Central Bank Digital Currencies

The payments landscape has becoming increasingly complicated in recent years with developments such as faster payments, open banking and blockchain changing the very fabric of the business. Now a new development is on the horizon which will bring yet further change for payment and E-money institutions: Central Bank Digital Currencies.

What is a central bank digital currency?

Central banks have traditionally issued their national currencies in two forms: physical notes & coins to the general public and electronically to the commercial banks. They are now proposing a third option which is to issue a digital version of the local currency using virtual tokens that could be issued directly to and used by consumers and businesses to settle transactions between themselves. This could well take the place of physical cash as a means of payment, although it is very likely to be a complimentary form of money for a number of years.

What are the driving factors?

  • Reduction in cash. Globally the volume of cash transactions is falling, a trend that is being enhanced by Covid 19. In Holland for example cash accounts for only 32% of total payments volume while in Sweden it has fallen to 15%. Indeed according to a survey by the Economic Intelligence Unit, by 2025 cash will only represent 5% of all payment transactions. The danger for the central banks is that in a totally non-cash world control of payment systems passes solely into the orbit of the private banks and other players. This is precisely the worry that has driven the Central Bank of Sweden for example to launch its “E-Krona” CBDC initiative.

  • Monetary policy. A number of central banks see a CBDC as a second instrument of economic control. Interest rates could be applied to control inflation (e.g.negative rates could be applied if the central banks wished to dis-incentivise people from saving in order to stimulate spending. That is very hard to do today as people would just draw cash out and store it physically). Similarly they could “helicopter” CBDC funds direct to households rather than via the banks who tend to hoard the cash rather than use it for lending. They could also use CBDC interest rates to push banks to offer more competitive market rates when they want to encourage saving.

  • Financial inclusion. A number of central banks are located in countries where a large part of the population is unbanked. A CBDC could allow for tokens to be distributed into smart wallets, thus allowing people easier access to finance. This method could also allow the central banks to distribute money quickly in a crisis.

  • Payments efficiency. There are still large disparities between payment infrastructures globally in terms of cost, speed and standards. Central banks see an opportunity to create an efficient, cheap and safe payments infrastructure.

  • Stablecoins. A number of so-called private “stablecoin” initiatives such as Facebook’s “Libra” are springing up. These are privately run payment systems where the stablecoin is in theory backed up by physical assets such as cash or securities. The central banks are concerned that local payment flows may be redirected into these private currencies thus distorting monetary policy. Also private individuals and businesses may be exposed to severe losses.

What are the CBDC payment models?

Central banks are currently examining three models:

  • CBDCs will only be used on an interbank basis. Banks will open CBDC accounts with the central bank and effect payments between themselves. In this model CBDC payments will most likely only be used to settle high value transactions such as FX and securities. Current trends show that only a few central banks are exploring this model.

  • A fully centralised model for retail payments whereby individuals open accounts with central banks directly and the latter offer a full banking service. This has the merits of providing a fully secure payments service backed up by central bank money. However, it would mean central banks offering a full commercial bank service which is beyond their historical remit and would put them in direct competition with commercial banks. It could also lead to a flight of retail liquidity in the event of a banking crisis, leaving commercial banks and other payment providers scrabbling for funding.

  • A semi centralised model where the central bank issues the currency but the account relationship is with the commercial banks (and other payment providers) and they offer payment services to customers. The currency is still full backed by the central banks, but they no longer have the burden of offering a full suite of payment services. This model seems likely to be the preferred one, based on current trends.

In terms of the architecture most of the central banks are considering either a centralised payments and accounting platform or one based on distributed ledger technology. The essential difference being that in the former model the database would be run by the central banks whereas in the latter there would be a number of databases (or nodes) each one operated by the platform providers. Information would then be distributed to each one.
In terms of distributing the CBDC coins central banks may either require recipients to open an account or the coins could be sent direct to a user’s electronic wallet. Both models could be adopted and in the case of tokens they could be distributed either directly to users or via a payments provider.

CBDC use cases

According to a recent survey of 66 central banks, 80% of them are engaged in CBDC projects. China is one of the front runners rolling out a retail based CBDC platform in several cities and rumored to be going live in time for the 2022 Winter Olympics. The Riksbank is also looking to roll out a combined wholesale and retail CBDC platform over the next few years. The former is using centralised architecture for the time being while the latter is using DLT. Both plan to offer an account based and a token-based model.


The momentum for CBDCs is growing and it is very likely that they will become a reality in the next five years. Payment and E-money institutions will need to consider the impact of this new phenomenon as payment systems, platforms and applications will all require changes. This challenge may become more complicated as CBDCs are rolled out in different countries.

Here at Authoripay we are very close to the developments in this space and are therefore in an ideal place to understand the implications. We will continue to update our clients as this development changes.

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