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  • Writer's pictureTeam Sygnum

Digital Nugget: What is the point of central bank digital currencies (CBDCs)?

While most of the world’s central banks are enthusiastically prototyping CBDCs, their motivations why are not always clear.

What do central banks mean by digital currency?

The puzzle starts with the very term ‘digital currency’. Fiat currencies are already digital and have been for a long time – other than the small portion of money that is in the form of cash (about ten percent of the global money supply).

Most money exists in a digital form, and most financial transactions are stored on digital ledgers. Pretty much all business-to-business transactions, as well as all financial market transactions, occur digitally. In 2020 only 20 percent of retail transactions were in cash. Central bank digital currencies (CBDCs) are clearly not making money digital – it already is. So, what do they mean with CBDCs?


Are CDBCs a version of cryptocurrencies?

The narratives around CBDCs often reference the innovation of cryptocurrencies and suggest that this was the inspiration for the CBDC concept. CBDCs, however, have nothing to do with the core idea of cryptocurrencies.

The insight of the whitepaper for the original cryptocurrency, Bitcoin, was the creation of decentralised money as an improvement over the fiat currency system. More generally, it also offered an alternative to centralised systems that create undesirable human incentives that are susceptible to corruption, abuse or creation of a bureaucracy that becomes dysfunctional over time. CBDCs, however, are not designed to be decentralised. They are another centralised form of money and do not build on any of the core insights that led to the creation of cryptocurrencies.

If anything, they introduce an extraordinary level of centralisation, transparency and control where all financial transactions run through the central bank’s ledger.

Will CBDCs be similar to stablecoins?

In theory, this is possible. Stablecoins have been gaining market share in payments as they offer a cheaper and faster alternative to payment processing and international remittances. Central banks could offer the ultimate stablecoin that is backed directly by their power to print money rather than by reserves or algorithms.

However, as we find out more about the intended designs of CBDCs, it does not appear likely that they will use a public blockchain as stablecoins do, or that they will rely on distributed ledger technology (DLT), the pivotal innovation that allowed for the creation of decentralised money.

DLT is powerful as it allows parties to securely transact in a trustless manner, removing the need for intermediaries, thereby reducing the cost and increasing the speed of transactions. It would make sense to use the technology of trustless transactions to improve the efficiency of the financial system and therefore of the whole economy. Yet, it does not appear that this is how CBDCs are being designed.

Some CBDC pilot projects mention the use of ‘private blockchains’ or DLT – but only in the case of so-called wholesale CBDCs that are purely for the settlement of interbank transfers and related wholesale transactions in central bank reserves. Improving the efficiency of interbank settlements in this manner might make sense, but this would not involve any other actor in the economy, be it a corporation or private individual.

Indeed, the vast majority of planned CBDCs are intended for retail and will not use the technology underpinning crypto assets. Accordingly, leading CBDC consultant ConsenSys defines CBDCs as using a ‘digital ledger that does not have to be a blockchain’. As fiat currencies are already stored on digital ledgers, the innovation of CBDCs remains elusive.

Deputy Governor of the Bank of England, Jon Cunliffe, who is overseeing the BoE’s work on CBDCs, recently echoed the findings of the Federal Reserve Bank of Boston’s Digital Currency Initiative. They found that ‘a distributed ledger operating under the jurisdiction of different actors was not needed to achieve our goals’.

The goals that the central banks are trying to achieve remain unclear, but it appears that CBDCs will not resemble stablecoins.

The end of fractional reserve banking?

When it comes to CBDCs for retail, it appears that an ordinary ledger held directly by the central bank will be used with the central bank processing all payment transactions. The CBDC concepts described are very similar to existing forms of fiat currency, with the exception that every financial transaction will be known to the central banks, giving them the ability to monitor and interfere with these transactions.

This is certainly one way to avoid having to rely on intermediaries, but it has nothing to do with cryptocurrencies or trustless technologies.

Even if payment processing is outsourced, the essence of the system will be the same: a CBDC as a direct obligation of the central bank.

The extraordinary erosion of privacy this implies has raised many red flags.

However, such a solution implies a redesign of the monetary system and this aspect has received very little commentary or attention. CBDCs being a direct obligation of central banks means the end of fractional reserve banking and the debt-based monetary system.

There is evidence that this may be intended, as one of the key advantages of CBDCs is listed as ‘eliminate the risk of a commercial bank collapse’.

If such a dramatic redesign of the monetary system is being considered, it is remarkable that CBDC projects do not make this clear and instead refer to the planned digital currencies as simply an ‘efficiency-enhancing upgrade’.

Programmable money

CBDCs are often referred to as a technological leap forward because they will be programmable money.

However, based on their planned design, it is clear they will not be programmable in the manner of smart contracts. As they will not use public blockchains or smart contract platforms and may not even amount to any more than a simple ledger, owned and controlled by a central bank, ‘programmable money’ in this case means money that the central bank can programme, i.e. money whose use can be restricted in some way – when, where, for what purpose it can be used and by whom, and even whether it can be used at all. The demand for this type of programmable money is expected to be almost zero.

So, the question remains – why are most central banks dedicating significant resources to this project?


Despite development efforts by most central banks, there is little clarity on what real-world problems retail CBDCs are trying to address or how they will be materially different from fiat currencies stored on digital ledgers today. CBDCs do appear to be proposing a dramatic redesign of the monetary system and there is surprisingly little discussion about this.

While wholesale CBDCs – which are intended for interbank settlement only – may use private blockchains to enhance efficiency, there appears to be little to no intention that retail CBDCs would leverage the concepts underlying cryptocurrencies such as decentralisation and trustless execution. If anything, they are moving in the opposite direction, towards greater centralisation and placing extraordinary trust in central banks.

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