Central Bank Digital Currencies

Central Bank Digital Currencies (CBDCs) are still a novelty. There are many theories about the potential uses of central bank digital currencies (CBDCs). Central banks around the world are also actively pursuing advances in technology. The creation of a digital currency is currently being considered by all the world’s major central banks, including the European Central Bank, which has presented to the public the first information about its own upcoming digital currency project, the digital euro. What is it and how does it work ? Let’s take a look.

What is CBDC (Central Bank Digital Currencies) ? 

CBDC is a digital token bound to the value of a country’s fiat currency, CBDC tokens are issued by the central bank, while cryptocurrencies are a decentralized ecosystem.

What is the purpose of CBDC ? 

According to the European Central Bank’s portal, the digital euro could support the Eurosystem’s objectives by providing citizens with access to a secure form of money in a rapidly changing digital world.

The ECB is concerned about the expansion of digital payments, which mainly benefit private companies and foreign currencies. The digital euro would be a direct claim on the central bank and would therefore have no liquidity, credit or market risk.

The aim is to create a fast, easy and secure way to make payments. To create competition with foreign card companies such as Visa and Mastercard, or digital payment services such as PayPal.

How would that work ? 

In the words of Dominik Stroukal, a Czech economist and cryptocurrency expert, it should look like this:

“It’s nothing more than having an account in a central bank and not in your commercial bank, or having an account in a central bank and in your commercial bank at the same time. Some institutions and CB employees even already have, and there is no law in the Czech Republic that prevents other people from opening an account at the central bank. The moment the CB did this, we would have access to digital currency. The definition of digital currency is that it is money that I have deposited in an account, except that it is money that I have deposited in a central bank and not in a commercial bank. That’s it.

The important thing is to know what the format of that digital euro should be, and therefore whether it will be compulsory for everybody to have it, or whether only those who want it will have it.

He goes on to explain that European banks need to keep a permanent eye on price and monetary stability. These banks do not want people to be forced to keep all their money in the bank, because that poses a certain risk. A commercial bank can go bankrupt and therefore the central bank offers a risk-free alternative to having money in cash. At the moment, if nobody wants to use cash anymore, as is the case now in Sweden, they should provide a risk-free alternative to opening an account with the central bank, because the central bank cannot go bankrupt.

According to a study by the Czech National Bank, the introduction of a digital currency could represent only a small and not very visible step towards further nationalization of the economy in the form of a transfer of part of the private sector and its responsibility to the state here to the central bank. The study concludes that in the future, after the introduction of CBDC, there could be pressures to expand the central bank’s lending activities to support various priority social objectives, such as combating climate change, inequality, supporting housing for the young, providing for old age, in other words, further pressure to finance the national debt by issuing new money, which contributes to inflation. 

What is the process of introducing this ?

The number of existing CBDC projects has increased significantly over the last few years. Currently, more than 100 countries are working on the CBDC topic. Of these, about half are still in the research and development stage. 39 countries have either piloted, validated or launched CBDC initiatives. The digital euro is still in the exploratory phase, which will last until 2023. It will only be decided whether the digital euro will see the light of day once the exploratory phase is over. The European Central Bank estimates that the earliest launch date will be 2025

What advantages can digital currencies have?

– The main advantage of a digital currency should be the speed and reliability of transactions without major associated costs. If most of the shops or our friends will have a digital wallet with digital currency, we will be able to pay in seconds. This works to some extent even now, as do some existing technologies, such as payments by card, phone or smart devices in stores, or payments using QR codes between friends. But it would remove the drawbacks of existing systems – for smaller shops, for example, these transactions are quite expensive.

– Another advantage could be the substitution of cash in case the use of cash drops significantly and is no longer accepted in some places. Thus, digital currency will also allow people who do not have a bank account to pay.

– Digital currency also offers an alternative payment option should traditional bank payments become unavailable due to technical problems or cyber attacks. 

– The advantage of a central bank’s digital currency over cryptocurrency is its security, which is ensured by the supervision of the financial market regulator. This is also why CBDCs could in the future create an alternative to fiat currencies or operate in parallel to them. 

– Balances in digital currency accounts can be interest-bearing.

What disadvantages can digital currencies have?

– The main disadvantage of a digital currency is the loss of anonymity. Selected individuals at the central bank and law enforcement authorities could have access to the full transaction history – unlike cash payments, which are completely anonymous.

– Digital currencies can also pose a risk to a country’s financial stability. If it were a digital currency created by a central bank, it would strengthen the role of the central bank and weaken commercial banks – which would be all the more dependent on liquidity from the central bank.

– Also, withdrawals from accounts may be accelerated. This means that potential attacks on banks may be faster.

– A foreign or private digital currency may also weaken the domestic financial system, and this digital currency will not be under the control of domestic financial stability supervision. 

– Another risk of digital currencies is the possible slow adoption of this form of money in society. If only a small proportion of people created digital wallets, there would be no incentive for others to join them – digital currency payments would not be more convenient


It is important to realize that we don’t really need any central bank digital currencies. CBDC did not come into existence as a demand from the consumers of the people who use this money. It is possible that we are opening another Pandora’s box, letting the central bank in, giving it a tool and, although it doesn’t look like it at the moment, in the future it may misuse it to, for example, restrict purchases of certain goods and services, track account movements (loss of anonymity) and therefore certainly loss of individual freedom.