The emergence of Central Bank digital currencies (CBDC thereafter) is one of the most radical events currently being developed in the global financial system. CBDC are digital assets, but they aren’t cryptocurrencies – in fact, they disrupt the entire philosophy that led to the emergence of Bitcoin.

Central Banks around the world compete to be the first to release their digital currencies, because the global economy is currently undergoing significant changes, and the trouble with the COVID-19 pandemic is one of the key drivers of this shift. China maintained leading positions for many years, aggressively developing their own DCEP (digital yuan), while the most influential Central Banks, including the Federal Reserve and the European Central Bank, collaborated with researchers to evaluate the positive and negative aspects of implementing CBDC. The actions of Central Banks geared towards developing sovereign backed digital currencies have only accelerated with the development of the cryptocurrency market. Ethereum became a blockchain used to create an entirely new decentralized finance ecosystem. Bitcoin survived a storm, a barrage of accusations, criticism, and doubts, but today it is used even more than ever before. While these two cryptocurrencies gain further traction, there’s no doubt that the largest threat for Central Banks was the announcement about the Libra token from Facebook – as the company prepared to enter the world of finance with their own platform, already made up of more than two million users, prepared to use Libra, which would create a giant shift in the global currency system.

Recent studies show that at least 18 Central Banks around the world are currently developing their own digital currencies. Until recently, this was done on an individual basis, but this year we can already observe tighter collaboration between banks, geared towards considering the impact of digital currencies on monetary and credit policies and financial stability, while also considering the optimal design of this kind of currency.

Why do Central Banks need digital currencies? Central Banks might introduce their own digital currencies for many reasons, but this is primarily a protective measure and an effort to restore currency control. The second reason stems from the optimization perspective. Existing monetary systems controlled by Central Banks might work well, but implementing digitalization might make them work even better. However, while Central Banks admit that digital currencies might be better than physical money, digital currencies developed by banks will not resemble decentralized cryptocurrencies. Although both CBDC and cryptocurrencies are based on blockchain technology, they differ from each other on principle. It’s most important to understand that CBDC are just like traditional money (dollars, rubles, pounds, euros, and so on), but in digital form, controlled by the country’s Central Bank.
Bank of International Settlements Report 

Early this year, the Bank of International Settlements (BIS) released a document featuring the results of a survey of Central Banks on the progress of their plans related to CBDC. The report shows that banks are motivated to embark on extensive research and experiments by a wide spectrum of factors. Approximately 80% of Central Barks are working in this field in one way or another, while 40% have transitioned from conceptual studies to experiments or proof of concept work, while a further 10% have developed their pilot projects.

The burning question is related to the optimal design of CBDC, as the optimal construction requires a good balance of costs and benefits and minimization of potential unexpected side effects. General purpose CBDC can be implemented in two alternative methods: either offered as deposit accounts at the Central Bank for all households and corporations, or as a digital currency/token with decentralized circulation without centralized accounting. Naturally, due to safety and confidentiality concerns, the second alternative is not favored by Central Banks, particularly in developed countries.

CBDC opportunities and problems

Central Banks have already begun to analyze the advantages and disadvantages of implementing CBDC, and they are paying special attention to the potential influence on the monetary and credit policies, financial stability, and the financial system at large. Various studies have assessed a series of advantages offered by CBDC. 

  1. More efficient payments — CBDC can solve a variety of problems, including inefficient payments, while maintaining government control over money. Central Banks believe that these currencies can increase efficiency for payment systems, while reducing transfer and computation time, thus leading to economic growth. Other advantages include the provision of efficient, secure, and modern money, as well as increased stability and accessibility of retail payments. 
  2. Increased security — widely accepted CBDC will make it easier to monitor illegal payments and savings, money laundering and financing terrorism. As a result, users will have a lower risk of being attacked by hackers trying to repossess thor funds, potentially reducing expenses on safety and insurance, linked with storage of fiat money. 
  3. Increased overall efficiency of monetary and credit policy — CBDC can act as serious competition for traditional monetary instruments, creating both problems and opportunities. Central Banks are concerned about Libra and other cryptocurrencies undermining the sovereignty of monetary and credit policies, but CBDC can combat the growth of cryptocurrencies released by the private sector. 
  4. Increased financial stability — CBDC can also boost financial and macroeconomic stability, reducing the so-called ‘moral risk of banks’ by diminishing the role of the banking system in creating money. 

Nevertheless, most of the proposed advantages are not as clear-cut, and most of them are still questions for debate. The advantages of CBDC seem indisputable, but that’s not enough. What are the potential disadvantages of implementing digital currencies? 

