Central Bank Digital Currencies: Motivations, Design Choices, and Global Developments

July 1, 2025 Research Reports 0

The Evolving Landscape of Digital Currency: A Comprehensive Analysis of Central Bank Digital Currencies (CBDCs)

Many thanks to our sponsor Panxora who helped us prepare this research report.

Abstract

Central Bank Digital Currencies (CBDCs) have emerged as a paramount subject in the ongoing evolution of the global financial system. This comprehensive research paper undertakes an in-depth exploration of the multifaceted dimensions of CBDCs, meticulously examining the diverse motivations underpinning their potential issuance, the intricate array of design choices available to central banks, and their profound implications for the traditional commercial banking sector, financial inclusion initiatives, and the broader macro-financial stability. Furthermore, it delves into the crucial aspects of monetary sovereignty in an increasingly digitalized world, cross-border payment efficiency, and the critical interplay between privacy and regulatory compliance. By rigorously analyzing existing global developments, advanced pilot projects, and the theoretical underpinnings, this paper offers a detailed and nuanced understanding of CBDCs’ potential to fundamentally reshape the architecture and future trajectory of money, financial services, and the global monetary order.

Many thanks to our sponsor Panxora who helped us prepare this research report.

1. Introduction: The Dawn of Digital Sovereignty in Money

Historically, the evolution of money has been a continuous journey, progressing from commodity money to metallic coinage, then to paper banknotes, and subsequently to electronic book-entry money held in commercial bank accounts. Each phase has been driven by technological advancements and societal needs for more efficient, secure, and widely accepted means of exchange. The advent of the 21st century has ushered in an unprecedented era of digital transformation, particularly within the financial sector. This revolution has manifested not only through the proliferation of private digital payment systems but also through the emergence of novel forms of digital assets, most notably cryptocurrencies such as Bitcoin and subsequently stablecoins, which aim to peg their value to existing fiat currencies.

While private digital innovations have gained significant traction, prompting debates on their inherent volatility, regulatory oversight, and potential for disrupting established financial norms, central banks globally have been compelled to critically assess their role in this evolving landscape. The notion of a Central Bank Digital Currency (CBDC) has thus moved from theoretical discussion to a concrete policy consideration. A CBDC represents a digital form of a country’s fiat currency, issued and backed by the central bank, and serving as a direct liability of the central bank, akin to physical banknotes. This distinguishes it fundamentally from commercial bank digital money (which is a liability of commercial banks) and private cryptocurrencies (which are not typically backed by a central authority).

This paper aims to provide a granular and comprehensive analysis of CBDCs, moving beyond a superficial overview to explore their foundational motivations, the intricate array of design considerations that shape their functionality, and the far-reaching implications they hold for monetary policy, financial stability, financial inclusion, and the global financial architecture. It seeks to consolidate current knowledge, synthesize global experiences from various pilot projects, and project potential future trajectories for this transformative innovation.

Many thanks to our sponsor Panxora who helped us prepare this research report.

2. Motivations for Issuing CBDCs: A Multi-faceted Imperative

The decision for a central bank to issue a CBDC is not unilateral but rather stems from a confluence of strategic objectives, economic imperatives, and responses to an evolving digital payment landscape. These motivations are often interconnected and vary in emphasis across different national contexts.

2.1. Enhancing Payment Efficiency and Reducing Costs

The current global payment infrastructure, while robust in many respects, still suffers from significant inefficiencies, particularly in cross-border transactions. Traditional payment systems often involve multiple intermediaries, leading to high transaction costs, slow settlement times, and limited transparency. Even domestic retail payment systems, while generally more efficient, can incur costs for businesses and consumers through interchange fees or gateway charges.

CBDCs offer a compelling solution to streamline payment systems by enabling direct, real-time, and often instant settlement of transactions. By leveraging digital technologies, potentially including distributed ledger technology (DLT) or highly optimized centralized databases, central banks can facilitate faster and more secure payment options. For instance, in wholesale applications, CBDCs could enable atomic settlement of securities and foreign exchange transactions, meaning the two legs of a transaction settle simultaneously, thereby eliminating principal risk. In retail contexts, CBDCs could drastically reduce transaction fees, particularly for small-value payments, making financial services more accessible and affordable. This directness also enhances transparency in the payment chain, which can aid in combating illicit financial activities while still respecting user privacy at appropriate levels.

