Advantages of Central Bank Digital Currencies (CBDCs)


Blockchain technology is often dubbed a disruptive technology. Its use cases are much wider than just cryptocurrencies and other investment products. With time, developers from all around the world are coming up with innovative ways to employ the CBDC technology more effectively. One of the products that blockchain technology has supported is a Central Bank Digital Currency or CBDC.

Unlike their crypto counterparts, CBDCs are not decentralized. However, several banks and government agencies have endorsed the idea of CBDCs as a way to evolve the current digital bank payment systems. At present more than 150 countries are conducting independent research and tests on developing a personalized CBDC. In the next five years, more countries are likely to issue a central legal tender using blockchain technology.

What is a CBDC?

A CBDC is a centralized digital currency that uses blockchain technology to keep a record of transactions. However, unlike cryptocurrencies, CBDCs need to be under the supervision of a central authority such as a State Bank or a financial regulatory agency. According to International Monetary Fund, a CBDC is a digital legal tender that has been issued by a Central Bank enterprise or a state Monetary Authority.

In terms of economic laws, CBDCs are a liability of a Central Banking enterprise or any other state financial regulatory authority. In other words, CBDCs are a digital sovereign currency that is the equivalent of the fiat under the jurisdiction of the same authority or a legal tender contemporary. It is worth noting that CBDCs are always going to have a regulatory authority to manage it and issue it as a monopoly.

Why is the World Moving Towards Digital Currencies?

The think tanks of the world are always imagining what the world is going to look like in the upcoming decade, century, or millennium. For the 21st century, the next most important technology is digital currencies. In 2009 when Bitcoin was first introduced as a decentralized digital currency using blockchain technology, several tech companies and individuals were already working on creating a digital payments platform.

The concept of digital currencies became more useful after the advent of personal computers, the internet, and smartphones. The operating systems and applications have become so sophisticated and advanced within ten years that more than 80% of the world population has access to online services that include banking, shopping, and making other purchases.

The innovators were already thinking about a time when the presence of a currency that could be used to make transactions online would become crucial. Therefore, both decentralized and centralized digital currencies are becoming more and more relevant in the growing e-commerce-based economy of the world. There are some concerns among government agencies about the increasing popularity of digital currencies for online payment and everyday purchases.

Therefore, an ever-increasing number of governments around the world are spending funds on creating a centralized digital currency so that their citizens have a digitized version of legal tender with the added benefits of blockchain.

Core Features of CBDCs

To understand the advantages of a CBDC, it is important to learn about some of the core features of a CBDC that are crucial for qualification. Despite being in business for more than a decade, digital currencies are still a relatively new concept for people. Therefore, an uninitiated person can confuse various types of cryptocurrencies with CBDCs. Here are some of the key features of a CBDC; if even a single feature is absent, the digital currency in question cannot maintain its position as a CBDC:

  • CBDCs are always issued and monitored by a Central Banking or State Monetary Authority.
  • Central Bank is responsible for backing the CBDCs under its legal jurisdiction.
  • CBDCs can work in tandem with peer-to-peer exchange platforms.
  • CBDCs can be programmed or coded using smart contracts to execute automated functions.
  • CBDCs are elevated to the status of legal tender within a country.
  • CBDCs can replace the fiat currency in a sovereign nation for trade and payment purposes, acting as its digital counterpart.
  • Central Banks peg their CBDC issues with a fiat currency or legal paper tender.
  • CBDCs are subject to regulations issued by the Central Bank or monetary authority under the law of the state.

History of CBDCs

The increase in popularity of digital tokens and cryptocurrencies has paved the way for the creation of CBDCs. As businesses are becoming wholly or partially online, consumers are also looking for active sources that could allow them to settle their bills online without using third-party e-money platforms. Citizens can show an interest in adopting CBDCs to avoid paying extra transaction fees on third-party e-money applications.

When Facebook, which is now known as Meta, introduced its first native digital currency named Diem, the government agencies pushed down the initiative with heavy regulatory pushback. If the biggest private organizations in the world start to issue personalized digital currencies, many people can lose interest in the fiat or legal tender, which can impact its value negatively.

