Central Bank Digital Currencies (CBDC) – What are They, and How do They Work?

Digital Central Bank Currencies (MNBC) – What are They, and How do They Work?

The majority of global economies are considering issuing a central bank digital currency (CBDC). In this dossier, we explain what MNBCs are, how they differ from cryptocurrencies, and which are the most advanced central bank digital currency projects.

What are central bank digital currencies used for?

Central bank digital currencies (CBDC) are digital-only versions of fiat currencies issued by various central banks. They work with network ledgers, which record transactions. CBDCs are centralized: they are only issued by the central bank of the country or region and are not a priori based on a network of miners, unlike Bitcoin (BTC), for example.

Just like “classic” fiat currencies, central bank digital currencies will be backed by monetary reserves, such as gold or foreign exchange reserves. It is an equivalent of paper currency, except that a CBDC exists only digitally.

The majority of major fiat currencies are, of course, already digital. Still, the difference is that CBDCs are destined to exist on their own, beyond the banking networks that we commonly use. This also raises questions about the role of banks, which could see their role reduced. Some even believe that it is the MNBCs, and not the cryptocurrencies, which represent the greatest danger for commercial banks.

Most of the CBDCs are in 2021 at the project stage. Research is being done by central banks, and proofs of concept are being published, but very few countries have a working version of their digital currency at this point. We also note that there is a great diversity in the projects, with different levels of centralization and anonymity for central bank digital currencies.

CBDC: uses that very

There are two broad categories of central bank digital currencies. On the one hand, there are CBDCs intended for the general public, which will be held by the citizens of a country or companies. They are intended to circulate freely, in the same way as cash.

On the other side, there are CBDC projects intended for internal use by financial institutions and banks. These are used to settle transactions quickly and securely.

When discussing central bank digital currency, however, it is often the first use case that is implied, as it is the one that could profoundly transform the way people in a country exchange money.

Are CBDCs Cryptocurrencies?

As we have seen, CBDCs are offered exclusively digitally, thanks to a shared register. We can therefore wonder if it is a cryptocurrency or not. Again, the answer varies depending on the project. Several countries have carried out tests with blockchains: this is the case, for example, Australia, which has chosen to conduct research with ConsenSys and Ethereum. The Banque de France would also do tests with Tezos (XTZ) and Ethereum (ETH). In these cases, CBDCs could approach cryptocurrencies from a technical point of view.

However, their level of decentralisation must also be taken into account. According to some commentators, a centralized currency cannot by nature be a cryptocurrency since this goes against one of the founding elements of the blockchain. Bitcoin was created specifically with the ambition of getting rid of fiat currencies and central banks. This is why the two types of digital currency are often referred to as back-to-back.

Blockchain or no Blockchain?

The digitization of a fiat currency does not necessarily go through a blockchain. It would thus seem that the “digital yuan” of China does not make use of this technology, although we are not yet certain. Note, however, that the blockchain remains very widely used: more than 88% of CBDC projects are based on this technology, according to a PwC report dated April 2021.

The report highlights several advantages to the blockchain, including its high security, the programmability of smart contracts, as well as its transparency. Possibilities in terms of confidentiality were also highlighted, which would bring CBDCs closer to species which are historically not very traceable. This is why central banks seem to favour this option.

Some CBDCs in development around the world

In January 2021, a survey by the Bank for International Settlements (BIS) revealed that 86% of central banks were working on digital currencies. However, not all of them are at the same stage, as shown by the CBDC Tracker map, which lists central bank digital currency projects:

Source: CBDC Tracker

Here is a non-exhaustive list of notable central bank digital currency projects:

China: the most advanced central bank digital currency

China is the most advanced economy by scale in terms of issuing a digital currency – by far. The government is indeed banking on its digital yuan to compete with the dollar, and it has accelerated the development of its MNBC since 2020.

The digital yuan was tested in several businesses at the beginning of 2021, and the wallet dedicated to the asset was opened to 47 million Chinese in the same period. Since then, salaries have started to be paid in digital yuan, and more than 3,000 dedicated distributors have been deployed in Beijing.