2.2. Promoting Financial Inclusion: Bridging the Digital Divide

Financial exclusion remains a significant global challenge, with an estimated 1.4 billion adults worldwide lacking access to formal financial services (World Bank, 2021). These ‘unbanked’ populations often face barriers such as high transaction costs, inconvenient access points, lack of necessary identification documents, or distrust in traditional financial institutions. The inability to participate in the formal financial system limits economic opportunities, hinders access to social welfare programs, and perpetuates cycles of poverty.

CBDCs have the potential to democratize access to digital payments. By offering a universally accessible digital form of central bank money, a CBDC can provide a secure, low-cost, and reliable means for unbanked populations to participate in the financial system. This can be achieved through various mechanisms: mobile-first designs that utilize ubiquitous smartphone penetration, even basic feature phones; offline payment capabilities that circumvent internet access limitations; and simplified onboarding processes that may not require a full commercial bank account. For example, in archipelago nations like The Bahamas, the Sand Dollar CBDC was primarily motivated by the need to provide financial services to remote islands where physical bank branches are scarce, demonstrating a clear case for financial inclusion (Wenker, 2022).

2.3. Enhancing Monetary Policy Implementation and Effectiveness

CBDCs present central banks with a novel and potentially powerful tool for the implementation and transmission of monetary policy. In traditional systems, monetary policy decisions, such as changes in the policy rate, are transmitted through the commercial banking system, which can sometimes be a circuitous and time-lagged process. A CBDC could facilitate a more direct and instantaneous transmission of policy measures to the broader economy.

For instance, a central bank could theoretically apply interest rates directly to CBDC holdings, potentially differentiating rates based on holding tiers or specific economic conditions. This offers a more granular control over liquidity and incentives for spending or saving. In times of severe economic downturn, a CBDC could also enable direct and targeted fiscal transfers to citizens, often termed ‘helicopter money,’ which could be more efficient and precise than traditional mechanisms. Furthermore, the granular data generated by CBDC transactions (while respecting privacy safeguards) could provide central banks with enhanced real-time insights into economic activity, allowing for more informed and agile policy decisions. However, the precise mechanisms and implications for monetary policy transmission are still subjects of active research and debate among central banks.

2.4. Counteracting the Rise of Private Digital Currencies and Maintaining Monetary Sovereignty

The proliferation of private digital currencies, including volatile cryptocurrencies and stablecoins, poses significant challenges to the established monetary order. If widely adopted, these private digital assets could erode the central bank’s control over the monetary system, leading to a fragmentation of the money supply, increased financial instability, and a potential loss of monetary sovereignty. This could complicate the central bank’s ability to manage inflation, ensure financial stability, and act as a lender of last resort.

By issuing a CBDC, central banks can provide a safe, stable, and state-backed digital alternative to private digital assets, thereby preserving their fundamental role as the sole issuer of sovereign currency and the ultimate guarantor of monetary stability. A CBDC ensures that the benefits of digital innovation in payments accrue within a regulated and centrally controlled framework, mitigating risks associated with private sector money creation and maintaining public trust in the national currency. This is particularly salient in the context of geopolitical competition, where the widespread use of a foreign digital currency could challenge a nation’s economic independence and influence (Time, 2021).

2.5. Enhancing Resilience and Security of Payment Systems

Beyond efficiency, CBDCs can bolster the overall resilience and security of a nation’s payment infrastructure. Existing payment systems, while generally robust, can be vulnerable to various disruptions, including cyberattacks, natural disasters, or technical failures within commercial banking networks. A CBDC could provide a resilient, publicly operated payment rail that acts as a back-up or primary system, ensuring continuity of essential payment services even in times of crisis.

Designed with state-of-the-art cybersecurity measures and potentially incorporating offline payment capabilities, a CBDC could serve as a crucial public good, guaranteeing access to central bank money when other payment channels might be compromised. This public-sector alternative enhances the robustness of the financial ecosystem, reducing systemic risk and increasing public confidence in the national payment system.

2.6. Fostering Innovation in Financial Services

While potentially competing with commercial banks in some respects, CBDCs can also serve as a catalyst for innovation within the broader financial sector. By providing a secure, reliable, and standardized digital infrastructure, a CBDC can act as a foundational platform upon which new and innovative financial products and services can be built by the private sector. This could include new payment applications, sophisticated lending platforms, or novel financial instruments.

The concept of ‘programmable money,’ inherent in some CBDC designs, allows for money to be ‘smart,’ enabling automated payments conditioned on specific criteria being met (e.g., payment only released upon delivery of goods, or automatic distribution of welfare benefits). This functionality can unlock entirely new business models and significantly enhance the efficiency of many economic processes, from supply chain finance to micro-payments, thereby fostering a more dynamic and innovative financial ecosystem.

