Learning Objectives:

  • Define CBDCs and understand their key features.

  • Analyse the design choices for CBDCs: retail vs. wholesale, account-based vs. token-based.

  • Understand the policy implications of CBDCs.

  • Compare CBDC approaches across major economies.

5.1 What are CBDCs?

Central Bank Digital Currencies are digital forms of fiat currency issued by central banks. They are distinct from cryptocurrencies as they are centralised and backed by the state. The Seneca course discusses “the potential for future adoption as fiat currency or as a legally recognized means of transferring value” . The Hong Kong Peak course covers the “Regulatory Landscape for Blockchain and Cryptocurrencies in Banking and Insurance Sector” which includes CBDCs .

Key Features:

  • Central Bank Liability: Unlike cryptocurrencies, CBDCs are direct liabilities of the central bank.

  • State Backing: Backed by the credit of the issuing state.

  • Legal Tender: May be recognised as legal tender alongside physical cash.

5.2 Design Choices

The CBDC literature identifies several key design choices:

Retail vs. Wholesale:

  • Retail CBDCs: Accessible to the public, like physical cash.

  • Wholesale CBDCs: Restricted to financial institutions, for interbank settlement.

Account-Based vs. Token-Based:

  • Account-Based: CBDCs linked to individual accounts, enabling identity verification.

  • Token-Based: CBDCs like digital cash, enabling anonymous transactions.

Privacy and Traceability:
The Fordham Law Journal notes the divergent approaches to CBDC regulation: “The European Union and United States are both grappling with the possibility of moving in different directions on a number of policy positions” . The US has adopted a “pro-blockchain, anti-CBDC stance,” while the EU is advocating for a “digital euro to safeguard financial sovereignty” . The Chinese Academy of Social Sciences notes that “the US prohibits CBDCs while the EU is exploring a digital euro” .

5.3 Policy and Implementation

China (e-CNY): The Chinese Academy notes “the digital renminbi leads global CBDC development and enjoys a clear first-mover advantage” .

EU (Digital Euro): The Fordham Law Journal notes discussions in the European Parliament “suggest the digital euro may be a long-term goal rather than an immediate priority, leaving room for policy shifts” .

US Approach: The US has taken a pro-blockchain, anti-CBDC stance, promoting “stablecoins as a method of upholding and continuing the U.S. dollar’s global dominance” .

5.4 Privacy and Trust

The ScienceDirect article provides a detailed analysis of “Privacy, ethics, and public trust” in CBDC design, noting that “the deployment of central bank digital currencies inevitably raises fundamental questions about privacy, ethics, and the boundaries of state power in financial oversight” . It identifies that “the European Union’s proposed Digital Euro explicitly incorporates tiered privacy levels” while “the United States is exploring conditional identity disclosure models” and “Russia’s Digital Ruble architecture offers no formal privacy protections” .

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