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The Prerequisites For The Adoption Of CBDCs

The Prerequisites For The Adoption Of CBDCs

News & Insights

22 Mar 2021

The technological structure of society has always determined the form of money and the configuration of payment systems in that society. Metalworking gave rise to ingots and coins.

The invention of paper in China led to the appearance of assignations in 910 and then banknotes. The development of technology led to the emergence of non-cash payments, the emergence of computers gave birth to electronic money, and the development of encryption algorithms, an increase in computing power and the ubiquitous internet eventually led to the creation of digital currencies.

At the turn of 2008 and 2009, an imperceptible revolution in the form of money took place in the form of Bitcoin — the first decentralized digital currency issued on the public blockchain network went live.

According to the Bank for International Settlements (BIS), by mid-2020, 80% of all central banks have entered the digital race to create central bank digital currencies (CBDCs). At the World Economic Forum in Davos in January 2020, a community of over 40 central banks, international organizations, academic researchers and financial institutions created a framework based on over 60 CBDC research and experiment reports to help central banks evaluate, design, and potentially deploy such assets — the CBDC: Central Bank Digital Monetary Policy Toolkit.

Central bank digital currencies (CBDCs) are digital payment instruments denominated in a national unit of account and under direct management by the central bank. The government (or central bank), not private banks, should maintain reserves and liquidity to support such a digital currency. Instead of printing money, the central bank issues electronic notes or bills backed by legislation and government credit. This is what distinguishes central bank digital currencies from existing virtual (crypto) currencies, which are not issued by central banks and are often completely decentralized without a sole issuer.

Although the concept of CBDCs was proposed decades ago (eg, Tobin (1987)), attitudes towards the question of whether central banks should issue them have changed drastically over the past year. Central banks initially focused on systemic implications that required caution (Barontini and Holden (2019)). But over time, the need to respond to the declining use of cash in some countries came to the fore, and a number of central banks were enthusiastic about issuing CBDCs. The tipping point was the announcement of Libra from Facebook, Gram for TON and Telegram, and the ensuing public sector’s response.

BIS Working Papers # 880 Rise of the central bank digital currencies: drivers, approaches and technologies, page 4

By the end of 2019, more public appearances by central bank officials indicated some skepticism, especially with regard to retail CBDCs. Since the end of 2018, the number of positive mentions of retail and wholesale CBDCs in speeches has been growing again, and now the overall nature of the discourse is positive.

BIS Working Papers # 880 Rise of the central bank digital currencies: drivers, approaches and technologies, page 8

One of the important factors in the increased interest of central banks in the topic of CBDCs is the unprecedented growth in the money supply of fiat currencies as a result of support for the global economy and the population in connection with the Covid-19 pandemic. Thus, in 2020, the total money supply increased by less than 3%, while basic money supply (M0) of US dollars increased by more than 50%.

Protecting public confidence in money, maintaining price stability, and ensuring the resilience of the payment infrastructure are some of the primary means by which central banks maintain public standing. In this context, Central bank interest in CBDCs as potential vehicles for achieving public policy goals has increased.

The use of cash in payments in advanced economies is declining. Covid-19 has accelerated these processes and boosted interest in reducing cash turnover. Fast and convenient digital payments have grown significantly in volume and variety. To develop and achieve public policy goals in the digital world, central banks have been actively involved in researching the pros and cons of offering digital currencies to the public (“general purpose” CBDC). The understanding of CBDCs has improved significantly over the past few years.

We are gradually starting to move from cash to digital fiat currencies. The next step is the transition to fully digital forms of money, which can lead to many potential consequences for the banking and monetary system, including for each of us as entrepreneurs, employees, individuals and citizens.

A review of analytical reports and articles on CBDCs leads to the conclusion that no one knows exactly where this transition will lead. Most likely, the CBDC will be the end of fiscal, monetary and social policy as we know it. The introduction of digital currencies of central banks will lead to a change in the ways of stimulating economic growth, lending, and consumer spending.

All this will lead to an unprecedented increase in the digitalization of mutual settlements, increase the rate of capital turnover, and make it possible to make payments of any volume in real time 24/7/365. As a result, it could significantly contribute to economic growth.

Forms of CBDCs

  • Retail CBDC (general purpose)
  • Domestic
  • Cross-border
  • Wholesale CBDC
  • Domestic
  • Cross-border
  • Hybrid (synthetic) CBDC — sCBDC

Retail CBDCs can be used by individuals, merchants and other organizations as a means of payment and possibly a store of value in personal wallets, bank deposits, or other forms of digital payments.

Wholesale CBDCs are intended for certain financial institutions, such as commercial banks and clearing companies, primarily for use in domestic or international interbank payments and settlements.

In July 2019, authors from the International Monetary Fund (IMF) proposed the concept of ‘synthetic CBDC’, which could also be called “private tokens with reserve collateral” or ‘hybrid CBDCs’. In this alternative, the central bank allows financial institutions, such as e-money or payment service providers (PSP), which usually do not have access to central bank deposit funds, to hold reserves at the central bank, providing stricter protections and monitoring of these institutions, and also potentially improving interoperability between different payment systems.