Most gaming platforms ask the users to make in-app purchases and ask the players to buy personalized tokens that allow the players to purchase benefits or tools. With the introduction of Web3 gaming models such as play-to-earn, government agencies are eager to introduce a digital currency to salvage and maintain the demand for fiat currencies.

In 2020, The Central Bank of the Caribbean country Bahamas issued the first-ever CBDC known as Sand Dollar. European Central Bank, USA, Japan, China, Russia, India, and many other countries around the world have already launched pilot CBDC projects.

According to a survey conducted by the atlanticcouncil, around 105 sovereign nations in the world that account for 95% of the aggregate global GDP are working on CBDC initiatives, while 50 nations have entered into an advanced phase and ten countries have already started a pilot phase.

Types of CBDCs

Since CBDCs are issued by state authorities as legal tender, it is not wrong to assume that they are not very diversified. However, the presence of blockchain at the core of a CBDC project allows the government to elevate CBDCs beyond typical digital currency features. In doing so, the CBDCs can have more than one model by design. Here are the two most basic models of CBDCs:

Retail CBDCs

Retail CBDC is the type of digital legal tender that has been dedicated by a Centralized Monetary Authority for everyday usage. It is not wrong to assume that Retail CBDCs are legal tenders that are specified for the use of the public in a given sovereign jurisdiction. Retail CBDCs can also operate as the digital equivalent of paper money or coins in the region.

The traders and citizens of the region are authorized to use Retail CBDCs for everyday exchange of value contracts. Retail CBDCs have two types.

Digital tokens are digital currencies or tokens that are issued by banks as mobile options for conducting trade and purchases.

Deposit accounts are present in the form of static consumer accounts under the supervision of a Central Bank that can work as a reserve or equity for a business and, in some cases, also serve as collateral for a mortgage or small business loans. Retail CBDC deposit account holders can also earn APY or Annual Percentage Yield from their local commercial banking branch.

Wholesale CBDCs

Wholesale CBDCs are specialized legal tenders that enable financial transactions and accounting services for financial and banking enterprises. The wholesale CBDCs can also operate as payment channels for big corporations to settle massive financial transactions. Wholesale CBDCs can settle big financial transactions in real-time with a negligible margin of error. Wholesale CBDCs are also useful for cross-border payments with higher efficiency than regular e-money.

Advantages of Central Bank Digital Currencies

Now that the readers are better acquainted with the concept, origin, history, and models of CBDCs, it is time for a detailed view of their importance and advantages. Many people might wonder about the main differences between regular digital e-money and CBDCs. It is important to keep in mind that CBDCs are more than just a digitized form of fiat currency. Here are some of their most prominent use cases:


The present digital banking system is efficient, but it is still using antiquated technology. It is easy for any organized hacking group to launch an attack on this banking system and steal money or information. Furthermore, the personal information of the consumers and their financial transaction history are also exposed to security threats. CBDCs that use blockchain as the core framework can introduce encryption technology to make the centralized digital payment network more secure.


Tracing fiat transactions is not always very easy for government agencies. The transactions that are conducted in all-cash are difficult to trace down, and it can pose a lag for the investigative process for financial or criminal prosecution authorities. CBDCs are a more secure and reliable way to improve traceability for every financial transaction.

Faster Payments

Digital payments platforms can take a considerable amount of time on account of verification delays and other regulatory issues. However, Centralized government agencies can make the process of user verification and other checks automated using smart contracts on CBDCs. In this manner, CBDCS are faster payment channels.

Cross Border Payments

Many businesses are unable to keep up with the increasing economic pressure from their rivals on account of weak cross-border payments. For some commercial enterprises getting access and a permit to make cross-border payments can be a lengthy and costly process. However, CBDCs can make cross-border payments much more efficient and reachable for a wider circle of small and medium-sized businesses.

Evolution of Financial Transactions

Financial transactions have come a long way since the barter system and bench-based banking and insurance companies. Today, the average consumer can order the good that they like from the other corner of the world within a matter of a few days. CBDCs are playing an important role in upgrading the traditional financial networks around the world.

Monopoly Resistance

Fintech and tech companies in the world can sometimes operate as a monopoly over blockchain-based digital currencies. However, the presence of CBDCs can allow the consumers to have an alternative to the commercial monopolies and maintain a healthy competitive environment in the sector.

