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Central Bank Digital Currencies (CBDCs): The next disruptor
About Central Bank Digital Currencies
Businesses and consumers are adapting to digital forms of monetary interactions faster than ever
imagined. Widespread digitization of economies and a growth of decentralized digital currencies have acted as a catalyst for central banks to rethink “money.”
In this document, we lay out the drivers and key design considerations for central bank digital currencies (CBDCs), an electronic form of central bank money, and the corresponding impact on commercial banks. In addition to “issuing” CBDCs, what else will a central bank need to consider when designing a CBDC? How will these decisions affect commercial banks? While there is no single answer, it is evident that the evolution of CBDCs will have profound ripple effects for the whole financial ecosystem.
Introduction to CBDCs
A CBDC is an electronic form of central bank money with potential
wide use by households and businesses to store value and make
payments. It is central bank digital money in the national unit (e.g.,
the US dollar) representing legal tender with the liability of the
central bank, similar to physical currency in circulation. This makes
CBDCs more secure and less volatile than other digital currencies.
The following table presents an overview of the purpose of and
common misconceptions about CBDCs.
CBDCs are rapidly evolving, and different central banks can take
different approaches in implementation. There are a number of
design decisions that lack broad consensus, including the following:
• Ability of CBDCs to completely replace notes and coins
• Degree of anonymity or privacy
• Access and availability
• Interest-bearing ability
• Traditional money, but in digital form;
• Issued and governed by a country’s central bank;
• Influenced in terms of supply and value by a country’s monetary
policies, trade surpluses, and central bank; and
• Based on a digital ledger, and may or may not leverage blockchain
or distributed ledger technology.
CBDC is not…
• Cryptocurrency (like Bitcoin) governed by distributed autonomous
communities instead of a centralized body;
• Value-dependent and determined entirely by the market; or
• Equivalent to electronic cash (e.g., balance in a digital wallet or
a prepaid card) with claim against an intermediary such as a
Overall, CBDCs would offer both a new form of central bank money
and a paradigm change in payments infrastructure. Hence, it
becomes important to understand the benefits of CBDCs and their
impacts on the wider payments landscape.
For an exploration of policy and regulatory considerations for CBDCs,
see Deloitte’s paper, Central Bank Digital Currencies (CBDC):
Regulatory and policy considerations in the US.
Drivers of CBDCs
The need for CBDCs is driven by the rapid digitization of economies, push for real-time payments and settlement, and need for more
efficient domestic and cross-border monetary interactions. According to the International Monetary Fund (IMF), centralized technology
such as CBDCs can reduce expenses, facilitate seamless flow of money, improve financial inclusion, and provide safer access to money
through digital channels. On the other hand, many central banks are also realizing the increasing influence of digital currencies and are
concerned about potential impacts on the financial system.
We have identified the following four key drivers
that have pushed central banks to explore CBDCs:
Supporting digitization of economies
Enhancing monetary and fiscal policy
• Help maintain and streamline central banks’ function of providing
legal tender and ensuring continued access in a purely digital
• Improve monetary policy for central banks, simplifying the
distribution of government benefits to individuals and improving
control over transactions for tax controls;
• Offer access to digital payments at minimum or zero cost via a new
general-purpose electronic payment medium.
• Enhance financial stability by managing liquidity squeezes and
offering public alternatives to private digital currencies; and
Streamlining current payment systems
• Improve payment contestability by reducing operational costs and
risks associated with managing physical currency;
• Lower barriers to entry by building an open infrastructure to foster
innovation and participation from private players;
• Help improve the efficiency of payment systems, both at point of
sale (POS) and peer-to-peer (P2P); and
• Help improve interbank payments through faster settlements and
open or extended settlement hours.
• Enable central banks to tap into more granular payment flow
data across an economy, enhancing macroeconomic data
integrity and analytics.
Improving financial inclusion
• Provide a tool to improve the competitiveness of local currency
as a means of payment in regions that are attempting to reduce
US dollar dependency;
• Be distributed through mobile devices, with some proofs
of concept having accomplished this without need of a bank
• Help bring the unbanked population of around 2 billion (as of
2020) into the global financial system.1
Overall, CBDCs would provide a more resilient payments
landscape, supporting competition, efficiency, controls, and
innovation in payments. They would also address declining cash
usage by improving the usability and availability of legitimate
central bank money.2
Central banks around the globe are exploring variations in
CBDC design while weighing factors such as access, privacy, and
distribution method. There are two common design formats for
CBDCs: token-based and account-based. Each approach has a
different technical infrastructure, as well as varying levels of
access and privacy.
Token-based CBDCs use a digital token, and access and claims
require users to have knowledge of the token (public-private key
pair). This approach typically offers a high degree of anonymity;
however, central banks can choose to implement identity
requirements to use the network. Token transfers rely on the
sender’s ability to verify the validity of the payment object and
therefore require a form of distributed ledger technology for
verifying the chain of ownership in each token and validating
payment transactions. This also means higher end-user risk of
losing a key or token held in a noncustodial wallet. In a tokenbased approach, commercial banks would need to be the first
line of defense for compliance with know your customer (KYC)
and anti-money laundering/combating the financing of terrorism
(AML/CFT) regulations. This method can provide universal access
to CBDCs, but also makes law enforcement more challenging
compared with other designs.
Account-based CBDC access and claims are linked to a bank account
tied to the identity of the account holder. This method is challenging
for universal access because it still requires a banking relationship.
