Digital Currency – What does it take to launch a CBDC?

3 min read

Digital Money

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Over the last few months, there has been a lot of buzz around “Digital Currency”. Coined “Central Bank Digital Currency” or CBDC, this novel currency refers to the digital version of fiat money. CBDC, unlike the cryptocurrencies, stablecoins, mobile wallet money and credit cards we know of today, is a government-issued electronic money. This currency is a legal tender, a government-backed IOU. The objective of this money varies from adding a new payment system to replacing the paper notes and coins. This has the potential to reach to a wider populace than currently covered in the monetary system. Hence this currency can be a formidable financial instrument of the future.

Despite the many merits, why are countries not rushing to introduce this new form of money? Why are countries spending years on research and launching long term pilots? What are the key considerations for effectively implementing a digital currency?

The development, implementation and eventual adoption done comprehensively is key for successful adoption. An elaborate study of the key considerations is crucial.

Governance Model

Any single entity would find the process highly complex to handle independently. Central banks would have to involve various partners including private firms at various stages. This ecosystem would include technology partners, banks, mobile operators and digital wallet providers. Defining business benefits for these partners would make them better invest in this ecosystem. Incentivizing the contributing partners, defining their roles, ensuring equal rights while preventing vested interests and collusion between partners are essential. The digital currency should be compliant with the countries’ regulations and local laws. It is vital to frame the process for addressing software bugs and periodic patch updates.

Privacy Vs Regulations Trade-offs

For privacy advocates, a key concern with any electronic payment system is its lack of dignity protecting anonymity. The freedom to buy anything, from anyone is always enticing. Yet, misuse of this very freedom for nefarious reasons such as money laundering and financing terrorism is possible. Compliance with AML and CFT regulations is a crucial requirement. Striking a balance between privacy and compliance is necessary. An option could be to allow anonymity in low-value transactions while imposing strict and mandatory KYC requirements for high-value transactions.

Network Effects

Central banks have to determine the form in which the digital currency has to be released and the resulting consequences. Will this be issued as paper money equivalent or will this be similar to bank deposits? Bank deposits earn interest while physical cash does not. Releasing as digital cash can make physical cash disappear. Vendors might refuse to accept paper money and demand its digital version instead. This would adversely affecting people who predominantly use cash and have limited understanding of anything digital. Releasing as bank deposits might result in people exiting the banks and instead of parking their money in the form of central bank deposits. This would cause banks to increase their interest rates to make deposits attractive. Mortgage rates will inadvertently rise. None of these would be favorable to the economy. Hence, the network effects associated with this new form of money has to be carefully studied.

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How the digital currency would be finally accessible varies from country to country. The currency can be restricted only for interbank settlements or can be made available to the general public as a payment instrument. The design of the currency is dependent on the accessibility factor.

Distribution Channels

Central banks have to determine the channels for distributing the digital money. They can consider using the current mediums such as mobile wallets, mobile phones via text messages, bank accounts via electronic settlement systems or design a new medium for fund transfers.

User Experience

This digital currency initiative is for people from all walks of life. Many of them would be digitally and linguistically challenged. Educating everyone to use this digital platform would be a hard task at hand. Besides, if the user experience is off-putting, the adoption rates of this new currency would plummet. The user interface and the underlying platform has to be simple, interactive and user-friendly. These qualities need to be embedded into the system without compromising security.

Controlling the Supply

Cash flowing in the system reflects the country’s economy. High money supply can result in hyperinflation whereas a decrease of it might end up with economy reeling under deflation. Controlling the supply of digital currency is essential.


Similar to physical money and cryptocurrencies, CBDC needs to be available in denominations. This would make micropayments and smaller transactions possible.

Impact on Social Welfare

Governments around the world promote social welfare systems to ensure, their people have basic human needs such as food and shelter. The aid can be in the form of food stamps, housing assistance and unemployment compensation. If the government decides to pay the compensation as digital cash instead of its physical version, will the beneficiaries be able to access and use the money? Will the local markets and grocery stores have the necessary infrastructure to accept the digital currency? Therefore, analyzing the impact on the welfare state is essential.

Interoperability across Geographies

Today, transacting in a single cryptocurrency across countries accelerates the cross-border payments. Time-consuming aspects such as currency conversions and involving multiple intermediaries can be avoided. Having a common digital currency can extend this benefit to CBDCs as well. However, this would entail many regulatory and legal challenges. Instead, standards to create, share and exchange various digital currencies would be beneficial in the long run.

In summary, a thorough analysis while introducing this new form of money is essential. Pilot programs with specific use cases such as cross border payments and mobile payments done in a controlled, jurisdictionally small environment would help understand the feasibility and implications. Implementation might take time. However, if done correctly, the central bank-issued digital money has the potential to bolster the economy and reach a wider populace than any of the current payment instruments.


Deepa Ramachandra I am a Blockchain enthusiast and evangelist. I write on Enterprise Blockchain and the Social Impact of Blockchain and Digital Currencies. I am curious about how emerging technologies of today disrupt and shape our tomorrow. Opinions are my own.

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