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CBDC - Introduction

Banking and Financial services industry is becoming more digitized in recent decades with e-KYC, digital payments, e-trading, digital services and mobility experiences reaching new heights. Nevertheless, money, has evolved over centuries by adopting new wave of services like coins, banknotes, cheques, cards, cash and account-based forms that have slowly matched the pace of digitization. In recent days there is growing discussion on digitizing the money and Central Banks around the world have started exploring Central Bank Digital Currencies (CBDCs).

Central Banks are taking advantage of innovative technologies to create a new form of money with digital native currency. Some Financial Institutions are exploring the issue of CBDC as a widely accessible digital form of money backed by Central Banks. As per the International Monetary Fund (IMF) - CBDC is a digital representation of a sovereign currency issued by and is a liability of a jurisdiction’s Central Bank or monetary authority. Key attributes/taxonomy of CBDC is that they are Central Bank-issued, backed by Central Bank, a deemed legal tender, pegged to a fiat currency, can be transferred from peer-to-peer and are programmable in nature.

Central Banks are also accelerating the CBDC projects due to the COVID-19 pandemic as usage of cash may transmit COVID-19 virus. Additionally, financial departments are issuing new stimulus packages, i.e. new government to person payment schemes. This is further geared up towards digital payments and has added more momentum to CBDC adoption.

Architecture of CBDC

There are different modes of CBDC:

  1. Direct CBDC – Central Banks operate a payment system which offers retail services. The Central Bank has a direct claim on CBDC and maintains the ledger of all transactions and executes retail payments
  2. Hybrid CBDC – The solutions run on two frameworks. Intermediaries take care of retail payments and Central Bank has a direct claim on CBDC and also maintains a wholesale central ledger of all transactions and operates secondary technical infrastructure to back up payment system if intermediaries fail
  3. Indirect or Synthetic CBDC (sCBDC) – Intermediaries issues sCBDC and operates all retail payments with consumers. sCBDC is backed with Central Bank reserves. Intermediaries fully back all liabilities for retail clients and back it with claims on the Central Bank

CBDC Operating Approaches

While CBDC is associated with Distributed Ledger Technology, Central Banks are debating on CBDC platform’s implementation on a decentralized platform rather than on a traditional centralized technology stack. Some of the salient points which are to be noted are as follows:

  • Central Banks fully control the issuance of CBDC as it does currently and delegates transitions approvals to regulated financial institutions in the decentralized network
  • Security - Central Banks currently have multi-Layered mature security to manage centralized database, and CBDC implementation on a centralized database can open up new security concerns. DLT platform stores multiple data sets in nodes/participants hence there is less scope for altering data. Central Banks are keen on issuing CBDC in DLT as it is a platform which permits limited access to Central Banks’ data and regulates various financial institutions interfacing with it for updating datasets
  • Resilience - Centralized platforms and DLT-based CBDC both face cybersecurity risks, cloud services interruptions and other risks. DLT based platform may provide enhanced resilience through immutability as data loss can be recovered from other nodes through ledger replication
  • Performance - Centralized technology processes more transactions per second than DLT. Technological research is expected to address the performance issues in DLT

Payments Framework Comparison

Payment framework functions are measured and compared with seven broad categories namely - accessibility, anonymity, bearer instrumentality, independence, operational efficiency, programmability, and service availability. Payment frameworks considered include cash, RTGS (Banks participation), RTGS+ (24*7*365 + Bank +Non-Banks participants) and CBDC.

