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A guide to central bank digital currencies and how they work


Central bank digital currencies are a virtual form of national currency. They are a kind of fiat money, issued in digital form by central banks.

With each passing year, an increasing number of countries are discussing the creation of their own digital currencies, which would be issued by their respective central banks. CBDCs represent the value of a state’s cash and non-cash money, and examples include the digital yuan in China and the digital dollar in the United States.

In practice, a central bank digital currency serves as a virtual means of payment that is issued and controlled by the state, guarantees the stability of the exchange rate of the currency based on its cash and non-cash components, regulates the circulation of the currency and deals with other transactional matters.

The economic reasoning behind CBDCs

The rapid development and popularization of crypto presents a genuine challenge to the stability of financial systems in all countries. The crypto market is seeing ever greater involvement, in particular from large corporations and institutions. The circulation of cryptocurrency is growing, as is its functionality. From the perspective of the traditional economy, the crypto market is an opaque grey area that behaves like a shadow economy. As a result, crypto poses a clear challenge to the monopoly of states on the issuance of money.

In view of this, CBDCs are a perfectly logical response to the crypto market. They are an attempt of sorts to lure cryptocurrency out of the shadows, not though outright bans but by competing with it. States are therefore attempting to offer financial participants currencies that are somewhat similar to cryptocurrencies in the hopes that they will eventually win a significant share of the crypto market or even displace cryptocurrencies.

What’s the difference between CBDCs and crypto? 

The main thing you need to understand about CBDCs is that they fall completely within the scope of the traditional financial system. The concept of central bank digital currencies is technologically close to crypto, but far from it in spirit. CBDCs are first and foremost ordinary fiat money – dollars, euros, yuan or rubles. They are issued by the central banks of various states, only in a digital form instead of paper.

  • Central bank digital currencies may or may not run on the blockchain, while cryptocurrencies are always on the blockchain.
  • CBDCs are not decentralized, as they are issued and fully controlled by central banks, while financial regulators do not have a direct influence on cryptocurrencies.
  • A consensus mechanism is used to validate cryptocurrency transactions, while the blockchain is not required for CBDCs to function because the transactions will be validated by central banks.
  • CBDCs are not anonymous in any way, while crypto can be viewed as a conditionally confidential means of payment, especially in the case of anonymous coins like Monero and Zcash.
  • A CBDC represents the money of the state, which can ensure that it is recognized and accepted within its jurisdiction. Cryptocurrencies, on the other hand, are the “thorn in the side” of governments, which are trying to suppress them.

The countries already using CBDCs

CBDCs are a new concept, and are not yet fully formed. There is no established methodology for creating and implementing CBDCs, and each government is developing its technology independently. Many countries are already at various stages of implementing CBDCs. According to the Atlantic Council’s Central Bank Digital Currency Tracker, two thirds of countries are working to create and implement CBDCs.

The public can already use CBDCs in China, the Bahamas, Nigeria and the Eastern Caribbean Currency Union. In many countries, digital currencies are at the stage of research and development or being piloted.

Different governments are seeing different levels of success and encountering a range of issues associated with introducing these currencies.

A CBDC was introduced in the Caribbean several years ago, but is used by an extremely small percentage of the population. Though there were no significant issues in creating a legislative framework for the currency, problems of infrastructure emerged. Smartphones, QR codes, virtual cards and established business processes are just some of the things that are needed for CBDCs to function, and all of these things are underdeveloped in the region.

The problem in Nigeria is different. The financial infrastructure is in place to support the effective use of CBDCs, but the country’s inflation rate is high. It is therefore easier and more profitable for Nigerian citizens to transfer local money into cryptocurrency so that it does not depreciate.

The rollout of China’s CBDC has been a resounding success. Over 250 million residents are already using the digital yuan (e-CNY), with transaction volumes reaching USD 14 billion by the end of summer 2022. China is now working to facilitate trade with other countries using e-CNY.