  1. Potential disappearance of the banking sector — it’s still unclear to what degree and in which direction this sovereign digital currency might influence the banking sector and financial stability. There may be various results, which will impact policy to a varying degree, with no clear indication of the most likely scenario. 
  2. Refinancing the banking sector — a widespread replacement of bank deposits with CBDC might lead to a significant reduction in financing in this sector. If digital currencies end up replacing private deposits, this might break down credit channels of commercial banks, which will negatively impact lending capacity and economic activity. 
  3. Impact on financial stability — replacing bank deposits with CBDC might also affect growth potential, if bank lending activity is under threat. First of all, even if banks are prepared and capable of attracting alternative financing, accepting CBDC as a simple and safe asset might destabilize credit supply. Secondly, the risks of disrupting bank financing might push the private sector towards underground activity.

Crypto and digital bank currencies – what’s the difference? 

It’s easy to understand the desire to compare soon-to-be-launched digital currencies from Central Banks and decentralized cryptocurrencies, however the core principles underlying CBDC essentially contradict the basic philosophy of the crypto world. Bitcoin was created to escape monolithic Central Banks and, in a sense, to undermine the monetary and credit policies of the Federal Reserve as a result of the global financial crisis of 2008. BTC and cryptocurrencies essentially offer an escape from banks, insurance against loss of purchasing power, particular when concerned with cash. CBDC seems to be playing for the other side, desperately trying to uphold the oligopoly of the global banking system. Although the growth of the development of CBDC offers indirect but obvious proof of the success of cryptocurrencies, the differences are too many to count. From a philosophical standpoint, they are the absolute opposite of everything that Bitcoin was created to achieve – avoiding the limitations of the financial system, offering financial autonomy, and establishing trust and transparency.

Centralization and decentralization 

The first, most important and obvious distinction between cryptocurrencies like Bitcoin and CBDC is decentralization, and its absence in the second case. 

Cryptocurrencies are supported by multiple distributed nodes, stimulated by rewards for each uncovered block that is necessary to support the network. CBDC are supported by a single centralized network, equipped to serve only the policy of the government that launches it. Control from Central Banks means that the banks will continue to make most of the decisions. It’s likely that Central Banks will choose to focus on one problem will ignoring another one – for example, by focusing on creating new jobs and supporting markets, while accumulating debt and refusing to combat inflation. Sounds familiar?

Confidentiality and autonomy

The second point for serious dispute between CBDC and cryptocurrencies is the idea of financial autonomy and confidentiality, in which case the former are less likely to respect your confidentiality and your data. 

Central Banks are linked with regulatory authorities, while cryptocurrencies retain a significant degree of their freedom, especially at the peer-to-peer level. This means that cryptocurrencies in peer-to-peer networks enable users to make their own decisions about the amount of data they are prepared to share and who is allowed to see this data. It seems almost inevitable that every transaction made with future CBDC will be automatically shared in data fragments with regulators or insurance authorities.

Although this might not sound like a big deal if you’re not doing anything illegal, the default opinion is that people who prefer to use technologies that preserve their confidentiality have something to hide. But this might stem from various reasons, not only related to illegal activities. Although confidentiality is obviously a requirement for criminals, it becomes a necessity for law abiding citizens seeking to protect themselves from criminals constantly in search of a vulnerable target.


The latest distinction is related to security, and we can see that while cryptocurrencies are struggling with this issue, Central Banks don’t appear to have this problem. 

Certainly, some vulnerabilities have already been discovered in blockchains, particularity as regards secure transfers – there are problems with self-service and identifying wallets after repeated use, a 51% chance of attack, and many others. Although this might not seem obvious, CBDC represent an even higher risk of attack. Governments that release CBDC are likely to be confronted with a barrage of cyberattacks from competing governments, particularly in the early years. As practice shows, government institutions and countries are highly sensitive to coordinated hacking attacks.

Central Bank digital currencies have a high chance of becoming a reality, but it is not entirely clear what this will look like – most CBDC projects are still at early or conceptual stages in their development. Although banks are moving ahead in studying the problems and opportunities offered by digital currencies at a global level, the current conclusions are still insufficient to support the emergence of CBDC. It’s also too early to discuss the optimal form of these currencies, and there are some other questions that remain open. For instance, how will CBDC impact monetary and credit policies, financial stability, and the position of financial institutes.

Since answers to these questions are yet to be found due to a large number of contradictions in contemporary discourse, it’s worth conducting additional research to get a better understanding of the advantages and disadvantages of CBDC. Only then will we be able to make a balanced decision on this subject.