Pros and Cons of Central Bank Digital Currencies (CBDCs)

Central Bank digital currencies (CBDCs) have emerged as a disruptive force in the global financial landscape. Backed by central banks, these digital currencies are revolutionizing transactions, value storage, and the very nature of money itself. With their rising popularity, even influential bodies like the International Monetary Fund (IMF) have recognized the transformative potential of CBDCs.

CBDCs are capturing the attention of economists, financial institutions, and policymakers worldwide. The IMF’s interest in CBDCs highlights their importance in promoting financial stability and inclusive economic growth in an ever-evolving financial landscape.

What are CBDCs and why are countries and financial bodies so invested in creating one? We will talk about the fundamental concepts of CBDCs, the pros and cons they pose, and which successful CBDC is being used today. Let’s dive right in. 

What are Central Bank Digital Currencies (CBDCs)?

Central Bank Digital Currencies (CBDCs) are digital forms of national fiat currencies issued and regulated by central banks. Unlike cryptocurrencies such as Bitcoin or Ethereum, Central Bank digital currencies are backed by the full faith and credit of the respective central bank and maintain a fixed value pegged to the traditional currency. Let’s dive into the history, the fundamental idea behind CBDCs, and the driving forces propelling countries to explore their implementation.

Central Bank digital currencies emerged as a concept following the rise of Bitcoin and the subsequent interest in blockchain technology. The initial discussions about Central Bank digital currencies took place around 2014, with central banks exploring the potential benefits and challenges. However, it wasn’t until 2019 that the concept gained significant traction, with the People’s Bank of China announcing its intentions to develop a digital yuan, also known as the Digital Currency Electronic Payment (DCEP) project.

The core idea behind CBDCs is to leverage digital technology to provide a secure and efficient medium of exchange that retains the stability and trust associated with traditional fiat currencies. CBDCs aim to combine the advantages of cash (widely accepted, peer-to-peer transactions) with the benefits of digital payments (convenience, speed, and traceability).

Several factors have driven countries to consider the creation of their own versions of CBDCs. These include:

  • Financial Inclusion: CBDCs can offer access to financial services for the unbanked and underbanked populations, bridging the gap and reducing inequalities.
  • Efficiency and Cost-effectiveness: Central Bank digital currencies have the potential to streamline transactions, reduce reliance on intermediaries, and minimize transaction costs compared to traditional banking systems.
  • Enhancing Monetary Policy: CBDCs can provide central banks with additional tools for implementing monetary policy, including more precise control over the money supply and targeted economic stimulus.
  • Addressing Cryptocurrencies and Stablecoins: The rise of cryptocurrencies and stablecoins has raised concerns about financial stability and regulatory control. Central Bank digital currencies can be seen as a response by central banks to maintain control and oversight over the monetary system.
  • Technological Innovation: CBDCs offer a platform for exploring cutting-edge technologies such as smart contracts, programmability, and interoperability, facilitating new financial applications and business models.

Pros of Central Bank Digital Currencies: Advantages and Benefits

Central Bank Digital Currencies (CBDCs) offer numerous potential advantages, revolutionizing the way we engage with money and financial systems. 

CBDCs have the potential to provide financial services to individuals who currently lack access to traditional banking systems. By leveraging digital platforms, CBDCs can enable secure and convenient transactions, opening up opportunities for financial inclusion. Central Bank digital currencies can help bridge the gap between the digital and physical worlds, ensuring that individuals without access to reliable internet connectivity or digital devices can still participate in the digital economy. Offline transaction capabilities and interoperability solutions can enhance financial access for remote and underserved areas.

In addition, CBDCs can enable peer-to-peer transactions without the need for intermediaries, reducing transaction time and costs. By removing friction in the financial system, CBDCs can streamline cross-border transactions and simplify complex payment processes. They have the potential to reduce transaction fees associated with traditional banking systems. By leveraging blockchain or distributed ledger technology, CBDCs can minimize transaction costs, benefitting both individuals and businesses.