There are several CBDC projects underway in the USA, with three being supervised by the Massachusetts Institute of Technology.

The USA has so far been in no particular rush to introduce the digital dollar. In December 2022, the US Department of the Treasury said that there was no need to expedite the launch of a CBDC and that there was currently no need to introduce a digital dollar. The financial ministry takes the view that US regulators need to carefully study whether the CBDC will actually make online interbank payments faster and cheaper.

On 22 March 2023, the Office of Financial Research (OFR) issued a new report on the prospects of CBDC integration. According to the report, the introduction of the digital dollar will lead to a decrease in the number of bank deposits made, which may in turn bring small banks to the brink of liquidation.

In Europe, EU members are also proposing a number of initiatives in this area, though no consensus has been reached and no projects have been launched.

Australia, Japan, Georgia and Ukraine have announced that they will pilot CBDCs in 2023.

The Central Bank of the Russian Federation is also going to pilot the digital ruble this year, on 1 April. The first stage will involve the testing of transactions between individuals – namely banking customers who are technically ready – and payments in the retail and service sector. Next, the Central Bank will set out to further scale transactions made using the digital ruble. The regulator is also making provisions for the use of a gold-backed digital token in international transactions. 

How to use CBDCs

The basic idea of how people will use CBDCs is more or less the same around the world. We’ll look at the digital yuan (e-CNY) as an example of how to use a CBDC.

To make a transaction using e-CNY, you first need to create an online wallet. This can be done by downloading an iOS or Android app on Chinese app stores.

The app is the primary means by which users can access the digital yuan. The app is operated by Chinese banks that have been given permission to provide online wallet services and facilitate the exchange of the digital yuan by the public.

Users can set up several online wallets within the app, and do the following:

  • set daily spending limits;
  • assign applications and services that can be paid for with e-CNY;
  • link their banks cards to the wallet.

In addition to paying for goods and services online, users can transfer small amounts directly to each other, and exchange the digital yuan even without an internet connection – the application supports NFC technology.

How will the full-scale rollout of CBDCs affect crypto?

Will CBDCs supersede cryptocurrencies? No. CBDCs and cryptocurrencies solve different problems, represent different forms of value, and operate on different planes.

A CBDC is a centralized, private form of digital money with a complete lack of anonymity. Cryptocurrency is a decentralized, transparent and anonymous means of payment.

CBDCs, like any other fiat money, are also subject to inflation. This is very different from crypto which is known for its halvings, token burns and impartial smart contracts. In countries where the inflation rate is high, it will therefore be much more financially prudent for people to keep their savings in cryptocurrency. 


CBDCs are nowhere near being a competitor to crypto. Cryptocurrency is a completely different world, a parallel reality where the majority of the decisions are made by individuals and not by the central bank, government or state.

It would be more appropriate to compare CBDCs with cash and non-cash money. Central bank digital currencies offer a number of advantages over these forms of fiat.

One of the advantages for users is the ability to make transactions directly, without the participation of third-party payment systems, which makes them faster and cheaper. Further to this, non-cash money is always tied to a bank, which may simply decide not to issue it in certain unfavourable circumstances. CBDCs, on the other hand, are not dependent on banks and cannot be moved. In this sense they can be compared to crypto or cash in your pocket.

For governments, CBDCs represent an opportunity to automate many economic processes, which currently require a huge amount of bureaucracy. This includes tax payments and pension fund contributions. Unlike with cash, governments also have total control over CBDC transactions, which simplifies the implementation of monetary policy.

Additionally, cross-border payments using CBDCs are a faster and cheaper alternative to existing systems.

It’s also worth remembering that digital currencies are 100% virtual, which means governments don’t need to purchase paper in order to issue the money, or spend money on printing, transportation, storage and disposal, which all present quite significant costs for state treasuries.

There is a great deal of discussion taking place all over the world about the advantages and disadvantages of CBDCs and whether they are actually needed, along with many other issues. Only time will tell what actually happens.