Many thanks to our sponsor Panxora who helped us prepare this research report.

3. Design Choices for CBDCs: Navigating the Architectural Landscape

The successful implementation of a CBDC hinges critically on a myriad of design choices, each carrying distinct implications for its functionality, user adoption, impact on the financial system, and policy objectives. These choices reflect a delicate balance between competing priorities such as efficiency, privacy, financial stability, and innovation.

3.1. Wholesale vs. Retail CBDCs: Targeting User Segments

A fundamental distinction in CBDC design lies in its intended user base:

  • Wholesale CBDCs (wCBDCs): These are digital currencies primarily designed for use by financial institutions that hold accounts with the central bank. Their purpose is to enhance the efficiency, speed, and security of interbank transactions, large-value payments, and securities settlement. Wholesale CBDCs often leverage distributed ledger technology (DLT) to facilitate atomic settlement – where the transfer of money and assets occurs simultaneously – thereby reducing counterparty risk and settlement risk. Examples of wholesale CBDC initiatives include Project Jasper in Canada, Project Ubin in Singapore, Project Helvetia in Switzerland, and the Federal Reserve Bank of New York’s Project Cedar, which explores a wholesale CBDC for cross-border payments (Federal Reserve Bank of New York, 2022). The focus here is on improving the plumbing of the financial system, making it more robust and efficient for institutional players.

  • Retail CBDCs (rCBDCs): Also known as general purpose CBDCs, these are designed for use by the general public – individuals and businesses – as a digital alternative to physical cash. Retail CBDCs aim to facilitate everyday transactions, offer a secure and accessible payment option, and promote financial inclusion. They represent a more direct interaction between the central bank and the public. Retail CBDC models often consider a ‘two-tiered’ architecture, where the central bank issues the CBDC, but commercial banks or other regulated payment service providers (PSPs) manage customer-facing services, including onboarding, KYC/AML checks, and facilitating transactions. This model aims to leverage the private sector’s innovation and customer service capabilities while maintaining central bank control over the digital currency itself. The e-CNY in China, the Sand Dollar in The Bahamas, and the proposed Digital Euro are prime examples of retail CBDC initiatives.

3.2. Account-Based vs. Token-Based Systems: The Mechanics of Ownership

Another critical design decision pertains to the underlying technology and how ownership and transactions are recorded:

  • Account-Based Systems: In an account-based system, CBDC holdings are recorded in identifiable accounts, similar to traditional bank accounts. Transactions involve debits and credits to these accounts. This system typically requires identity verification (Know Your Customer – KYC) to open an account and for each transaction. While providing robust traceability for regulatory oversight (AML/CFT) and dispute resolution, it inherently offers less anonymity than cash. The central bank or its designated intermediaries would maintain a ledger of all account balances. This model offers strong control and data capabilities but may raise privacy concerns.

  • Token-Based Systems: A token-based system mimics the properties of physical cash, where digital tokens representing value can be transferred directly between parties without necessarily requiring an account or direct identity verification for every transaction. Ownership of the token confers value, and transactions are authenticated cryptographically, similar to how cryptocurrencies operate. This approach can offer higher degrees of user privacy and potentially facilitate offline payments. However, balancing anonymity with the imperative to prevent illicit activities (e.g., money laundering, terrorism financing) becomes a significant challenge. Hybrid models are also being explored, combining elements of both, such as token-based transfers for small amounts and account-based verification for larger transactions.

3.3. Privacy and Anonymity: The Balancing Act

The tension between user privacy and regulatory requirements for oversight (such as Anti-Money Laundering – AML and Counter-Terrorism Financing – CFT) is perhaps one of the most contentious aspects of CBDC design. Physical cash offers inherent anonymity, a feature highly valued by many users. Traditional digital payments, conversely, leave extensive data trails.

A CBDC must strike a delicate balance. Achieving complete anonymity, akin to cash, is generally deemed impractical for a digital system that must comply with modern financial integrity standards. On the other hand, a system that allows for granular surveillance of every transaction could be met with significant public resistance and raise fundamental civil liberties concerns. Central banks are exploring various models:

  • Tiered Anonymity: This approach might allow for limited anonymity for small-value transactions, similar to anonymous prepaid cards, while requiring identity verification for larger transactions or cumulative spending above a certain threshold. This resembles current cash transaction reporting requirements.
  • Pseudo-anonymity: Transactions might be cryptographically obscured to the public, with access to underlying identity information restricted to authorized entities (e.g., law enforcement) under strict legal mandates.
  • Privacy-by-Design: Incorporating privacy-enhancing technologies from the outset, such as zero-knowledge proofs or secure multi-party computation, to minimize the amount of identifiable data collected or shared, while still allowing for necessary regulatory checks.