China is, therefore, well and truly the first in the race for central bank digital currencies. It’s a safe bet that when its CBDC is offered to the general public, it will give a new boost to other global projects which do not wish to be left behind by the Chinese economic juggernaut. The starting signal will certainly be given on the occasion of the 2022 Winter Olympics, which will take place in Beijing.

Turkey – An CBDC as a Lifeline

Turkey’s digital lira is also among the most advanced projects. At the end of December 2020, the governor of the central bank of Turkey announced that the concept phase of the digital currency project was completed and that the test phase would begin in the second half of 2021. The country is expected to offer a complete MNBC in the next two years.

Turkey is driven by two factors, with the growing adoption of cryptocurrencies in the country on the one hand. The territory is indeed one of the most dynamic global markets. The second reason is the fall of the Turkish lira (TRY), the price of which has been plunging for years. Ankara thus hopes to revalue its fiat currency.

Turkish lira rate (TRY) – Source: Xe.com

Very little information is available on this digital lira, but it seems that the country’s central bank has focused on the blockchain to begin this phase of testing.

The Bank of Sweden: one of the most advanced in Europe

The Central Bank of Sweden is one of the most advanced in Europe. As early as December 2019, it launched a test environment for its “e-krona”, with experiments that could be carried out over several years. From the political point of view, the issuance of a central bank digital currency has not been officially confirmed, but the project is moving forward.

The Riksbank recently explained that it had moved to phase 1 of its pilot project. It will make it possible to measure the effects that an MNBC could have on the Swedish economy. The e-krona will also begin to be tested from a technical point of view during the year 2021.

The United States: Between mistrust and opportunity

The United States has been distinguished by a very strong distrust of central bank digital currencies. At the end of 2019, however, we learned that the Federal Reserve (Fed) had started experimenting with a digital dollar. But the information is scarce, and the declarations of the institutions do not seem to prioritize this project. In 2020, the Democratic Party proposed a digital dollar for the stimulus package for the US economy, but it did not make it into the final piece of legislation.

The US Federal Reserve is still working in tandem with MIT to develop a technology platform that could lead to an “e-dollar”. But U.S. central bank president Jerome Powell recently confirmed that the institution is voluntarily taking an extremely cautious approach.

Things are therefore slipping for the US digital dollar to the point that private initiatives have developed to bring about change. In May 2021, the non-profit organization Digital Dollar Project announced the launch of five pilot programs to test potential use cases for an American CBDC. For its part, the “Fed” should release a research note during the summer of 2021.

The digital euro: a slow development at the European level

At the European level, there is also great caution. The central bank’s digital currency project is well and truly on track, but its release is expected to take many years. Decision-making has been slow, and Christine Lagarde, President of the European Central Bank (ECB), believes that we will not see the issuance of the digital euro before at least 2025.

It must be said that the impact of the digital euro could be considerable. According to the bank Morgan Stanley, it could drain up to 8% of the reserves in euros kept by the banks. Little is known about the digital euro so far, but it is likely that digital wallets will have a deposit limit, which could be set at 3,000 euros per person.

We also note that the Banque de France is heavily involved in this project and is working on the development of the interbank specificities of the digital euro.


The majority of central bank digital currency projects are, therefore, in the approach and test phases. It is, however, notable that the vast majority of financial institutions wish to digitize their fiat currencies and that they rely for this on blockchain technologies.

By nature, a change of this type will, however, take a long time, which leaves an opportunity for digital currencies and cryptocurrencies from the private sector to develop. We think particularly of stablecoins, for example, Tether (USDT) or the USD Coin (USDC) for the dollar. With technologies advancing very rapidly, it is, in any case, likely that the landscape will be very different in 2025 than it is today.

Disclaimer: The information in this article should not be considered financial advice, and FXCryptoNews articles are intended only to provide educational and general information. Please consult with a financial advisor before making any investment decisions.

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