  1. Accessibility - Consumer access to payments frameworks. Typically, cash can be accessed by everyone. However, RTGS is limited to financial institutions. In the US, RTGS transactions done with Bank accounts covers up to 93.5% of households, RTGS+ covers around 95.2% of households. CBDC used by either banks or smartphones apps have the potential to reach around 98% of households
  2. Anonymity – Cash allows customers to do transactions privately. RTGS/RTGS + does not allow private transactions and adheres to AML/KYC regulation and electronic record-keeping requirements. CBDC must also comply with AML/KYC regulations, electronic history and also allows private transactions similar to cash
  3. Bearer Instrument – Bearer instrument is payable to anyone and the instrument holder can claim directly with the issuer. Cash and cheques are bearer instruments; RTGS is not considered as it has to rely on records of third party payments mechanism. CBDC is designed to act as a bearer instrument through ownership of digital objects or private key
  4. Independence – Independence refers to the level of intermediation. Cash is an independent instrument and paper currency exchange happens between two parties. RTGS/RTGS+ requires third party payments frameworks, financial institutions and smart devices for transactions. CBDC requires intermediation in the form of smart devices, apps and wallets
  5. Operational Efficiency – Operational efficiency in payments mechanisms impacts the cost incurred by Central Banks. US Fed reserve expense budget was around $960 mil in 2019 for printing notes and operating costs, and $295 mil for RTGS in 2020. The primary expenditure included technology modernization costs and payment services network maintenance costs. CBDC operating costs mainly depends on design and costs could be lower than payments services cost and other cash operating costs incurred by the more traditional methods
  6. Programmability – CBDC is potentially defined as ‘programmable money’. Programmability such as smart contracts enables automated execution of payment operations like interest payments, delivery vs payments, receipts vs payments. RTGS/RTGS+ do not have DLT level programmability and depends on API’s functionality exposed to various participants to achieve automated payments operations

Growth of CBDC and trends

Bank for International Settlements (BIS) is measuring the Central Banks progress on research, development and implementation of retail and wholesale CBDC through the CBDC Project Index (CBDCPI). Below table summarizes the progress on CBDC by countries across the world:

Phase Phase Definition Countries
Phase 0 No announced project 139
Phase 1 Research 17
Phase 2 Development or Pilot 19
Phase 3 Live CBDC 0
  1. Research: Established-working groups to explore the use cases, impact, and feasibility of CBDC's cross-border potential:
    • Countries - Australia, Brazil, Switzerland, Denmark, Spain, Indonesia, Israel, Iceland, Malaysia, Netherlands, Norway, New Zealand, Russian Federation, Swaziland, Tunisia United States of America, South Africa
  2. Development: Initiated technical build and early testing of CBDC in controlled environments. Pilot projects initiated for small-scale testing of CBDC in a real environment with a limited number of participants:
    • Countries - United Arab Emirates, Bahamas, Canada, China, France, United Kingdom and Northern Ireland , Hong Kong, Japan, Korea the Republic, Saudi Arabia, Sweden, Singapore, Thailand, Ukraine, Uruguay, Euro area (ECB), Eastern Caribbean, Ecuador, Cambodia
  3. CBDC projects in the pilot stage:
    • CBDC project from Sveriges Riksbank (Sweden Central Bank) called e-krona project
    • Peoples Bank of China completed the pilot Digital Currency and Electronic Payment (DC/EP) project for retail CBDC


Central Banks have started exploring CDBC issuance as a new form of money. CBDC is expected to serve as digital money to solve the diminishing use of cash in some countries and others are considering CBDC as an innovative method that brings financial stability in the economy. However, CBDC acting as a new payment technology may soon be available in a number of countries around the world and situations like COVID-19 may ignite this process. Central Banks can benefit and learn from each other by sharing best practices, approaches and technologies mutually and thus contribute to the most advanced payment platform in the financial system. Central Banks should continue to work on CBDC pilot projects involving intermediaries, financial institutions, countries and clearly consider the role of CBDC in the future digital economy.

Bank for International Settlements -


About the Author

Veerabasappa Jayanna
Senior Consultant

Veerabasappa Jayanna, is a Senior Consultant with Mindtree's BFS vertical and a subject matter expert in Capital Market domain. He is responsible for delivering innovative solutions to our customers while leading domain consulting, alliance management, and domain competence building.

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