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Central bank digital currencies (CBDCs) have the potential to transform the way money moves around the world. While this is an exciting prospect, the introduction of these new instruments poses some difficult questions.

What is money? The academic definition is well known: an accepted medium of exchange, a measure of value, or a means of payment. Over the centuries, money has taken on various forms, from cowrie shells to precious metals to the fiat currencies we know today, whose value derives from public faith in the issuer rather than the value of the commodities they once represented. 

Digital technology is now raising the prospect of another evolution in the concept of money. Privately issued cryptocurrencies have hinted at some of the benefits of going digital, including the potential for more efficient payments, greater financial inclusion, and increased innovation and competition in financial services. 

As a result, more than a hundred central banks are studying the idea of launching digital versions of fiat currencies, according to the Atlantic Council’s Central Bank Digital Currency Tracker. Eleven – beginning with the Central Bank of The Bahamas in 2020 – have already introduced their own CBDC. 

CBDCs in circulation 

 Country   Currency   Launch date
 The Bahamas   Sand Dollar   October 2020
 Saint Kitts and Nevis  DCash   March 2021
 Grenada   DCash   March 2021
 Saint Lucia  DCash   March 2021
 Antigua and Barbuda  DCash   March 2021
 Saint Vincent and the Grenadines  DCash   June 2021
 Nigeria   eNaira   October 2021
 Montserrat   DCash   December 2021
 Dominica   DCash   December 2021
 Anguilla   DCash   June 2022
 Jamaica   JAM-DEX  June 2022

Source: Atlantic Council/ CFA Institute research. Data correct as of 11 October 2023

Despite this apparent enthusiasm for CBDCs, general understanding of CBDCs remains low and the implications of a global shift to CBDCs are not yet fully clear. In a CFA Institute survey of our members in February 2023, only 13% of respondents claimed to have a strong understanding of CBDCs. 


To consider the potential implications of CBDCs, it is important to consider where these new instruments would fit in the global monetary system. 

Money in today’s society already exists in different forms: central bank money, commercial bank money and non-bank money. Digital technology potentially allows central banks to issue something very different: a fourth kind of money. 

Central bank money

The notes and coins that you physically carry in a purse or pocket constitute central bank money — also called fiat currency. They are issued by a central entity such as the Bank of England or the US Federal Reserve, and there is no commodity, such as sterling silver or gold, sitting in reserve somewhere to back it up. The paper or metal used to distribute central bank money has no intrinsic value, but societies accept that these instruments have value and can be used to settle accounts and transactions. 

Central bank money also serves a policy purpose, as its centralized nature allows the issuer to regulate the amount of money in circulation and influence its value by setting interest rates or managing foreign exchange rates. These money issuers can also require commercial banks to hold a portion of their assets at the central bank, to ensure confidence in the financial system.

Commercial bank and non-bank money

Commercial bank money refers to the money in an economy that is created by commercial banks: the cash they hold on deposit plus the debt they issue. This form of money is significant because it boosts liquidity and efficiency in the financial system, helping to drive productive investment and support economic development.

What sets commercial bank money apart from central bank money is that its value is not guaranteed. If a commercial bank goes out of business, its assets go with it. Most countries have some level of insurance or government protection, but any money deposited above those levels is at risk should the bank become insolvent.

The third form, non-bank money, is everything else that a society might accept for trade or as a store of value. This could include airline miles or loyalty points, cryptocurrencies, money market funds and deposits at non-bank institutions. Again, if their issuers run into trouble, so will these instruments. 

So where do CBDCs fit?

The idea of combining technology with currency is hardly new. Many societies have already largely moved away from physical cash. In a survey for Sweden’s Riksbank in 2022, for example, only 8% of consumers said they had used cash for their most recent purchase in a store. Central bank money held in electronic form still represents fiat currency, and is accepted as legal tender for goods and services. 

Recent advances in digital technology, however, mean electronic forms of money can now offer additional functionality, such as real-time settlement and improved traceability. 

The use of distributed ledger technology and blockchain is particularly relevant to the future of money. In a blockchain system, all transactions need to be verified by a network of computers and are then stored as an immutable, irreversible record. This carries security benefits, as all transactions are traceable, and it is impossible for individual users to tamper with the data. 

Privately issued cryptocurrencies, such as Bitcoin, have proven the usefulness of this technology. In a CBDC context, however, control of the currency would remain centralized – unlike Bitcoin, which was conceived as an alternative store of value to any currency issued by a central bank.

“The CBDC concept is at least partially a response to the growth of cryptocurrencies,” said Olivier Fines, Head of Advocacy and Capital Markets Policy Research for EMEA at CFA Institute. 

“Technology now allows for the creation of digital currencies that are free from the influence of monetary authorities and the frictions created by the scaffolding of the institutional banking system. But as digital finance matures, you might need to reintroduce some of that friction and regulation to maintain a level of security,” he said. 

Applying similar blockchain technology to a CBDC could give central banks greater visibility over the money in circulation and reduce the risk of money laundering. On the other hand, it could tempt individual users to move their assets out of commercial banks and into their own, secure CBDC wallets, with potentially serious consequences for the current financial system based on the intermediation of commercial banks. In short, it could modify the functioning of financial flows between various economic agents, including individuals and businesses. 

A fourth kind of money

From a payments perspective, CBDCs could coexist with physical cash or replace it entirely. And because a nation’s monetary authority would be the issuer, CBDCs should seamlessly slot into foreign exchange platforms. 

Many arguments for introducing a CBDC focus on reduced costs for transfers and custody of physical cash, which could also bring improvement to the efficiency of payments and cashflow more broadly. 

A CBDC could enable instant transfers across town or the globe, dramatically improving cash flow issues for businesses and individuals, as well as international trade.

There is also the financial inclusion benefit, as individuals would need only a smartphone to access a digital wallet – potentially attractive to the millions worldwide who lack access to a formal bank account. 

These benefits are particularly appealing in less-developed economies. In our 2023 survey, respondents in emerging markets were almost twice as likely to say that a CBDC would enhance financial inclusion. (See Chart.) 


It is important, however, to consider all the implications of the adoption of CBDCs. 

The top concern, according to CFA Institute members, is data privacy. Because the technology allows central banks to maintain a full record of all transactions, a CBDC could challenge the expectation of anonymity that comes with cash transactions, depending on design and operational choices. It could also, therefore, be used to monitor individual behavior or control access to the financial system.  

Digital technology permits central banks to integrate a wide range of features in a CBDC, potentially going well beyond the functions played by central bank money today. A CBDC, for example, could be designed to pay interest directly to digital wallets – something that is impossible with physical cash. 

Fines says the CFA Institute’s survey unearthed some legitimate concerns, as well as a knowledge gap. 

“This is not yet a mature enough concept for people to assume they know what the impact would be,” he said. 

The introduction of CBDCs will entail much more than a simple switch from an analogue process to a digital one. How these new instruments are designed will determine their impact on the global financial system. 

Next: CBDC and the Implications of Design Features


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