The implementation of a Central Bank Digital Currency (CBDC) involves political, economic, technological, and societal considerations. This new financial technology can provide innovative monetary policy mechanisms to drive our economy and society in different ways. We often state that disruptive innovations can be used for good and evil: in the case of CBDCs, it can be used as a political, economic, or social weapon.

Have a look at our previous post about the rise of Central Bank Digital Currencies 👈

Two operational solutions characterized by structural differences

The increased interest in Central Bank Digital Currency has led to a surge in ideas and research about the topic. When it comes to designing a CBDC, there is a crucial distinction between direct and indirect CBDCs. A direct CBDC makes it possible for everybody, from big banks to informal workers, to deposit their money with the central bank. It would be like having a central bank account for basic payment services.

But if a significant number of bank deposits moved to the central bank, banks would lose a cheap source of funding and might have trouble providing as much credit as demanded. To avoid displacing banks and stifling innovation, central bankers and scholars have been exploring models of indirect CBDC. The so-called two-tiered CBDC is issued to regulated and supervised institutions, which then distribute the CBDC to the public.

The question about direct and indirect CBDCs is, in fact, a question about balance sheets. It’s all about defining whether the digital money you own is an entry in the central bank’s balance sheet or whether it appears in the balance sheet of an intermediary.

The platform model proposed by the Bank of England is trying to find a way to preserve the benefits of a direct CBDC while reducing its downside. In this model, you still find intermediaries between the central bank and the public. However, these intermediaries are not offering a balance sheet to hold people’s digital money. They provide instead technological tools to help any person or business connect with the central bank and access the digital money kept there. The platform model combines indirect connection to the central bank with direct access to the central bank balance sheet and the CBDCs.

This type of CBDC could promote innovation and boost public-private collaboration in the monetary system. The central bank would continue to be responsible for the monetary infrastructure, making the payment system work, and setting up money accounts for everyone, not just banks.

More than that, the central bank would have to ensure that this infrastructure is not only safe and resilient but neutral and open. The goal should be to allow different types of software that meet performance and security requirements to access the payment system’s data and functionality.

Each form of CBDC comes with different benefits and challenges. And depending on a country’s monetary and financial system, each CBDC consideration is viewed differently. More developed countries might take a rather passive approach, sitting on the sidelines, monitoring what other countries are doing - to learn, develop, and figure out what they want to use CBDC for.  Developing countries, on the other hand, are taking a more active approach. Their goal of a CBDC may differ fundamentally from developed countries, trying to get a stronger foothold in the global monetary system.

The old continent eager to preserve traditional finance

The European Union has initiated its first step towards a CBDC with its latest report on a digital euro, but even within its member countries there are different opinions about its goal and usage.

Have a look at our previous post regarding Nyctale's answer to the Digital Euro public consultation  👈

Looking at some of Europe’s biggest economies, the German central bank (Deutsche Bundesbank), for instance, is considering alternatives to CBDC as a digital payment solution, as it might represent a threat to their financial system. In their perspective, it is crucial to building tools to restrict how a digital euro is used upon launch. People should only be able to use the central bank-backed digital euro as a mode of payment and not as a store of value.

If the CBDC has the same characteristics as traditional money, depositors could withdraw their funds in times of a crisis by converting it into digital euros, making the funds a liability for the central bank. This might lead to the structural disintermediation of the banking sector and, as a consequence, could potentially dampen the provision of bank credit to the economy.

Given the particulars of such a project, a digital euro creation would carry political implications. Central banks may limit the amount of digital euros users can hold at any given time. Or banks could control demand for the digital euro by introducing incentives based on tiered remuneration.

Alternative digital payment solutions could prevent undesirable implications related to the introduction of a CBDC. The German central bank is also considering the ways in which it may link blockchain-based solutions and smart contracts with conventional payment systems.

The Central Bank of England (BoE) is looking into payment options for people in the U.K. who were affected by the COVID crisis to deliver safe, efficient, and convenient payments to shoppers and merchants — a role that a CBDC could potentially fill.

The challenges facing the central bank in releasing a CBDC include promoting competition and innovation among other forms of money, ensuring technology doesn’t dictate policy, and working with other institutions for solutions. Central banks need to partner with a broad range of stakeholders given the breadth of issues presented by CBDC.