The public’s acceptance and trust in a CBDC will heavily depend on the perceived level of privacy it offers compared to existing payment methods. Central banks must clearly communicate their approach to privacy and ensure robust data protection frameworks are in place.

3.4. Technology Stack: Centralized vs. Distributed Architectures

The choice of underlying technology is crucial for the CBDC’s performance, scalability, security, and resilience:

  • Centralized Database: This involves a traditional, centralized ledger managed directly by the central bank. It offers simplicity, established security protocols, and high transaction speeds typical of existing real-time gross settlement (RTGS) systems. However, it raises concerns about a single point of failure and potential for censorship.
  • Distributed Ledger Technology (DLT): This involves a network of participants validating and recording transactions on a shared, distributed ledger. DLT can offer enhanced resilience (no single point of failure), immutability of records, and potentially greater transparency among network participants. However, current DLT implementations face challenges related to scalability, energy consumption (for public blockchains), and the complexity of governance. Many central banks exploring DLT for CBDCs are considering permissioned DLTs, where participants are vetted, striking a balance between decentralization and control.

Hybrid models that combine elements of both approaches are also being explored to leverage the strengths of each while mitigating their respective weaknesses. The choice will depend on the specific performance requirements and policy objectives of each central bank.

3.5. Interoperability and Cross-Border Payments

For a CBDC to be truly effective in a globalized economy, its interoperability with existing domestic payment systems and potentially with other CBDCs for international transactions is paramount. Without seamless integration, a CBDC risks becoming an isolated silo, limiting its utility. Central banks are exploring various models for cross-border CBDC payments:

  • Bilateral Linkages: Direct connections between two CBDC systems.
  • Common Platform: Multiple CBDCs operating on a single, shared platform.
  • Interlinking: Various CBDC systems connected via a hub or common standards.

Projects like Project mBridge (a collaboration between central banks from China, Hong Kong SAR, Thailand, UAE, and the BIS) aim to explore multi-CBDC platforms for wholesale cross-border payments, demonstrating the growing focus on enhancing the speed, cost-efficiency, and transparency of international remittances and trade finance (BIS, 2022). Interoperability also extends to domestic systems, ensuring that a CBDC can seamlessly interact with commercial bank accounts, card networks, and other payment instruments.

Many thanks to our sponsor Panxora who helped us prepare this research report.

4. Impact on the Traditional Banking System: Redefining Roles and Responsibilities

The introduction of a widely adopted retail CBDC has the potential to fundamentally reshape the landscape of the traditional commercial banking system, necessitating careful design and implementation to mitigate risks while fostering innovation.

4.1. Disintermediation Risks and Deposit Erosion

One of the most frequently cited concerns is the risk of disintermediation, where individuals and businesses might shift their deposits from commercial banks to holdings of risk-free CBDC directly with the central bank. This ‘digital bank run’ could occur rapidly, especially during periods of financial stress, potentially destabilizing commercial banks by reducing their primary source of funding – customer deposits. A significant outflow of deposits could impair banks’ ability to extend credit, affecting their profitability and their critical role in channeling savings into productive investments.

Central banks are exploring various mitigation strategies:

  • Tiered Remuneration: Applying a negative or zero interest rate on CBDC holdings above a certain threshold to discourage large holdings and incentivize deposits in commercial banks.
  • Holding Limits: Imposing limits on the amount of CBDC an individual or entity can hold to prevent large-scale shifts.
  • Two-Tiered Architecture: As mentioned earlier, designing a system where commercial banks or other regulated PSPs remain the primary interface for customers, managing accounts and facilitating transactions, rather than the central bank holding direct retail accounts. This ensures that commercial banks retain their customer relationships and a significant part of their operational role, even if the underlying liability shifts.

4.2. Competition, Innovation, and Efficiency Gains

While CBDCs pose disintermediation risks, they also act as a powerful catalyst for competition and innovation within the banking sector. The availability of a risk-free, central bank-issued digital currency could push commercial banks to innovate and improve their services, offer more competitive interest rates on deposits, and develop new digital products to retain customers. This competitive pressure could ultimately benefit consumers through better services and lower fees.

