Central Bank Digital Currencies: what hurdles remain?

January 15, 2021

The emergence of private stablecoins and crypto-assets – most notably bitcoin in 2008 and libra in 2019 – has sparked speculation that the central bank's role in overlooking and supervising money might be undermined. Thus, every move or comment made by a central bank about virtual money sparks a frenzy of headlines about the impending move to create central bank digital currencies (CBDCs).

The Digital Advantage

For some time now, many central banks worldwide have been researching on the merits of launching their own sovereign digital currencies. Pertinent matters for their consideration include the need to improve and modernize payments systems, the declining use of cash in some markets, the universal requirement of improving AML and CFT frameworks, and financial inclusion. However, CBDCs have the potential to deliver meaningful advantages.

According to Ken Timsit, managing director of ConsenSys, when they explored the implications of blockchain technology, there was always a need to build bridges between the legacy economy and the digital world. And the exciting part about CBDCs is that they make it possible to bridge the gap.

Per a survey conducted by BIS in late 2018 with 63 central banks representing the markets that account for 80 percent of the world's population, the survey indicated that 70% of these institutions were actively researching CBDCs. And about half of these had moved beyond conceptual and theoretical research to what the BIS described as proof-of-concept-type activity based on testing various technologies. The report notes that CBDC research has reached an advanced stage, and a few central banks are considering plans to launch their own digital currency. 

Entry of e-krona

Sweden's central bank, the Riksbank, claims to have one of the most advanced CBDC programmes in the world. A steep decline in cash-based transactions in Sweden has spurred the development of an e-krona. The authorities react to the prospect of cash no longer being accepted by retailers in the coming years. The Riksbank is operating the e-krona through a test environment to conclude how it would function. In this environment the central bank will control payments with e-krona through mobile phones, cards, and watches.

As stated by McConnell, the chief financial officer at Custody Digital Group, there are many aspects of CBDC development that need to be looked into, and that is why central banks want to run sprints, or pilot programs, to test what the outcomes can be from a financial stability an environmental perspective.

Emerging Markets

Many other developed markets are working assiduously to match the progress accomplished by the Riksbank, particularly in terms of focus on the retail CBDC extension. This eventually comes down to market specifics, given that a number of other countries have experienced a smaller decline in the use of cash compared to that of Sweden, which happens to be one of the most cashless economies in the world. Meanwhile, payment systems and associated infrastructure are generally well established in these economies. Though this may change, most progress towards a retail CBDC is likely to occur among smaller emerging market economies. 

According to Bhavin Patel, senior economist and head of fintech research at the Official Monetary and Financial Institutions Forum, many advanced economies don't need a CBDC yet. Consumers in these markets don't face many challenges in making bank transfers and payments. The need for CBDCs originates mostly from emerging economies.

Diminishing Boundaries

Beyond domestic frontiers, for many analysts, the actual value of CBDCs lies in their potential to be used on cross-border monetary dealings. This is particularly true for domains with high levels of migrant workers. 

Two central banks have already cooperated on cross-currency and cross-border digital payments. The Monetary Authority of Singapore and the Bank of Canada trialled a link-up of their domestic experimental payment frameworks constructed from two different distributed ledger platforms in the first trial of its kind. It successfully executed a cross-border transaction without a third party's participation, involving a Canadian Dollar-Singapore Dollar payment. Nonetheless, more work is needed to determine how an approach of this kind would work at a large scale level.  

Indeed, the need to achieve interoperability between CBDCs, as well as between digital currencies and the existing payments and financial framework internationally, will be crucial for the success of CBDCs. Although it may be, in relative terms, easier to expand a CBDC within a domestic market, assuring that the currency can be used and has value beyond national borders will be more challenging to achieve. 

According to Ken Timsit, the domestic payment systems of many advanced countries work quite well, so the benefits of CBDCs are easier to explain and demonstrate when it comes to cross-border trade and payments. As a result, for individual countries to recognize the benefits, CBDCs need to be interoperable.


Though the advantages of CBDCs are clear, the questions around their mechanics and how they will disrupt or alter the existing financial sector landscape and macroeconomic stability remain unanswered. With several markets on the cusp of launching CBDCs in the coming years, the world of finance is set for further disruption. It may be a slow revolution, but the introduction of CBDCs into the mainstream is now just a question of time.

Send more than money.