Universal Access

While the world seems to be growing smaller and smaller, there is still a considerable population of the masses hailing from developing countries who do not have access to banking or financial services. With the help of CBDCs, digital currencies can become more accessible to a wider number of people in such rural areas and pave the way for greater financial inclusion and independence.

Strengthening Fiat

A CBDC can increase the demand and value of its local fiat currency in the international market. More commercial and individual users are likely to incorporate digital currencies in their Central Banking network to dethrone the status of the USD as the international medium of exchange.

Advanced Banking

With the availability of CBDCs in a region, the banking enterprises will have a chance to upgrade their financial and digital payment processing systems. CBDCs can automate a lot of accounting and banking functions that can also transform the baseline infrastructures of regional and commercial banking units operating under a Central Bank.

Regulatory Clarity

CBDCs are a wholly digitized payments network. Therefore, they come with automated node models to carry out the transactions in light of the regulatory guidelines issued by a central monetary authority. However, if any of the conditions or regulatory guidelines are violated by the users, the CBDCs can halt the transaction and also alert and inform the user paving the way toward better regulatory clarity.

Economic Development

CBDCs are intrinsically many times faster, secure, and more efficient than regular e-money and digital payment banking networks. Therefore, they can play an important role in improving the economic condition by upgrading the traditional banking infrastructure at every level.

Environment Friendly

Fiat currency is often regarded as paper currency since it is printed on a piece of paper that has to be made from tree bark or other organic resources. However, since CBDCs are a wholly digitized form of currency, they are many times environment friendlier.

Furthermore, these CBDCs also cut down the carbon footprint of centralized financial networks by removing the need for paper-based documentation at the retail, commercial, and state level.


Many government organizations in the world are considering a switch to the CBDC network on account of its cost-effectiveness. Due to the automation of transaction verification, a lot of human-based work can be shifted to computers. Furthermore, issuing a new CBDC requires significantly lesser cost in comparison to paper money since it does not require a printing press or extensive security resources to store and keep it safe.

Forgery Proofing

Fiat currencies have always suffered from the dangers of forgeries. Despite making very costly changes in legal tender, the intelligence agencies in the world have found specialized forgery groups that can replicate the paper money and cause damage to the economy. With the use of encryption technology, CBDCs are safe from the threat of forgeries.

Financial Crime Mitigation

Financial crimes such as money laundering, smuggling, and other unlawful crime syndicates have managed to stay away from the criminal investigative agencies in the world using the cover of cash payments. However, with CBDCs, traceability becomes easier for government agencies, and it can pave the way for mitigating criminal activities in the country.

Tax Payables

A considerable population of citizens can evade taxes by hiding their real income or forging financial records. However, with the presence of CBDCs, it will become very difficult for anyone to manipulate their financial records or hide their real income streams. Additionally, the government will be able to automate the process of tax collection, which can further improve the tax payables income for the state.


CBDCs are based on blockchain technology, and they are a great way for the Central Banking system evolution. By offering a considerable amount of advantages to the governments, commercial enterprises, and retail consumers, CBDCs can contribute to economic development on a state and international scale.

CBDCs are not just for making wholesale transactions, but they can also accommodate users who are working at a retail level. Economist and Senior Professor at Cornell University Eswar Prasad told CNBC during a recent interview that “A combination of CBDCs, stablecoins, and cryptocurrencies is going to exterminate the fiat currencies from existence in the coming days.” produces top quality content exposure for cryptocurrency and blockchain companies and startups. We have provided brand exposure for thousands of companies to date and you can be one of them too! All of our clients appreciate our value / pricing ratio. Contact us if you have any questions: Cryptocurrencies and Digital tokens are highly volatile, conduct your own research before making any investment decisions. Some of the posts on this website are guest posts or paid posts that are not written by our authors (namely Crypto Cable , Sponsored Articles and Press Release content) and the views expressed in these types of posts do not reflect the views of this website. Tokenhell is not responsible for the content, accuracy, quality, advertising, products or any other content posted on the site. Read full terms and conditions / disclaimer.