In parallel, the Swiss National Bank (SNB) and the Bank for International Settlements (BIS) plan to test a CBDC by the end of this year. This proof-of-concept will pave the way for experimenting with retail CBDC. It will also help explore connections to existing payment systems and monitor compliance.

Looking ahead, the BIS also plans to work with more central banks, including the Hong Kong Monetary Authority and the Bank of Thailand, to test cross-border usage of digital currencies.

APAC CBDC is driven by Chinese moves - is Russia following?

In Asia, China continues to lead CBDC progress with its central bank publishing a draft law that aims to provide regulatory framework and legitimacy for its forthcoming digital yuan. The draft law takes aim at third-party efforts at yuan-backed digital currencies, stating that individuals and institutions are prohibited from making and issuing a currency designed to “replace” digital yuan circulation. This move would presumably criminalize all non-state-sanctioned yuan-backed stablecoins. China hopes to start officially issuing the digital yuan before the Winter Olympics in Beijing in February 2022.

Hong Kong region’s government is considering collaborating with mainland authorities on China’s digital currency project. But Hong Kong is mostly interested in wholesale and cross-border digital currency use cases, a contrast to China's primarily retail-facing digital yuan. If the digital yuan can be applied to cross-boundary payments, it would further promote the mutual connectivity between China and Hong Kong.

In Japan, policymakers appear disconcerted by the advancement in China's CBDC initiative. Here, CBDC might be capped on the quantity issued and holding allowed. Such restrictions could be put in place in order to prevent the flight of capital from commercial banks.

Private collaborations begin to appear as the Japanese messaging giant LINE is in discussions with Asian central banks regarding digital currency projects. The company would work with central banks focused on developing digital currencies for micropayments. The Bank of Korea could trial its solution, and a recent report noted that other countries like Uruguay, Bahamas, and Cambodia are also developing CBDCs for micropayments to reduce money management costs.

In Russia, a country with one of the highest crypto-assets adoption rates, the head of the parliament’s Financial Markets committee believes that a digital ruble pilot will start in 2021. The central bank (CBRF) had already started consultations on the feasibility of launching cryptoruble pilots.

There is a real possibility of seeing a digital ruble in circulation in late 2021, which could be used on DLT platforms, and businesses could be able to leverage it to track goods and payments. At least five Russian banks are interested in taking part in Russia’s non-public digital ruble pilots in the first half of 2021.

The CBRF is considering using the digital ruble to distribute salaries and benefits once the currency is publicly adopted. Users will be able to store and transfer the upcoming digital currency through an analog of a bank card. In order to accept the digital ruble, merchants will have to reconfigure payment terminals.

Russia is ready to adopt the digital currency in terms of technological and legal aspects. The first digital ruble pilots are expected to launch in 2021 after Russia’s law “On Digital Financial Assets” is adopted on Jan. 1.

Smaller countries in stronger competition with decentralized currencies

As the exception that proves the rule, the Bahamas launched the world's first CBDC, the ‘Sand Dollar’. It’s the first country in the world to officially launch a CBDC beyond a pilot program. Residents can use the digital currency at any merchant with a Central Bank approved e-Wallet on their mobile device. The central bank selected transaction provider NZIA as its technology solutions provider for the rollout of the digital currency.

The Sand Dollar is intended to drive greater financial inclusion within the archipelago nation of more than 700 islands on which 393,000 residents live.

The Central Bank of The Bahamas is planning to make its Central Bank Digital Currency project interoperable on an international level. The Sand Dollar’s interoperability with other wallets is a key strategy alongside integrating real-time gross settlement and Automated Clearing House.

But for other developing countries worldwide, the topic is more sensitive. For instance, the Philippines' central bank isn’t ready to pull the trigger on a CBDC. They want to learn from private-sector digital currencies, but still believe they are inferior to central bank money. Much more work is needed to make a digital currency a reality there.

A research effort is needed to look into capacity-building and the creation of networks between other central banks and financial institutions. The central bank plans to look into how to improve the country's existing payment system and to draw upon other central banks' CBDC research worldwide.