Country-specific analysis is critical to assessing the form and potential of a CBDC. Retail CBDCs can provide security and resilience benefits, although the apparent risks may outweigh the benefits. Wholesale CBDCs could provide security and resilience benefits for cross-border payment systems, although it is unclear if they will bring benefits beyond those already available today.

Examples of CBDC implementation

The Bank for International Settlements (BIS) assumes a consumer-driven approach for selecting the form of CBDC implementation. The left side of the CBDC pyramid presents consumer needs and six related features that will make CBDCs useful. On the right side of the pyramid, the corresponding design options for the central bank digital currency are presented.


The architecture of the current DC / EP pilot project is a ‘hybrid CBDC model’: it includes a CBDC, which is a direct requirement for The People’s Bank of China (PBC), but real-time connection and payment services are managed by intermediaries (called ‘authorized operators’). The central bank periodically (once a day) receives and stores copies of retail accounts and transactions. The role of the PBC is to provide the basic infrastructure, while intermediaries, such as commercial banks, other payment service providers and telecommunications companies provide services to the public.

In early October 2020, the city of Shenzhen distributed 10 million RMB ($1.47 million) in digital RMB to residents in 50,000 traditional (digital in this case) red gift bags, each containing 200 RMB ($30) in DCEP. Similar experiments have been carried out in a number of other cities in China.

If a decision is made to go beyond the current pilot phase, DC / EP will be an add-on to M0, which includes notes and coins, as well as central bank deposit accounts. It is not intended to be a complete replacement for cash.

Sweden (Riksbank)

The architecture of the current test unit from Riksbank is a hybrid CBDC. Riksbank currently only offers CBDC to banks and other RIX members. The other digital money in society is money from private banks issued by commercial banks. Riksbank researchers point out that the current pilot project is a ‘decentralized database of all electronic data’ of the kroon in circulation at any time the Riksbank checks all transactions before they are completed. “They classify this as Decentralized Reseller Solutions, noting that such projects will require Riksbank to “provide a contingency solution in the event of one or more resellers failing to prevent a significant number of end users from making payments in electronic kroon”.

The pilot currency is based on R3 Corda distributed ledger technology. The pilot network used for e-kroon is private and available only to members approved by the Riksbank.


The architecture of the current digital baht (BoT) pilot is retail CBDC. The Inthanon project, launched in August 2018, involves collaboration between the central bank and eight major financial institutions, as well as technology partners R3 and Wipro.

In January 2020, BoT announced the creation of a cross-border transfer prototype developed in conjunction with the Hong Kong Monetary Authority. BoT’s stated goals are to try out a tokenized version of Thai fiat currency as part of a decentralized real-time gross settlement system (RTGS), as well as liquidity saving mechanisms (LSM) and the use of tokenized baht for interbank bond trading and interbank REPO.

In Phase 4, BoT plans to expand the digital baht to the retail market, although executives cautioned that “this phase will require careful study of both the pros and cons.”


Ukraine believes that the CBDC can help fight its thriving shadow economy. The pilot e-hryvnia project included completely anonymous e-wallets, although the central bank noted that it could be developed in the future to comply with KYC requirements.

The central bank tested a centralized ecosystem for e-hryvnia involving two tiers and a layer of middlemen.

Tier 1 consists of the NBU as the issuer of the CBDC, the owner of the technological platform, and the distributed register of the electronic hryvnia. Intermediaries — banks and agents — were appointed to provide services to individuals and merchants through e-wallets. Level 2 consists of individuals and merchants who transact across a wide ecosystem.

The NBU report notes that one of the significant shortcomings for Ukraine is the lack of a modernized payment infrastructure that would support the effective circulation of the future electronic hryvnia.

Eastern and Western partners of the Russian Federation not only announced the release of their digital currencies, but also conducted experiments, and China has already launched a limited circulation of the digital yuan. Given such an information background, the Central Bank of the Russian Federation was no longer able to remain silent. On October 13, the Bank of Russia presented a report on the possibilities and prospects of issuing the digital ruble for consultations with experts and the public.

This step of the Bank of Russia is aimed at public discussion and study of the need to create a digital currency, which will become the third form of money in Russia along with paper and non-cash funds.

Perhaps unsurprisingly, the advisory report is written with a disdainful stance towards cryptocurrencies and emphasizes several times that cryptocurrencies are not money from the point of view of the Central Bank of the Russian Federation. At the same time, the arguments are unconvincing, and sometimes contradict the definition of money and the real state of affairs.

The report emphasizes that the digital ruble does not belong to the class of cryptocurrencies, and is not a cryptocurrency in the classical sense. This is true.

At the same time, the digital ruble will have properties of cryptocurrencies that are important from the point of view of the economy and economic activity:

  • Easy integration with digital platforms and the ability to use smart contracts for settlements;
  • High-speed transactions
  • Low cost of operations;
  • Absence of intermediaries when performing transactions (depending on the chosen model of the digital ruble);
  • Reliability, high security of operations, and low probability of errors.

