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The Pros And Cons Of Central Bank Digital Currencies (CBDCs)

The Pros And Cons Of Central Bank Digital Currencies (CBDCs)

Explainers

12 Oct 2022

A Central Bank Digital Currency (CBDC) is a digital version of a country’s own fiat currency.

What Is A CBDC?

CBDCs can be used in payments and other operations that are traditionally conducted with a fiat currency. They are issued by central banks just like fiat currencies and they are pegged to the national currency of the country they are developed in.

For example, China’s digital yuan (e-CNY) is the digital version of its fiat currency Chinese yuan (CNY). The e-CNY is issued by The People’s Bank of China (PBOC), China’s central bank and 1 e-CNY = 1 CNY.

Across different parts of the world, countries, banks, and institutions have been working on CBDCs. As a matter of fact, some countries have started to implement their own CBDCs. For example, the Bahamas was the first to launch a CBDC. It implemented the Sand Dollar in 2020. Nevertheless, there is still a lot to work to be done since the implementation of a new form of national virtual currency requires various technical feasibility checks to ensure that they are ready for mass adoption.

The Importance Of Blockchain Technology For CBDCs

Although their structure is really similar to cryptocurrencies, CBDCs don't require blockchain technology to function. But CBDCs need a wallet system on a stable chain structure - for example, a DLT or distributed ledger technology. In practical terms, CBCDs need a system where citizens can transact easily and seamlessly.

Since blockchain provides the requirements for the development of CBDCs, it has a big potential and is of interest to governments. The developments in the blockchain world should also be taken into account considering the popularity of cryptocurrencies and NFTs during the past few years. People around the world have already started to learn about blockchain technology and there is a significant familiarity with the concept, which is a big advantage for governments to gain trust and create a familiar user experience for their CBDCs.

The Difference Between A Stablecoin And A CBDC Explained

Both CBDCs and stablecoins are pegged to fiat currencies; however, their structures are completely different. Stablecoins are cryptocurrencies that are not under any governmental authority but by companies while CBDCs are regulated by governments. Stablecoins are an effective counterbalance to the volatility often experienced in the digital assets industry by leading cryptocurrencies such as Bitcoin and Ethereum. Therefore, stablecoins can lose their peg to their fiat currencies where governments will maintain CBDCs peg.

Increasing Popularity And Global Development Of CBDCs

The popularity of CBDCs has been drastically increasing in the last few years. According to the BIS’s report about digital currencies: “Nine out of 10 central banks are exploring central bank digital currencies (CBDCs), and more than half are now developing them or running concrete experiments.”

Examples of countries experimenting with CBDCs are China with the “digital yuan”, Sweden with the “e-krona” and the Bahamas with the“Sand Dollar.” The list will undoubtedly expand in the future, with more countries implementing their newly founded CBDC in the fear of missing out on a big trend. The other plausible reason why countries would implement their own central bank digital currency is to drive the use cases of their own currency rather than digital assets. Nigeria is a case in point, where the government launched the e-krona in an attempt to draw the population to transact with it - as opposed to using cryptocurrencies. As Chimezie Chuta explained to TechCrunch, the concept of CBDCs has become a necessity for central banks that have seen the entrance of cryptocurrencies like Bitcoin and Ethereum into mainstream finance. These digital assets are therefore viewed as “a direct challenge to central banks’ authority everywhere in the world.”

The rapid development of CBDCs globally, therefore, comes as a response to the increasing popularity of digital assets. Banks are unwilling to relinquish their authority and power and must therefore remain relevant with the establishment of CBDCs.

Benefits Of CBDCs

Governments have various reasons to issue CBDCs. Safety, security, and efficiency being at the top of the list, CBDCs have the potential to solve certain problems of the current economic systems of governments. Here are some cases in which CBDCs come in handy:

  • Tax collection can be way more efficient with CBDCs, with the creation of an automated system where the government directly collects the percentage of transactions as taxes according to the type of transactions.

  • The impact of CBDCs on third parties’ risks; Banks can fail or they can change their policies. With CBDC's mass adoption, third-party platforms won’t be necessary since CBDCs will give direct control of wallets to the owners including transactions and investments.

  • Foreign trade will also become easier with the help of CBDCs. Buyers will be able to send the price of goods they are buying easily and quickly, which saves both buyers and sellers precious transaction time.


From the survey on BIS’s report about digital currencies, it can be seen that both advanced economies (AE) and emerging market and developing economies (EMDE) value “payments safety” most, followed by financial stability. When we look at the last few years, one of the biggest challenges governments are facing is the volatility of their fiat currencies. This volatility is causing citizens to worry about their own investments and funds stored in the bank. Considering this situation and the data from BIS’ survey, financial stability and payment safety are the most sensitive issues that people believe CBDCs are a solution for.

