The Future of Money: Central Bank Digital Currency (CBDC)

4 min readDec 16, 2021


Central Bank Digital Currencies (CBDCs) differ significantly from widely recognized cryptocurrencies and are potentially one of the most significant innovations in the evolution of money. In this article, we explore various aspects of CBDC and their impact on the future of money, as well as possible development scenarios.

New digital currencies or cryptocurrencies?

A new wave of tokenized money began with the introduction of Bitcoin in 2008 as the first widely used decentralized peer-to-peer cryptocurrency based on a distributed ledger technology called the blockchain. Decentralized cryptocurrencies are rooted in encryption and anonymity, criticizing the traditional monetary system and intending to create a new financial system from the outside. The market has received further development impetus with more technological innovations and solutions on the horizon.

It is against this backdrop that central banks around the world have increased interest in the development and creation of CBDCs. Conceived as a digital representation of fiat currency, CBDC is a central bank obligation in the same way as physical currency. Unlike cryptocurrencies, CBDCs remain completely in the orbit of the traditional financial system of fiat currencies, which are supported by the trust in the currency’s issuer — the national central bank.

According to the Atlantic Council’s GeoEconomics Center, 87 countries (representing over 90 percent of global GDP) are exploring a CBDC. For example, in May 2020, only 35 countries were considering a CBDC.

CBDCs Category

One of the categories of CBDCs is related to the implementation model.

According to this, the first option for CBDC is “wholesale”, which is limited for use by financial institutions for wholesale settlements, that is, for interbank payments or securities settlements. The opposite option is a “retail” CBDC for the general public, which is expected to result in increased access to financial services. In a hybrid CBDC implementation model, the financial system will be similar to the existing one. Commercial institutions would be mandated to fully back a CBDC-like liability to the consumer with their own CBDC deposits at the central bank.

Another category of CBDCs can be considered through their underlying format.

CBDCs are split into account-based and token-based types. In an account-based type, the transaction format is analogous to the current electronic payment system, where the balance in the user account is updated.

The token-based format uses cryptography to verify digital signatures to complete and confirm a transaction. Such CBDCs are “programmable money”, in which there is a certain mathematical logic associated with the definition of the money itself and the rules for payments between several peers. The programmed nature here is very similar to stablecoins and other cryptocurrencies.

The third category of CBDCs is related to the distribution model.

Centrally-focused: According to this model, all parties involved in a transaction will have accounts at the central bank. Payments will be simply transferred from one account to another and all claims will be confirmed by the central bank. The central bank will issue the currency and manage a permission system to clear transactions.

“Synthetic CBDC”: This is an indirect model in which the central bank transfers the digital currency token to a commercial bank or financial technology, which in turn distributes the currency and complies with KYC and AML requirements.

Hybrid: Most central banks are working on a hybrid model whereby the central bank transfers the CBDC to a regulated intermediary such as a commercial bank or financial technology that processes the transaction and complies with KYC and AML requirements. However, importantly, the claim remains on the central bank.

Current State

With the global crypto market cap reaching $2.20T as of December 2021 and new technologies evolving, countries are actively engaging in CBDC research and development to keep up with blockchain technology advancements. This is being played out in the world’s two largest economies — the United States and China.

China’s digital currency electronic payment system has been in development since 2014. China is expected to move towards massive CBDC by Beijing of the 2022 Winter Olympics. The country’s e-yuan relies on a centralized database that records and tracks all transactions on the network, as well as controls access to the network. Many expect China to be the first country to fully implement CBDC.

In turn, the US Federal Reserve announced that they are moving towards developing their own digital currency — Fedcoin. Fed Chairman Jerome Powell said they are watching the situation closely and stressed the importance of ensuring the digital currency is issued correctly without rushing to outstrip its global competitors. The CBDC is planned to be developed for use by the general public. More details are expected in 2022.

The potential benefits of CBDC are currently on the radar for most policymakers and financial institutions. As of today, the trend of the future of money is likely to be a combination of centralized, decentralized, account-based, and token-based with CBDCs, stablecoins, and cryptocurrencies co-existing alongside traditional digital and physical currencies.

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