Existing card payment systems are not adapted to operate with digital currencies, which requires the creation of new payment solutions that support the basic principles of digital currencies — working with smart contracts, minimizing intermediaries and costs, and maximizing convenience and speed. The introduction of the digital ruble in the Russian Federation and digital currencies in other countries will require the creation of a new payment infrastructure.

If the Bank of Russia does not monopolize this space with its Rapid Payments System, then this will create incentives for the development of payment innovations and facilitate the entry of various fintech companies into the market. This, in turn, will lead to increased competition in the payments market and the financial services market, and, as a result, reduce transaction fees, thus increasing their quantity and quality.

On the other hand, the emergence of the digital ruble removes the need to implement an initiative in Russia similar to the European PSD2 in order to create an open banking sector that would give non-banking organizations access to the payment services market for a larger number of participants. This will allow banks to save money and resources for implementing access and upgrading their ABS. Thus, Russia will be able to leapfrog the development of its own payment market, having access to all the advantages of open banking.

At the same time, the report raises legitimate questions about the role of commercial banks in the new monetary paradigm. The banking community itself is leaning more towards ‘Model D’, which negates a number of advantages of the digital ruble, leaving commercial banks a central role in customer service and payments. And, in fact, it repeats the model of non-cash money.

The most preferable one from the author’s point of view is ‘Model C’, in accordance with which the Central Bank opens and maintains clients’ wallets on the digital ruble platform, provides access to the Central Securities Market for individuals and legal entities, and banks carry out AML / CFT procedures, initiate the opening of client wallets and settlements on them, and provide them with other RBS services. At the same time, in all the models of the “retail digital ruble”, the Bank of Russia is the only issuer of the digital ruble.

The digital ruble is needed by the Central Bank for complete control of the issuance process and allows full control and transparency of all operations with digital rubles. Despite the emphasized controversy about the confidentiality and anonymity of transactions with the Central Bank, we must understand that the Central Bank and the state will receive complete control over all payments and all accounts of citizens and businesses. And here the question is not only and not so just about the readiness of the market for this, but about the readiness of the state itself to ensure the inviolability of this data and prevent leaks.

Thus, the initiative of the Bank of Russia is a little belated, but at the same time, it is undoubtedly revolutionary. Since Russia does not abandon its claims to be at least the most important regional player, it will be practically impossible to deliver on these claims without switching to a new form of money. As can be expected, a number of issues remain that require elaboration on the part of the Central Bank, the government, and the market.


The transition to CBDCs will lead to a 7/24/365 mode of monitoring and tracking transactions of national currencies, the state will record every financial transaction in a chain of blocks centrally stored by central banks. Once widespread, the introduction of the CBDC will mean that there will no longer be “over-the-counter” transactions, such as paying a plumber for work after hours or wages in an envelope — of course, this only applies to CBDCs, not cryptocurrencies or other forms of money.

To pay for a product or service, we will be forced to use new digital national money so that the authorities can fully control all transactions. When cash is no longer accepted throughout society, it becomes easier to enforce the form of money that is tracked in a central database. No one will be able to erase or modify past transactions, since each of them has a unique ‘hash’ or ID, and any intervention will leave traces. It will be impossible to hide. This can be positive in terms of combating fraud and criminal activity. The maximum level of transparency will be ensured in society (for the state).

Governments may well decide to target a specific group of the population with micro-incentives to stimulate spending in that specific group on a certain type of goods / or services. Governments can issue special loans or types of bonds to, say, the ‘middle class,’ when higher consumption is required to stimulate national growth. Since the data will be owned by the government, it can divide it into demographic and socio-economic or other groups as it sees fit. This new form of currency could turn today’s access to capital upside down. Governments can provide loans directly to their citizens, setting conditions and rates depending on the socio-economic groups to which they belong.

CBDCs can be an important tool for central banks to continue to provide secure means of payment in parallel with the wider digitalization of people’s daily lives. Public trust in central banks is central to monetary and financial stability and the provision of the public good with a common unit of account and a reliable store of value. To maintain this trust and understand whether CBDCs have jurisdictional value, the central bank must act with caution, openness, and in collaboration with market participants. It takes a lot of work to truly understand many of the issues, including where and how the central bank should play a direct role in the ecosystem and what role private sector participation should play.

About the Author

Mikhailishin Andrey Yurievich. Co-founder and head of the Joys payment service (Digital Payments LLC). Member of the Financial Services Working Group of the BRICS Business Council, partner in the creation of the BRICS Pay international payment system. Member of the Subcommittee on Payment and Settlement Systems and Technologies of the RSPP Commission on Banks and Banking Activities. Expert at the Business Incubator of the Plekhanov Russian University of Economics. Digital Payments LLC is a resident (member) of Skolkovo and a resident of StarHub Moscow | | @habergeon

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