Case Example: Potential CBDC Development in Vietnam

Vietnam ranks as the first among all countries in terms of cryptocurrency adoption due to the country’s economic circumstances and increasing demand among citizens to carry out their own transactions securely.

Previously, Vietnam’s central bank The State Bank of Vietnam (SBV) received instruction from its government to start working on CBDCs. Even though there is not any final definite decision on CBDCs, it would not be wrong to believe that Vietnam may be adopting its own CBDC. And it is very likely that this CBDC will be using blockchain technology.

Some of the main reasons for Vietnam to issue a CBDC:

  • As mentioned previously, fear of missing out (FOMO) may be one of the factors for countries looking to develop their own CBDC. In the case of Vietnam, its second-largest export market, China has already started implementing its own CBDC (e-CNY) in different parts of the country. As China accelerates the mass adoption of e-CNY, it will definitely be an influence on the future of Vietnam’s economy. Therefore, in the near future, Vietnam would need to accelerate its own CBDC development to respond to China's e-yuan to not lose any leverage in its foreign trade.

  • Vietnam can use its own CBDC to increase the efficiency of exports to the EU Vietnam. For example, the payment of each transport can easily be simplified by sending the partial amount of received goods via digital currencies from the buyer's wallet to the exporter's own wallet. This solution would not only be fast but also secure considering the removal of middle parties and the use of smart contracts that cannot steal, delay or lose money in the transaction.

  • Most of the citizens of Vietnam have already used blockchain due to their cryptocurrency transactions. They’ve been using cryptocurrencies to transfer money and keep their money protected from high inflation in their country by making investments. Therefore, Vietnam can easily adopt using a CBDC.

But Wait, Is It Easy For Vietnam To Create A CBDC?

Creating a CBDC requires working on different areas. In addition to technological development; legal background, user experience, and integration are some examples of these areas.

Using blockchain technology would be really helpful considering its progress in the last 14 years starting with Bitcoin’s development in 2008. Vietnam might be aware of this opportunity since “the first official legal entity specializing in the field of blockchain technology called ‘The Vietnam Blockchain Union (VBU)’” was launched. VBU’s tasks include researching, applying, and testing blockchain technology in accordance with Vietnamese law, so why not test the technology in development of a CBDC?

Vietnam’s potential CBDC also needs a strong legal framework that protects the privacy of wallet owners and legalizes use cases that can be used for daily tasks like payments and transactions. With the work of policymakers, companies and organizations might also become interested in integrating this CBDC. For example, e-shopping platforms can start offering this CBDC as a medium of payment for their visitors.

Summary Of The Pros And Cons Of CBDCs

Efficiency, security, and transparency are examples of the potential positive impacts of CBDCs. Efficiency includes tax collection being more efficient and faster transactions with the removal of third parties (also resulting in lower transaction costs). With transparency provided by CBDCs, corruption and other illegal activities that require money transfers may significantly decrease. Without third parties such as banks, there also will be less of a risk of money loss caused by external factors like technical problems. This is because the ownership of all assets will go to wallet owners, not third parties.

While talking about CBDCs, potential problems and negative consequences should also be included in discussions since there are cybersecurity risks, lack of familiarity, and privacy protection to consider. Self-owned wallet technology will require a lot of education to translate to mass adoption since fraudsters are likely to exploit any vulnerabilities they find. CBDCs might be a tool to improve the transparency and security of transactions, but a key drawback to consider with this asset class is that it once again falls under centralized power.

The most important criticism of CBDCs is the power of governments since they have full authority over these digital currencies. All transactions can be monitored which causes a lack of privacy. The control over different metrics is also in the hands of governments. For example, a negative interest rate policy can be launched in seconds with the wish of central banks to increase consumer spending and convert private wealth to investments. Or any transaction can be canceled by the government by putting determined wallets under close supervision.

CBDCs: A Magical Door To Financial Freedom Or A New Level Of Surveillance?

Well, there cannot be a definite answer to this question since CBDCs’ future depends on how they will be used by the governments. CBDCs can potentially give their governments incredible power to control all transactions and payment flows. This power can cause discussions on privacy protection since governments will be able to track every single transaction of a citizen.

There are also cybersecurity risks that can be scary for the mass audience. But traditional fiat currencies also have a lot of risks such as fraud. Therefore, for both traditional currencies and CBDCs, there are various risks. So just because CBDCs have cybersecurity risks doesn’t mean they shouldn’t be explored.

Ultimately, CBDCs are a relatively new concept that will definitely take a lot of place in the media and the scope of governments. They have certain advantages such as security, safety, and transparency, but on the other hand, the downside of CBDCs is that they pose a potential threat to personal privacy. With both pros and cons, it is still too early to draw a conclusion on the future of CBCDs. But one thing is certain - they have the potential to revolutionize traditional economies by giving rise to the mass adoption of self-owned digital assets.

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