Yuan (e-CNY) started back in 2014 when the government established a special task force. After years of research, China started to implement pilot programs in 2020, rolling out the program across multiple cities. In 2024, Hong Kong launched a pilot program allowing its citizens to use Digital Yuan, marking a major step in China’s efforts to internationalize e-CNY. The goal of Digital Yuan is to improve payment efficiency, reduce reliance on cash, and offer an alternative to digital payment systems. With the increasing maturity of the project, China has started to implement the trial in everyday transactions.
India
The Reserve Bank of India (RBI) launched pilot programs for Digital Rupee (e₹) in late 2022. The pilot programs were for both wholesale (CBDC-W) and retail (CBDC-R), with the wholesale CBDC used for interbank settlements and the retail CBDC tested with select banks, customers, and merchants across different cities. As India continues to move forward towards a digital economy, the Digital Rupee is expected to play a major role in it. Recently, to promote the Digital Rupee, the Indian government has been considering a ban on privately operated cryptocurrencies like Bitcoin and Ether.
United Kingdom
The United Kingdom is in the process of developing its own Central Bank Digital Currency called Digital Pound or Britcoin. The Bank of England (BoE) and the HM Treasury (HMT) have partnered up to develop the CBDC and have been researching it since 2020. In 2022, Prime Minister Rishi Sunak voiced his support for Central Bank Digital Currencies and launched a set of public policy principles for retail CBDC. Recently, BoE has established a ‘Digital Pound Lab’ for hands-on experimentation for testing API functionality, use cases, and potential business models for payment interfaces.
Other than the countries mentioned above, there are several others that are also keen on developing CBDC of their own. The Reserve Bank of Australia announced a CBDC pilot program based on the Ethereum blockchain. Recently, the Bank of Korea stated that it will begin a three-month trial program for CBDC named “Hangang.”
Australia
In 2023, the Reserve Bank of Australia (RBA) launched a CBDC pilot program based on the Ethereum blockchain. This was launched in partnership with the Digital Finance Cooperative Research Centre (DFCRC). By experimenting with real-world use cases, they aim to improve financial services like cross-border payments and tokenized asset trading.
South Korea
South Korea’s Bank of Korea (BOK) has also been actively exploring Central Bank Digital Currency. In March 2025, BOK announced that they would conduct a three-month trial program called “Hangang” from April to June and would include 100,000 consumers and seven commercial banks. The focus of the program is to test the large-scale use of CBDCs in everyday transactions.
What Countries Are Against CBDC?
United States of America
Like many other countries, the United States also began researching Central Bank Digital Currencies (CBDCs), with the Federal Reserve Board launching its official review in January 2022. Progress stalled because of disagreements among policymakers, with some seeing CBDC as a tool to maintain the dollar’s global dominance while others raised concerns about privacy, financial stability, and government overreach. The discussion effectively ended when President Donald Trump signed an executive order banning CBDCs, citing concerns like privacy and national sovereignty. Furthermore, Fed Chair Jerome Powell said that the Federal Reserve will never create a Central Bank Digital Currency (CBDC).
Japan
Japan started developing its Digital Yen in 2020, led by the Bank of Japan (BoJ). In 2021, they began testing its proof of concept phase, and the Ministry of Finance in 2023 explored the option of launching an expert panel to test the feasibility of issuing the Digital Yen. However, after conducting research, they halted further studies, citing low public demand due to an already efficient digital payment system. Furthermore, it would cause financial instability by disrupting the traditional banking system, and there were no clear economic benefits to be gained by implementing the CBDC.
Will CBDCs Increase Government Control Over People’s Lives?
The rise of Central Bank Digital Currencies has increased various debates about financial freedom and government oversight. While CBDC does come with a lot of benefits, it also expands the government’s control over people’s money. Here are the ways CBDCs could increase government control,
- Greater Financial Surveillance: The government can easily monitor their citizens’ spending habits in real-time as transactions are recorded in a centralized system.
- Programmable Money: They can also limit financial freedom by setting restrictions on how CBDC can be spent.
- Reduced Anonymity: Transactions made through CBDC can easily be tracked by the government, which is different from cryptocurrencies and physical cash.
CBDC Benefits and Risks
Pros of CBDC
Enhances Data Privacy:
With the rise of AI-driven financial services, data privacy is at risk. The current data protection regulations fail to keep up with the advancement of technology. CBDCs offer a secure alternative by preventing the exploitation of transaction data and could be the perfect solution to meet the needs of the hour.
Levels the Playing Field in Payment Landscape:
Major players in card and e-payment sectors have excessive pricing power. CBDCs could break this monopoly, fostering competition and ensuring a more balanced financial system.
Helps Combat Illicit Activity:
CBDCs boost financial transparency by tracking every currency unit, making it easier to detect tax evasion and financial crimes.
Cons of CBDC
Risk of Bank Runs:
At times of financial uncertainty, if individuals withdraw a large sum of money and convert it into CBDCs, it could trigger bank runs.
Regulatory Challenges:
The current legal framework may not be equipped to handle the complexities associated with CBDCs, leading to potential legal and financial uncertainties. The central bank issuing CBDCs might face certain risks if the adoption of digital currency leads to any economic consequences.
Conclusion
The rise of Central Bank Digital Currencies (CBDCs) marks a major turning point in the global financial landscape. On one hand, they promise to enhance payment efficiency, improve financial inclusion, and streamline monetary policies, and on the other, they raise concerns about privacy, government control, and financial stability. As countries develop their own CBDCs, the future of money is becoming increasingly digital, changing the way we save, spend, and transact.
However, there are several major questions that have yet to be answered. Will CBDCs coexist with cryptocurrencies, or will they push decentralized assets to the fringes? Will CBDCs truly empower people, or will they become another tool for financial oversight? As CBDCs continue to evolve, these debates will shape the future of financial systems, either fostering economic freedom or tightening state control over money.
Reference Links
https://cointelegraph.com/news/some-central-banks-have-dropped-out-of-the-digital-currency-race
https://newsonjapan.com/article/135205.php
https://research.hktdc.com/en/article/OTAzODAwODAz
https://hedera.com/learning/tokens/what-is-a-central-bank-digital-currency-cbdc
https://www.bostonfed.org/publications/one-time-pubs/project-hamilton-phase-1-executive-summary.aspx
https://coinedition.com/swiss-national-bank-crypto-not-ready-for-prime-time-cbdc-is-key/
https://coinedition.com/south-korea-pilots-cbdc-as-crypto-reshapes-job-market/
https://coinedition.com/india-might-ban-bitcoin-and-ether-to-boost-its-cbdc/
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