The Central Bank of Kenya has reportedly started discussions with international central banks to explore the possibility of entering the central bank digital currency space. The push comes as a result of mushrooming of private cryptocurrencies which made the Central Bank feel left out. A research effort into how a CBDC could be made available to the general public appeared to position central bank-mandated digital currency in explicit competition with decentralized coins.

Indeed, Central Banks might be competing with decentralized or community-based initiatives, as illustrated by the project Akoin, a cryptocurrency developed by renowned popstar Akon to improve social opportunities and access for African entrepreneurs.

Its blockchain platform is willing to bring a trusted digital currency to countries within Africa that suffer from weak and over-inflated fiat currencies that prevent citizens from accessing financial services. The project’s main objective is to improve social opportunities and connectedness for millions living in rural and remote regions of Africa who lack connection to the internet and therefore the global economy.

Other countries like Cuba are turning to Bitcoin to receive remittances from abroad to circumvent the country’s banking blockade. Indeed, overseas Cubans continue to look for ways to circumvent banks in their quest to send money home, with most major financial institutions in the world wary of doing any sort of business with the nation.

Argentina is also undergoing a boom in crypto largely spurred by Argentina’s financial crisis. More and more Argentines are turning to new forms of investment such as crypto-assets to protect the value of their money. But the American dollar is still the currency of choice for most Argentinian. In this case, stablecoins offer Argentines access to the dollar without having to wade into foreign currency exchange black markets.


Although in different ways and pace, the fact that many central banks are currently analyzing CBDCs favors international dialogue and close cooperation. That is important in order to achieve quick and substantial progress in international payments and monetary policies. It is in the interest of the global central bank community that new payment arrangements, like stablecoins, with potentially global reach, should be offered - if appropriately regulated and supervised.

But central banks would do better to move quickly and efficiently on CBDCs. Dialogue and cooperation take time when crypto-assets, stablecoins and decentralized financial services keep growing and maturing every day. With a coming financial and economic turmoil provoked by the COVID-19 crisis, decentralized assets are progressively gaining momentum and could eventually compete in the near future with some well-established currencies.


BoE hasn't 'made any decision' regarding a CBDC, says fintech director - Cointelegraph ; Oct 28, 2020 [1]

Cubans Turn to Bitcoin Remittances with 25% Commission to Beat Blockade - Cryptonews ; Oct 27, 2020 [2]

The Big Choices When Designing Central Bank Digital Currencies - Coindesk ; Oct 26, 2020 [3]

Swiss central bank, BIS plan to test digital currency by the end of this year - The Block ; Oct 26, 2020 [4]

Kenya's central bank exploring CBDCs due to 'mushrooming' of private cryptos - Cointelegraph ; Oct 26, 2020 [5]

China's central bank lays regulatory foundation for CBDC - Cointelegraph ; Oct 24, 2020 [6]

‘The cryptoruble is the future’ says Russian policymaker - Cointelegraph ; Oct 22, 2020 [7]

Philippines' central bank isn’t ready to pull the trigger on a CBDC - Cointelegraph ; Oct 22, 2020 [8]

Akon’s social ecosystem cryptocurrency ‘Akoin’ will begin trading on Bittrex on November 11 - Cryptoslate ; Oct 22, 2020 [9]

CBDC as a store of value threatens financial system, says German official - Cointelegraph ; Oct 21, 2020 [10]

Hong Kong ‘Exploring’ Collaboration With China on Digital Yuan: Finance Chief - Cointelegraph ; Oct 21, 2020 [11]

LINE is in talks with Asian central banks to work on digital currency projects - The Block ; Oct 20, 2020 [12]

Bundesbank official: Launching a central bank digital currency is a 'political decision' - The Block ; Oct 20, 2020 [13]

Five Russian banks express interest in piloting digital ruble - Cointelegraph ; Oct 16, 2020 [14]

‘No single digital currency will dominate the world’ Bank of Japan now says - Cointelegraph ; Oct 15, 2020 [15]

The Bahamas launches world’s first CBDC, the ‘Sand Dollar’ - Cointelegraph ; Oct 21, 2020 [16]

The Bahamas central bank wants to make its digital ‘Sand Dollar’ global - Cointelegraph ; Oct 15, 2020 [17]

P2P Bitcoin Trading Drops in Argentina Amid Torrid Times for Fiat Peso - Cryptonews ; Oct 09, 2020 [18]