Furthermore, by providing a common, standardized digital rail for payments, CBDCs could foster a more level playing field for various payment service providers, encouraging new entrants and fostering technological advancements across the financial ecosystem. Banks might shift their focus from managing deposits to more sophisticated lending, advisory, and asset management services, leveraging their expertise in credit assessment and risk management.

4.3. Implications for Financial Stability and Crisis Management

The design and implementation of CBDCs must meticulously consider their potential impacts on overall financial stability. While CBDCs offer significant benefits for payment system resilience, they also introduce new risks:

  • Faster Digital Bank Runs: The ease and speed of digital transfers mean that a bank run from commercial deposits to CBDC could occur much faster than traditional physical bank runs, potentially overwhelming existing liquidity management frameworks.
  • Cybersecurity Risks: A national CBDC system, being a central digital infrastructure for all money, would become a prime target for cyberattacks. A successful attack could have catastrophic consequences, undermining public trust and financial stability. Robust cybersecurity measures and continuous threat intelligence are paramount.
  • Monetary Policy Control: While offering new tools, poorly managed CBDC implementation could complicate central bank efforts to manage liquidity and interest rates if there are significant shifts in money demand between commercial bank deposits and CBDC.

Conversely, a well-designed CBDC can enhance financial stability by providing a robust, resilient payment system and by offering a new channel for crisis management. In a crisis, the central bank could use the CBDC infrastructure to inject liquidity directly into the economy or provide targeted support to financial institutions, enhancing its role as a lender of last resort. The enhanced data availability (with appropriate privacy safeguards) could also provide central banks with a more accurate and timely picture of financial flows, aiding macro-prudential policy and early warning systems for systemic risks.

4.4. Redefinition of Banking and New Business Models

In a CBDC world, the core functions of commercial banks may evolve. Their role as primary deposit-takers might diminish, but their expertise in credit intermediation, risk assessment, customer relationship management, and the provision of value-added financial services would remain crucial. Banks could transition from holding vast quantities of low-cost retail deposits to focusing more on wholesale funding markets and competitive service offerings.

New business models could emerge, with banks acting as payment service providers on top of the CBDC infrastructure, offering enhanced digital wallets, smart contract functionalities, and integrated financial advisory services. The overall effect would likely be a shift towards a more diversified and technologically advanced banking sector, driven by both competitive pressures and opportunities enabled by the CBDC. However, careful regulatory adaptation will be necessary to ensure a smooth transition and maintain a robust financial ecosystem.

Many thanks to our sponsor Panxora who helped us prepare this research report.

5. Financial Inclusion and CBDCs: A Pathway to Broader Participation

As previously highlighted, one of the most compelling arguments for issuing a retail CBDC is its potential to significantly advance financial inclusion, particularly in economies with large unbanked populations or those facing geographic barriers to financial access. CBDCs can dismantle many of the traditional obstacles to financial participation.

5.1. Providing Ubiquitous Access to Digital Payments

Many financially excluded individuals lack access to traditional banking services due to factors such as geographical distance to physical branches, high minimum balance requirements, or a lack of formal identification. CBDCs, especially those designed for mobile-first interaction, can circumvent these barriers. With a simple smartphone or even a feature phone, individuals can access digital payment capabilities directly, bridging the gap in financial services.

For instance, the eNaira in Nigeria aims to leverage high mobile phone penetration to reach citizens, many of whom are unbanked. Similarly, the Sand Dollar in The Bahamas was explicitly designed to provide financial services to residents of remote islands where physical banking infrastructure is scarce or non-existent (Wenker, 2022). Offline payment capabilities, being explored by several central banks, further extend this access, ensuring that transactions can occur even without internet connectivity, which is critical in areas with unreliable infrastructure.

5.2. Reducing Transaction Costs for Low-Income Individuals

Traditional financial services often come with various fees, including transaction charges, account maintenance fees, or high remittance costs. These costs can be disproportionately burdensome for low-income individuals, making formal financial services uneconomical. By eliminating multiple intermediaries in the payment chain, CBDCs can significantly lower transaction fees, making digital payments more affordable and accessible.

This reduction in costs can be particularly impactful for small-value transactions, which constitute a large proportion of daily economic activity for many low-income individuals. Cheaper and more transparent cross-border remittances enabled by wholesale CBDCs could also provide substantial benefits to migrant workers and their families, ensuring more money reaches the intended recipients rather than being consumed by fees.

