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Testing the Viability of Central Bank Digital Currencies

Writer's picture: Sanad AroraSanad Arora

Advancing technology and a growing trend towards peer-to-peer transactions facilitated by online platforms has ushered a revolution in the field of digital payments. Even the Central Banks want to exploit these new technological developments and are investigating the technology of ‘Central Bank Digital Currency (CBDC)’ to use it as a medium to not only proliferate the space of digital payments but also make it accessible to the public at large and expedite the payments and settlements mechanism for retail and wholesale payments. More than 60 Central Banks are researching on the use of CBDC’s in their economy, with countries like China, Sweden, Canada and the U.K launching pilot projects.[1] But astonishingly, it is the smaller countries such as the Caribbean, Bahamas and Cambodia which are leading the charge on CBDC’s with live projects such as Bahamas Sand Dollar, Bakong Cambodia, and Eastern Caribbean DCash[2]. Taking into consideration, the rising consensus towards the use of CBDC’s for advancing the economy, even the RBI is exploring the use of CBDC’s, and has already started working on a pilot project, with plans to launch its own CBDC by the end of 2022[3]. Amidst all these developments, it is imperative that we don’t stay blindsided to the potential pathbreaking impact CBDC’s can have on the functioning of the payments and settlements system and the economy. Through this article, the author makes an attempt to apprise the readers of the fundamentals of the technology and partake in an analysis discussing its pros and cons.


Before delving into further analysis, it is crucial to note that CBDC’s should certainly not be mistaken for cryptocurrency, at the risk of sounding reductionist, CBDC in very simple terms is just fiat currency but in a digital form. The RBI defines CBDC as “legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency” (Reserve Bank of India, 2021). Despite being considered as ‘legal tender’ and equivalent of fiat currency the digital nature of CBDC allows it to hone characteristics specific to the function it has to perform, hence the purpose for which CBDC is being issued will have a great influence on its design.


Possible iterations of CBDC’s

Since CBDC’s are essentially a form of programmable currency, there are a lot of customisations which the issuer can make to alter its characteristics, such as:

  • They can be token based or account based. A token based CBDC can be formulated on a centralised blockchain with the Central Bank as its regulator, which would operate via a public private key mechanism. On the other hand, an account based CBDC is similar to the current account-based model with respect to physical currency and would essentially require a banking relationship with the CBDC holder and the bank, where each transaction is debited or credited through the account(Fernández de lis & Gouveia, 2019 ).

  • They can be made universal via the system of token-based currencies or private via the system of private currencies (Fernández de lis & Gouveia, 2019 ).

  • They can be anonymous (like cash) or identified (like current accounts). The first corresponds to the idea of token-based CBDCs, and the second to account-based CBDCs (Fernández de lis & Gouveia, 2019).

  • They can be programmed to pay interest at the option of the issuer, which essentially translates to interest being enabled as a feature on such currencies (Fernández de lis & Gouveia, 2019).


From the various possible customisations of CBDC’s, there are three basic objectives which can be culled out, acting as the basis for issuing of it: (i) to improve the working of wholesale payment systems; (ii) to enhance the instruments available for monetary policy (iii) to innovate new methods of monetary policy and quantitative easing during financial crisis. However, the conundrum with respect to achieving each of these goals is that every individual goal requires us to create a CBDC with different characteristics, which would be interacting with different categories of individuals/institutions and thus have different levels of market and technological penetration. To cut it short, th