To transfer funds, banks would process each payment by debiting
the sender’s CBDC account and crediting the beneficiary’s CBDC
account. Transactions need to be verified using user identities,
and therefore, robust identity management systems are required
to maintain a unique identifier per individual across payment
systems. In an account-based approach, compliance with KYC
and AML/CFT regulation is the responsibility of the central bank.
Verification of transfers in an account-based system depends on
establishing appropriate safeguards against identity theft, fraud, and
unauthorized transfers from valid accounts.
There are many design considerations, including distribution, access,
and privacy, that need to be carefully considered to determine the
right CBDC implementation. Reviewing lessons learned from existing
CBDC and crypto approaches, intended benefits, and trade-offs can
help a central bank determine the best approach.
landscape of CBDCs
CBDCs are not just a theoretical concept; there are live CBDCs
and many proofs of concept globally, as depicted in figure 1. Key
• More than 60 central banks are exploring CBDCs at varying levels
• 14% of central banks are moving forward to development and
• Three retail CBDC projects are live (Bahamas Sand Dollar, Bakong
Cambodia, and Eastern Caribbean DCash).
Though countries like China, Sweden, Canada, and the United
Kingdom have led research and pilot projects in the past few years,
the actual execution of CBDC pilots is being led by smaller nations.
In late 2020, the Central Bank of the Bahamas launched the Sand
Dollar, a digital currency backed by that nation’s central bank. The
Sand Dollar has facilitated easier monetary transactions across
an otherwise vast archipelago. It is also meant to improve ease of
transaction, service delivery costs, and financial inclusion. The Bank
started experimenting with the CBDC in 2019.5
Research and pilot CBDC projects are showing promising results
over a short time span. Globally, 14% of central banks are close
to implementation, and the success of pilot projects will further
motivate others to explore. With great opportunities to enhance
monetary and fiscal policy, central banks are giving considerable
attention to CBDCs, and in turn, the rest of the financial ecosystem
will need to be ready to adjust.
Figure 1. Global CBDC landscape
Banque de France
Wholesale CBDC experimentation
Bank of England
Swiss National Bank
Bank of Canada
Project Jasper and
Bank of Japan + ECB
Digital Dollar Project
of the Bahamas
Banco Central do Brasil
Bank of Korea
South African Reserve Bank
Pilot or experimentation
Reserve Bank of India
CBDC pilot (announced)
Reserve Bank of Australia
Wholesale CBDC experimentation
HKMA and BOT and
CBUAE and PBC DCI
As of April 2021.
Impact of CBDCs on
Commercial banks are focused heavily on customer-facing
operations, secure transactions, and regulatory reporting and are,
given CBDC design decisions, essential partners in successfully
rolling out a CBDC. CBDCs introduce an electronic form of central
bank money, adding significant complexity for commercial banks,
and may imply a drastic change across the organization to keep up
with the need to innovate compatible products.
As central banks embark on the digital currency journey with
CBDCs, it could lead to a paradigm shift in the way domestic and
global economies operate. While there is a lot yet to be determined,
the design of a CBDC will have implications for the entire financial
Depending on CBDC design, commercial banks will need to plan for changes in the following areas:
High-level scope of changes
Benefit from CBDC
• Banks could innovate current products and services across portfolios to leverage and
adjust to CBDC opportunities and behaviors (for example, designing an offline payment
infrastructure or electronic vault to store CBDCs for large institutions).
• The rollout of a CBDC would generate large amounts of transaction data that can open
opportunities for analysis and new real-time economic insights.
• If central banks go the way of account-based design, it will disintermediate correspondent
banking networks, as central banks would directly provide liquidity in each market.
• Banks will need to maintain compliance with AML, KYC, and custodian-related regulation.
• Banks may need to adapt their infrastructure to process CBDC transactions; enhance
digital apps to introduce CBDC functionality, leveraging existing processes; evolve customer
interfaces; and enable open, compatible infrastructure (e.g., digital wallets) or hardware (i.e.,
• Existing legal frameworks may be reformed based on CBDC design.
• For cross-border, FX transactions, or multicurrency wallets, banks may also need to manage
designs unique to individual CBDCs.
• Depending on the design decisions of a central bank, commercial banks may need to create
real-time infrastructure for identity and access management.
Proactively prevent cyberthreats
• Customer privacy and data security are expected to become key concerns due to
cybersecurity threats and vulnerabilities.
Navigate tax changes
• Different accounting rules and audit and financial reporting requirements are expected for
Reorganize for change
• Organizations may need to develop training required to manage CBDC-related processes,
technologies, and regulation.
The introduction of CBDCs is a disruptor for the
financial ecosystem, promoting payment efficiency
and representing an additional alternative to
the current money model from an operational
and technological point of view. Central banks
are moving rapidly toward implementation, and
therefore, commercial banks should use this time
to explore the digital currency landscape and
reimagine it for emerging services, opportunity,
and value creation.
World Bank Global Partnership for Financial Inclusion, “G20 Financial Inclusion Indicators,” accessed August 26, 2021.
Ledger Insights, “Bank of England releases Central Bank Digital Currency research roadmap,” March 12, 2020.
Bank for International Settlements (BIS), “Central banks of China and United Arab Emirates join digital currency project for cross-border
payments,” February 23, 2021.
Vipin Bharathan, “Central Bank Digital Currency: The First Nationwide CBDC In The World Has Been Launched By The Bahamas,”
Forbes, October 21, 2020.