CBDCs can provide greater transparency by enabling real-time tracking and auditing of transactions. Every transaction recorded on the blockchain or distributed ledger can be easily verified, reducing the potential for fraud or corruption. The transparency and traceability of CBDC transactions can help combat money laundering, illicit financing, and other financial crimes. By leveraging advanced technologies such as data analytics and artificial intelligence, authorities can detect and prevent fraudulent activities more effectively.

Finally, Central Bank digital currencies can incorporate programmable features, such as smart contracts, which enable self-executing agreements. This opens up possibilities for automated financial processes, streamlined supply chains, and innovative business models. This feature can spur the growth of the digital economy by facilitating microtransactions, incentivizing digital asset creation, and supporting small businesses. By reducing barriers to entry and enabling frictionless transactions, Central Bank digital currencies can foster entrepreneurship and economic development.

Cons of Central Bank Digital Currencies: Drawbacks and Challenges

While Central Bank Digital Currencies (CBDCs) hold significant promise, it is crucial to acknowledge and address the potential drawbacks and challenges associated with their implementation. 

One issue the crypto community has with Central Bank digital currencies is that they inherently involve the tracking and recording of every transaction on the blockchain or distributed ledger, raising concerns about privacy and personal data security. 

Some individuals may worry about the potential for excessive surveillance and intrusion into their financial lives. This was clearly evident when certain members of the crypto community were skeptical about the IMF’s plan to launch a platform for CBDCs. According to a Reddit user, the project was seen as an attempt by the IMF to gain more control by exploiting neglected issues like financial inclusion to advance central bank digital currencies (CBDCs).

It also means that individuals are more susceptible to cyber threats, such as hacking or data breaches. Safeguarding personal data and implementing robust security measures become critical considerations.

When it comes to the finance industry, CBDCs could potentially disrupt the role of commercial banks and financial intermediaries. With the ability to conduct peer-to-peer transactions, individuals may opt for direct interaction with the central bank, bypassing traditional banking channels. This could impact banks’ profitability and their ability to provide loans and other financial services. This has been one of the many reasons most traditional finance systems do not like the idea of blockchain technology in finance. 

Moreover, the implementation of CBDCs could impact interest rates, money supply management, and the effectiveness of traditional monetary policy tools. Central banks need to carefully navigate and adapt their policies to maintain financial stability.

Central Bank digital currencies introduce complexities in managing interest rates, monetary supply, and exchange rates. Central banks must carefully assess and mitigate the potential risks associated with Central Bank digital currencies to maintain stability in the broader economy. The adoption and integration of Central Bank digital currencies into existing financial systems may introduce volatility and potential risks of financial instability. Regulatory frameworks, risk management practices, and international cooperation are vital to mitigate such risks effectively.

Case Studies and Examples of Successful CBDC Implementations

Examining real-world examples of successful Central Bank Digital Currency (CBDC) implementations provides valuable insights into the potential of CBDCs and the factors that contribute to their success. 

China’s CBDC – The Digital Yuan

One successful CBDC project is the Digital Yuan, or e-CNY, launched by the People’s Bank of China. It is one of the most prominent CBDC projects. The Chinese government demonstrated strong support for the Digital Yuan, providing clear guidelines and a comprehensive roadmap for its implementation. The Digital Yuan underwent rigorous pilot programs and testing in various cities, allowing the central bank to gather valuable user feedback, identify areas for improvement, and refine the design and functionality of the CBDC.

For example, Jinan, the capital city of Shandong Province in China, has introduced digital yuan payments across its entire bus network, making it easier for people to use digital currency in their daily transactions. After a successful pilot phase on two bus lines, the city officials have now implemented this new payment method on all bus routes, demonstrating their commitment to embracing the digital yuan. To encourage its adoption, Jinan has also implemented a reward system, offering fare discounts to passengers who choose to pay with the CBDC, making the digital yuan an attractive option for public transportation users.

