Mr. Nakamoto saw how the banking system collapsed during the 2007-08 recession and he came up with the concept of Bitcoin which is a peer to peer system of cash payments. It is based on blockchain technology where transactions are stored and verified on blocks which are connected to each other. Thus in turn eliminating the middleman. Now obviously the banks would be green-eyed but again anyone would find the concept of bitcoin and blockchain cool and sensible. The banks came up with an idea of having their own version of digital money which we all know by the name CBDC- Central Bank Digital Currency. The digital currency will be a legal tender and can be used to buy and sell products or services as you do with a normal fiat. Basically a digital version of your paper fiat. It will have the full backing and trust of the government likewise a fiat. The basic goal of the CBDC is to give you a feel of Crypto but circulated in a traditional banking system format.

CBDC has become one of the hottest topic in the fin world. Central banks of various countries are exploring the option of having their own version of the CBDC. Governments and Finance Institutes are performing various research and analysis on how CBDCs will be helpful the economy and its impact on monetary and fiscal policies of the country. A bank of International settlements report claimed that over 80% Central Banks have started working on CBDC. Recently in the Union Budget of the Indian Government, it was announced that the RBI-Central Bank of India will be issuing the Digital Rupee based on blockchain technology in the financial year 2022-23. As a result its important for us to dig deep and understand it more.

Types of CBDC

CBDCs are classified into two on the basis of their use

Wholesale CBDC

These are used in the banking hierarchy to conduct and settle transactions. It can be compared to traditional Central Bank reserves. It helps in facilitating transactions between two banks where counterparty risk is high. The real time gross settlement payment system would help magnify and eliminate such risks. CBDCs also enable setting of pre-requisites, so a transfer wont occur if the conditions are not met. The current settlement system works with only a single currency or under a specific geographic location. The Distributed Ledger Technology (DLT) available in wholesale CBDCs can expedite and automate the process for making International payments.

Retail CBDC

These are digital currencies for direct consumers. They eliminate the risk of banking institutions becoming illiquid and sink the funds of the depositors. Retails CBDCs can be further divided into two-

Value or Cash based Access
In this system the tokens are passed onto from one wallet to another pseudonymously. The wallet will be identifiable on the public blockchain but it will be difficult to identify the party who has done the transaction. The development of such a system is easier and faster as compared to token-based access.

Token or Account based Access
This is similar to creating a bank account where an intermediary will be responsible for verifying the KYC details and also monitor any illegal transaction between any accounts. This provides more data security as it prevents data leak to commercial organizations’ and public authorities.


  • Real Time Payments
    Many a times payments have to be done in a timely manner, to facilitate faster service to customers. With CBDC there is no need to rely on intermediaries like clearing houses. The lag time between payments is eliminated and hence payments can directly be made from the payer to the payee. It will also reduce transaction fees in the process. Further it also reduces third party risks like what if the Bank runs out of Money? or there is a Bank run! These kind of actives can disrupt the balance of a monetary system.
  • Tracking Unlawful Activities
    CBDC’s will make it easy for the government and the central banks to easily track every unit of CBDC. which is not possible with cash. It will help avoid tax evasion as there will be no means to hide any financial activity or even an off-shore activity. Illicit activities can be stopped at bay by tracking the criminal and in turn will also be easier to return back the funds to the victim.
  • Proof of Transaction
    CBDC transfer will create a digital record. In case of conflict, the transaction can act as an evidence.
  • Reduction in costs
    Being digital it reduces the costs of printing and maintenance of paper notes. In developing countries where there is an abundance of rural areas, it will reduce the costs associated with banking infrastructure.
  • Monetary Policy Transmission
    CBDCs will revolutionize Monetary Policies. Wholesale CBDCs will get automation in inter bank process and Retail CBDCs will establish a direct connection between the central banks and the consumer. It will allow more direct control of money supply. This will eventually lead into a full reserve banking system, a system where banks lend only time deposits rather than demand deposits. There was also an interesting case with the trial of digital Yuan in Shenzhen. The coin was programmed in such a way that it had an expiration date thus encouraging people to spend and help boost the economy.


  • Disrupt the Traditional Banking System
    The Retail CBDCs will be directly supplied by the Central Bank to the consumers. It will lead the common person to lead out of the traditional banking system. In this the other commercial banks have no role to play of creating debt or deposits. Customer shift to CBDCs will make the commercial banks balance sheets weak. In many extreme conditions it may also lead to bank runs.
  • Centralization
    Even though CBDC’s may use blockchain technology they are still controlled by Central banks and lack the essence of decentralization. With the power at their disposal, the issuers may anytime increase or decrease the supply.
  • Reduced Privacy
    The Central Banks will have total control over the transaction data as well. If CBDC is not implemented well with proper privacy protections, hackers can track and use this data leading to loss of financial privacy.
  • Dollarization
    The CBDC of a stronger country like USA can destabilize the currency of a weaker country. We all are aware of how Ecuador’s official currency the Sucre was replaced by the US Dollar, as the citizens were forced to convert their currencies due to increasing inflation rates in early 2000s.

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