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Central bank digital currencies (CBDCs) represent a digital form of currency issued directly by a nation’s central bank. While sharing similarities with cryptocurrencies, CBDCs differ in that their value is anchored by the central bank and corresponds to the nation’s official fiat currency. Numerous countries are actively exploring the development and implementation of CBDCs, underscoring the significance of comprehending their implications for society as more nations contemplate the transition to digital currencies.






CBDCs have the capacity to enhance financial inclusion and mitigate the prevalence of dollarization or cryptoization


Fiat currency denotes a government-issued form of money lacking backing from tangible commodities such as gold or silver. Functioning as legal tender, it facilitates transactions for goods and services. Initially, fiat currency existed in the form of banknotes and coins; however, advancements in technology have enabled governments and financial institutions to augment physical fiat money with a digital credit-based system that tracks balances and transactions electronically.

While physical currency remains prevalent and accepted globally, certain developed nations have witnessed a decline in its utilization, a trend that intensified amid the pandemic.

Goals of CBDCs

In the United States and numerous other nations, a significant portion of the population lacks access to traditional financial services. In the U.S. alone, as of 2020, 5% of adults were without a bank account. Additionally, 13% of U.S. adults who did possess bank accounts opted for more expensive alternative services such as money orders, payday loans, and check-cashing facilities.

The primary objective of central bank digital currencies (CBDCs) is to furnish both businesses and consumers with attributes such as privacy, transferability, convenience, accessibility, and financial security. CBDCs have the potential to diminish the maintenance expenses associated with intricate financial systems, lower cross-border transaction costs, and offer individuals currently reliant on costly alternative money-transfer methods more economical alternatives.

Moreover, CBDCs would mitigate the risks inherent in utilizing digital currencies or cryptocurrencies in their current state. Cryptocurrencies are notorious for their extreme volatility, with their value undergoing frequent fluctuations. This instability could precipitate significant financial strain for many households and jeopardize the overall stability of an economy. In contrast, CBDCs, backed by government entities and overseen by central banks, would furnish households, consumers, and businesses with a secure mechanism for conducting digital currency transactions.



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Types of CBDCs

There exist two categories of central bank digital currencies (CBDCs), namely wholesale and retail. Wholesale CBDCs are predominantly utilized by financial institutions, while retail CBDCs find application among consumers and businesses.

Wholesale CBDCs resemble holding reserves at a central bank. Financial institutions are granted accounts by the central bank to either deposit funds or settle interbank transfers. Central banks can then employ monetary policy tools such as reserve requirements or interest on reserve balances to influence lending practices and establish interest rates.

On the other hand, retail CBDCs are government-backed digital currencies utilized by consumers and businesses. These currencies eliminate intermediary risk, which pertains to the possibility of private digital currency issuers encountering bankruptcy and consequently jeopardizing customers’ assets.

Retail CBDCs are further categorized into two types, distinguished by how individual users access and utilize their currency:

  • Token-based retail CBDCs: These are accessible through private keys, public keys, or a combination of both. This method of validation enables users to conduct transactions anonymously.
  • Account-based retail CBDCs: This type of CBDC necessitates digital identification to access an account.

Issues Addressed By CBDCs

  • Eliminates the risk associated with third-party events such as bank failures or bank runs. Any remaining residual risk within the system is assumed by the central bank.
  • May reduce elevated cross-border transaction expenses by simplifying distribution systems and enhancing jurisdictional collaboration among governments.
  • Has the potential to uphold and safeguard the dominance of the U.S. dollar, which remains the most widely used currency globally.
  • Eliminates the expense of establishing a financial infrastructure within a nation to extend financial access to the unbanked population.
  • Can establish a direct link between consumers and central banks, thereby eliminating the necessity for costly infrastructure.

CBDCs vs. Cryptocurrencies

The cryptocurrency ecosystems offer a glimpse into an alternative currency system where stringent regulations do not govern each transaction. These systems are challenging to replicate or counterfeit and are safeguarded by consensus mechanisms that deter tampering. Moreover, cryptocurrencies operate in an unregulated and decentralized manner. Their worth is determined by investor sentiments, usage patterns, and user engagement. They are highly volatile assets, primarily suited for speculative purposes, rendering them less suitable for integration into a financial system that prioritizes stability. In contrast, central bank digital currencies (CBDCs) closely mimic the value of fiat currency and are engineered for stability and security.


Could central bank digital currencies (CBDCs) impact the transmission of monetary policy?

CBDCs have the potential to impact the macroeconomic landscape that underlies the transmission of monetary policy. Offering a secure store of value and efficient payment mechanism, CBDCs can intensify competition for deposit funding, elevate the portion of banks’ wholesale funding, and diminish bank profits. Additionally, CBDCs have the capacity to enhance financial inclusion and mitigate the prevalence of dollarization or cryptoization. These alterations in the macroeconomic context have the potential to reinforce the channels through which monetary policy is transmitted, provided that the CBDC is appropriately designed. In typical circumstances, moderate levels of CBDC holdings are anticipated to have relatively minor effects on the transmission of monetary policy. However, in environments characterized by low interest rates or financial market strain, the impact of CBDCs can become more pronounced, particularly as the relative value of CBDCs rises. A non-interest-bearing CBDC could solidify the zero lower bound for interest rates. Lastly, CBDCs could heighten the risk of flight to safety from retail bank deposits during periods of market turbulence.


Financial inclusion is often a primary policy objective for a retail CBDC, particularly in emerging and lower-income nations. When appropriately crafted to tackle barriers to financial inclusion, CBDCs have the potential to be embraced as a payment mechanism by populations lacking access to traditional financial services. CBDCs can be structured to replicate some of the favorable attributes of cash, such as providing payment access without the necessity of a bank account, instilling trust associated with central bank-backed currency, offering minimal or no transaction fees, and imposing less stringent identity requirements for low-risk individuals who encounter challenges in obtaining formal identification documentation. Nonetheless, it is imperative to maintain full compliance with financial integrity standards.

Furthermore, CBDCs can offer advantages beyond those of physical cash, such as facilitating the development of financial histories to broaden access to credit. Consequently, CBDCs can serve as a pivotal entry point into the formal financial system. As a public-sector-led initiative devoid of profit motives, CBDCs have the potential to stimulate competition by reducing the costs of payments and financial services. Additionally, CBDCs can cater to the needs of remote and low-income populations that are underserved by the private sector, by being available on various hardware devices and functioning in offline environments.

However, it is crucial to acknowledge that while CBDCs offer significant potential, they are not a panacea for financial inclusion. They can encounter common barriers faced by digital products, such as disparities in digital and financial literacy, as well as limited access to electricity and digital networks. Therefore, policymakers should conduct comprehensive assessments of various policies and initiatives, including but not limited to CBDCs, to effectively support financial inclusion based on the specific needs and circumstances of each country.

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Modupe Folarin is a multifaceted individual driven by a passion for Tech Innovations, Creativity and Business Branding.As a prolific writer and business brand promoter, she wields words with strategic precision, helping businesses and individuals tell their stories and amplify their presence in the digital sphere.

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