During the Spring Festival, the local government launched digital yuan activities worth over 180 million yuan ($26.5 million) in several Chinese cities to promote its usage. Shenzhen provided 100 million yuan ($14.7 million) to support the domestic catering sector, while Jinan, Lianyungang, and Hangzhou allowed residents to use digital yuan coupons for holiday purchases. Hangzhou’s citizens fully utilized the provided funds for various expenses, including supermarket bills, transportation, and tourism. Before this, Chengdu and Beijing had also received substantial amounts of the digital yuan to encourage its adoption in early 2021 and several months later, respectively.

Activities like this have ensured a coordinated approach and efficient execution. The Digital Yuan was designed to seamlessly integrate with existing payment infrastructure, enabling widespread acceptance and usability across various platforms and merchants.

Sweden’s CBDC – e-Krona

The e-Krona project, led by Sveriges Riksbank (the central bank of Sweden), focuses on exploring the feasibility of a CBDC in Sweden. The e-Krona project leverages advanced technologies, such as distributed ledger technology, to explore new possibilities in CBDC implementation. Collaboration with external partners, including the private sector, fosters innovation and brings diverse expertise to the project.

As of April 2023, Sweden’s central bank, Riksbank, has concluded the third phase of its central bank digital currency (CBDC) research, focusing on a collaborative model for retail and conditional payments. The research, which began in 2020, initially prioritized collaboration with existing private payment services. The Riksbank explored various governance options and found that the lowest level of guidelines lacked clarity and risked limited adoption and functionality for the public.

During the research, the Riksbank successfully conducted a trial of a conditional payment for purchasing a car, showcasing the potential programmability of the e-currency. However, this raised concerns about privacy due to the additional information required for such complex transactions.

Notably, the Riksbank highlighted that the system’s transparency could impact bank secrecy and potentially aid in identifying misconduct by service providers.

The project is still in the testing phase and one can only imagine how it will be in the coming months. 

Bahama’s CBDC – Sand Dollar

The Central Bank of the Bahamas initiated Project Sand Dollar, aiming to issue a digital representation of the Bahamian dollar (B$). The project’s main goal was to improve access to regulated financial services for unbanked and underbanked communities within the country, while also enhancing transactional efficiency and reducing service delivery costs. 

Key specifications of the Sand Dollar included achieving interoperability among payment service providers, supporting offline functionality during communication disruptions, enabling near-instantaneous transaction validation, providing point-of-sale support for businesses, ensuring auditable non-anonymous transactions, monitoring for fraud detection, restricting domestic use of the digital currency, and implementing multi-factor authentication for wallet users. Additionally, a digital ID solution incorporating KYC and identity features was considered for the financial services sector. 

The digital version of the Bahamian dollar served both wholesale and retail applications, allowing inter-bank payment settlements and enabling the general public to make and receive digital payments. Holders maintained direct claims on the Central Bank, akin to having accounts with the institution.

The Sand Dollar project prioritized education and awareness campaigns to familiarize the public with the benefits and usage of the CBDC. These initiatives help build trust and promote adoption among individuals who may be less familiar with digital currencies.


Central Bank Digital Currencies (CBDCs) have the potential to reshape the financial landscape, offering various benefits and addressing key challenges. We explored the pros and cons of CBDCs, recognizing the potential for increased financial inclusion, enhanced efficiency, improved transparency, and innovation. However, we also discussed concerns related to privacy, disruption of traditional banking systems, technical challenges, and potential economic implications.

Real-world case studies, such as the Digital Yuan, e-Krona, and Sand Dollar, have demonstrated successful CBDC implementations. Factors contributing to their success include government support, clear roadmaps, extensive testing, technological innovation, public engagement, collaboration, and addressing specific regional challenges.

As CBDCs continue to evolve, policymakers, regulators, and stakeholders must strike a balance between innovation, privacy, security, and financial stability. Robust strategies, risk management frameworks, and inclusive approaches will be essential in maximizing the benefits of CBDCs while mitigating potential drawbacks.