Central Bank Digital Currencies

Central Bank Digital Currencies (CBDC) have been on the policy agenda for a while now and with the onset of the COVID-19 Pandemic, the clock seems to have sped up. 

In late March of this year both houses of the United States Congress introduced bills that contained language for the creation of digital dollars and digital wallets. There were a few differences in the drafts and the language has since been removed, but one thing is clear, CBDCs are right around the corner.

A recent survey by the Bank for International Settlements (BIS) stated that 80% of central banks are exploring CBDCs, and 10% think they’ll roll out a digital currency within the next three years. In fact, Banque de France (Central Bank of France) announced last week, they had conducted a successful test of a “digital euro”.

Currently, central bank money is composed of physical coins and bills as well as reserves held by the central bank on behalf of state chartered financial institutions. CBDCs would be a third form of central bank money and could conceivably replace all physical coins and bills. Users all over the world have shifted to cards and digital forms of payments, and governments have signaled the possibility that they would be willing and eager to move away from physical representations of their currencies altogether. 

The United States is actually somewhat late to the movement toward CBDCs. Central Banks across the globe have been testing and working on their own versions of a CBDC for a few years now. These countries include: Iceland, Denmark, Norway, Sweden, Brazil, Ecuador, Cambodia, Ukraine, South Africa, Uruguay, China, Israel, France, Switzerland, and the Bahamas. This might be surprising but it falls in line with the last 30 years of Central Bank history, with the majority of Central Bank innovation having originated in smaller countries like Norway, Sweden, and New Zealand. 

We don’t know exactly what a CBDC will look like for each monetary system, but based on the information provided by Central Banks and other financial institutions, we have a good idea about the choices they’ll have to make when designing their own CBDC. 

Potential Architecture

Central Banks could set up a blockchain/distributed ledger (DL) or they could go with an account based system that isn’t too much different than the typical user’s bank account today. We don’t know which option Central Banks will go with but we can imagine that there will be a mix of approaches depending on the CB’s particular priorities and the current system already in place in their respective countries. 

Keep in mind that a blockchain or DL-based CBDC would more than likely operate within a “permissioned” network of authorized validators. It would not be an open and decentralized network like a Bitcoin or Ethereum. In this permissioned set up, the central bank might be a super-node that would have ultimate control and the final say over issuance and validation if desired. Regulators or other institutions like banks and payment processors could participate and assist the central bank as validating nodes, or observer nodes, where they could have validating or view privileges. Cambodia looks poised to be the first country to go live with this type of approach. 

Central Banks don’t have to go in this more “distributed” direction and can instead be the sole operator and authority of a simple account based system. An account based system will have no need for a consensus algorithm or a process for transaction verification, but the responsibility of managing the CBDCs will be all on the central bank’s shoulders. 

A CBDC powered by a DL would be more cash/token like and peer to peer than an account based system which would be most similar to a debit card or checking account.

In an account based system all accounts would be held and managed by the central bank. This would be an incredible expansion of access to central banks that we haven’t seen in a couple hundred years.

In fact, in the early days of  the Bank of England and Sveriges Riksbank (Sweden’s CB) individuals and non-financial firms held accounts at the central bank. This practice ended because paper bills couldn’t scale, so maintaining lots of individual accounts became impractical. But holding accounts at central banks has become feasible again, with the aid of our current technologies. 

Potential Financial Properties

Central Banks also have some decisions to make about their CBDCs store of value properties. It looks like from our research central banks have 3 options for their CBDC: a constant nominal value, an indexed real value, or an interest bearing store of value.

A constant nominal value is what your cash bills, coins, and checking account have now. All it means is a $20 bill remains a $20 bill. It can’t be marked down to a $10 bill. There’s nothing remarkable about this option, but it could be a popular choice given we’re used to this type of set up.

Central Banks could also index its CBDC to a “basket of goods and services” so that it keeps its purchasing power as constant as possible. This could not be done with bills and coins, but can easily be done in a digital environment. During times of general price increases the nominal value of the CBDC would move up to match the general move up in prices, and alternatively when the general price level moves down the nominal value of the CBDC would also move down. Purchasing power would neither be gained nor loss. This would be a true “stable-coin” in terms of real purchasing power.

And lastly central banks could opt to issue an interest bearing CBDC. This would effectively give individuals the same treatment that commercial banks and other financial institutions have with central banks, completing the trend of central banks paying interest to more and more entities. This option might sound most appealing to the user because interest rates are usually thought of as a positive for the holder, but this option would give the most discretion to central bankers, opening the door to a negative interest rate! Be careful what you wish for. 


Digitization of finance has been well underway since the 70s and prognosticators since then have theorized about the advent of digital monies. Bitcoin and thousands of other crypto-assets beat governments to the punch and central banks are now playing catch-up, learning from what cypherpunks and entrepreneurs have already done. Central banks fear that they could cease to be as influential as their monopolies once granted if they don’t enter into cyberspace.

The buildout of CBDCs around the world could actually accelerate the adoption of Bitcoin and other crypto-assets. Institutions will have to build digital money infrastructure or at least familiarize themselves with it and individuals will have to adjust and learn how to use and navigate the new infrastructure like digital wallets. The friction between the old and the new will quickly evaporate, making an institution’s or individual’s entry into crypto-assets much smoother.

In addition, nation-states will have even greater financial control and surveillance capabilities than they already have over their populations. This could make the attributes of privacy, censorship resistance, and control more attractive to the general population once they realize the full implications of a CBDC in the hands of governments.  

And lastly, this new financial infrastructure would threaten some of the functions of legacy commercial banks, payment processors, and smaller fiat currencies. Many institutions could become redundant, unneeded, and might be unable to adapt enough to survive in the new environment. 


We could have our first CBDC appear sometime in 2020, 11 years after the invention of Bitcoin. There are a lot of unknowns and there are many different variations we could see, but one thing is certain: digital money is here to stay and there’s no going back.

    Permission.io retargeting pixel Skip to content