Central Bank Digital Currencies (CBDCs): Progress and Challenges in Financial Digitalization

As the global economy rapidly digitalizes, Central Bank Digital Currencies (CBDCs) are attracting attention as a key issue in the monetary policies of various countries. CBDCs are not merely technological experiments; they represent a serious effort to transition traditional fiat currencies into the digital realm, fundamentally transforming the nature of the financial system.

What Are CBDCs: Fiat Currencies in the Digital Age

Central Bank Digital Currencies (CBDCs) are digital versions of a nation’s fiat currency. They refer to currency issued and managed directly by the central bank in electronic form, replacing physical banknotes and coins. While possessing the same legal authority as traditional cash, they leverage digital technology for convenience.

The main advantage of CBDCs is improved transaction efficiency. They significantly reduce costs associated with producing, storing, and distributing physical currency, enabling faster and safer transactions. This efficiency is especially evident in cross-border payments and everyday small-value transactions.

With the shift toward digital finance, CBDCs also play a vital role in promoting financial inclusion. By providing access to digital financial services for regions and populations that previously lacked banking access, they facilitate broader economic participation.

Technical Foundations: The Role of Blockchain and DLT

Questions often arise about whether CBDCs use blockchain technology. The answer is not straightforward; approaches vary by country.

Some nations have chosen to adopt blockchain technology, utilizing the security and transparency of distributed ledgers to ensure transaction trustworthiness. Others employ digital ledger technologies like Distributed Ledger Technology (DLT) that allow for central management, enabling central banks to maintain oversight and regulation while enjoying digital efficiencies.

The choice of technology is closely tied to each country’s financial strategy. Some prioritize complete decentralization, while others focus on maintaining regulatory control. This diversity contributes to the evolving global CBDC ecosystem.

Fundamental Differences from Cryptocurrencies

While both CBDCs and cryptocurrencies are digital currencies, their core natures differ significantly. This distinction influences their future roles.

Centralization vs. Decentralization

CBDCs are characterized by centralized issuance and management by the central bank. The supply, circulation, and regulatory policies are all under central authority, ensuring stability and trust.

In contrast, cryptocurrencies like Bitcoin and Ethereum operate on decentralized networks without a central authority. Blockchain technology enables peer-to-peer transactions without intermediaries. However, in practice, most cryptocurrency trading occurs through exchanges, which introduces a degree of centralization.

Value Stability

CBDC values are anchored to the issuing country’s fiat currency, making them generally stable and suitable for daily payments and savings.

Conversely, the value of cryptocurrencies like Bitcoin and Ethereum is driven by market demand, supply, and speculative factors. Their high volatility presents investment opportunities but also risks for everyday transactions.

Privacy and Surveillance

The privacy level of CBDCs varies depending on their design. Some prioritize transaction privacy, while others incorporate monitoring and anti-fraud features for regulatory compliance.

Cryptocurrencies have traditionally been associated with anonymity. However, advances in blockchain analysis have made it possible to trace transaction origins and identify users, meaning their “anonymity” is more perceived than guaranteed.

Global Progress: CBDC Developments by Country

CBDC adoption is accelerating worldwide. In early 2020, about 35 countries were exploring CBDCs; now, according to the Atlantic Council, that number has grown to approximately 130 countries. Nineteen G20 members are in advanced stages of development, indicating that CBDCs are becoming mainstream.

China: e-CNY (Digital Yuan)

China launched the digital yuan (e-CNY) nationwide during the 2022 Beijing Winter Olympics, becoming the first major economy to successfully implement a CBDC at scale. This milestone marks a significant step in national digital currency adoption. China is also exploring cross-border use of e-CNY, aiming to establish it as an international payment method.

Bahamas: Sand Dollar

The Bahamas Central Bank issued the Sand Dollar in fall 2020, making it the first fully operational CBDC on a national scale. The Bahamas actively developed a blockchain-based digital ecosystem, especially after Hurricane Dorian in 2019, where CBDC played a key role in social recovery. The Sand Dollar is regarded as one of the most advanced digital currencies globally.

Australia: eAUD

The Reserve Bank of Australia is conducting pilot programs with major banks like Commonwealth Bank and ANZ. These collaborations aim to validate practical use cases for eAUD, gradually addressing operational challenges associated with CBDC deployment.

Brazil: DREX

Brazil’s CBDC, named DREX, is in advanced pilot stages utilizing DLT. The program aims to improve settlement efficiency for interbank transactions and considers future retail expansion.

India: CBDC Pilot

The Reserve Bank of India announced a proof-of-concept and pilot for retail CBDC in fall 2022. Driven by rapid digitalization and fintech growth, India is actively pushing forward with CBDC implementation. As of mid-2023, over 1.3 million wallets had been downloaded, and around 300,000 merchants began accepting CBDC payments, indicating clear progress.

Other projects include the Eastern Caribbean’s DCash, Jamaica’s JAM-DEX, and the U.S.'s FedNow, among many others.

The Coexistence of CBDCs and Cash

It is unlikely that CBDCs will completely replace cash in the near term. Practical challenges such as digital literacy gaps, privacy concerns, and cybersecurity risks remain significant.

A more realistic scenario involves a long-term coexistence of CBDCs and cash. In regions with limited digital infrastructure, traditional cash will continue to be in demand, while in urban areas, CBDCs are expected to become dominant, creating a two-tier system.

This coexistence ensures diversity and inclusivity within the financial system. The choice of payment method will be left to individuals and businesses, fostering a more flexible and adaptive financial environment.

Future Outlook for the Digital Financial Ecosystem

CBDCs are unlikely to replace cryptocurrencies, as their fundamental philosophies differ. CBDCs emphasize regulation and stability, while cryptocurrencies pursue decentralization and regulatory circumvention. This dichotomy suggests a complementary coexistence of two distinct monetary systems.

Additionally, private digital currencies like stablecoins are emerging, making the digital financial ecosystem more complex and layered. For example, PayPal’s stablecoin PYUSD is designed to promote blockchain-related initiatives and provide institutional investors with a safe yield opportunity during bear markets.

The future financial system will likely evolve into a multi-layered digital platform integrating the stability of CBDCs, the decentralization of cryptocurrencies, and the convenience of stablecoins.

What matters most in this evolution is not which currency type is “supreme,” but how each plays its role within the market and interacts with others. The global expansion of CBDCs indicates an irreversible trend toward financial digitization, with governments, financial institutions, and tech companies undergoing large-scale structural shifts.

Overcoming challenges such as infrastructure development, regulatory frameworks, and social acceptance will be crucial to creating a more efficient, inclusive, and secure financial system. Ultimately, the future of money is heading toward not only digitalization but also a diverse ecosystem of different currency forms.