5.3. Enhancing the Efficiency of Government Transfers and Social Welfare Programs

Governments worldwide disburse significant amounts of funds through social welfare programs, subsidies, and disaster relief. Traditional methods, often involving physical cash distribution or bank transfers that require recipients to have bank accounts, can be slow, inefficient, costly, and susceptible to fraud or diversion. CBDCs offer a direct, secure, and highly efficient channel for government transfers.

By leveraging the programmability features of CBDCs, governments could directly disburse funds to eligible recipients, ensuring timely delivery and reducing administrative overhead. This also enhances transparency and traceability of funds, minimizing opportunities for corruption. For example, during a crisis, direct CBDC disbursements could provide immediate financial relief to affected populations, accelerating recovery efforts and ensuring targeted support reaches those most in need.

5.4. Building Financial Identity and Pathways to Broader Services

For many unbanked individuals, a primary barrier to accessing financial services is the lack of a verifiable financial history or identity. Engaging with a CBDC, even through a simplified onboarding process, can provide a digital footprint that, over time, could serve as a rudimentary financial identity. This digital identity could then potentially open doors to other financial services, such as micro-loans, insurance products, or savings schemes, offered by commercial banks or other financial institutions.

By fostering familiarity with digital financial transactions and providing a secure entry point into the formal economy, CBDCs can act as a stepping stone towards broader financial inclusion, empowering individuals to participate more fully in economic life and access a wider range of financial tools to improve their livelihoods.

Many thanks to our sponsor Panxora who helped us prepare this research report.

6. Global Developments and Pilot Projects: A Diverse Landscape of Innovation

The exploration and development of CBDCs are global phenomena, with central banks worldwide at various stages of research, piloting, and even deployment. These diverse initiatives reflect differing national priorities, technological capabilities, and regulatory landscapes. The Bank for International Settlements (BIS) has noted that over 90% of central banks are now exploring CBDCs in some form (BIS, 2023).

6.1. China: The Digital Yuan (e-CNY)

China has been a trailblazer in retail CBDC development, with its Digital Yuan, or e-CNY, being one of the most advanced and widely piloted retail CBDCs globally. Initiated by the People’s Bank of China (PBOC), the e-CNY project began its research phase in 2014 and commenced extensive pilot programs in various cities from 2020. The primary motivations for China include modernizing its payment system, enhancing financial inclusion, and maintaining monetary sovereignty amidst the dominance of private payment platforms like Alipay and WeChat Pay.

The e-CNY employs a two-tiered operational framework: the PBOC issues the digital currency to commercial banks, who then distribute it to the public and manage customer-facing services. It supports both online and offline payments and features elements of programmability, allowing for conditional payments. While the PBOC has stated its focus is primarily on domestic retail payments, its potential for cross-border use, particularly within the Belt and Road Initiative, raises geopolitical implications regarding the future of international finance and the U.S. dollar’s global reserve status (Time, 2021).

6.2. European Union: The Digital Euro

The European Central Bank (ECB) initiated its Digital Euro project in October 2020, moving into an investigation phase to assess the feasibility and design of a potential digital currency for the eurozone. The motivations include ensuring strategic autonomy in payments, fostering innovation, addressing declining cash usage in some member states, and maintaining monetary sovereignty in the face of private digital assets.

The proposed Digital Euro would be a retail CBDC, distributed through a two-tiered system involving commercial banks and other payment service providers. Key design considerations emphasize privacy, financial inclusion, and a commitment to not disintermediate commercial banks. The ECB has stressed that a Digital Euro would complement, not replace, cash and commercial bank money. The investigation phase concluded in October 2023, moving to a ‘preparation phase’ where technical work is being undertaken, though a decision on issuance is still years away (European Central Bank, 2023).

6.3. United States: The Digital Dollar

The United States, through the Federal Reserve, has adopted a more cautious and research-oriented approach to a potential digital dollar. Unlike China or the EU, the U.S. has not committed to issuing a CBDC but is extensively researching its potential benefits and risks. The motivations center on maintaining the dollar’s international standing, enhancing payment efficiency, and promoting financial inclusion.

Key initiatives include the Federal Reserve Bank of Boston’s Project Hamilton, a collaboration with MIT, which explored the technical feasibility of a high-performance retail CBDC. The Federal Reserve Bank of New York’s Project Cedar has focused on wholesale CBDC applications, specifically for cross-border payments, demonstrating potential efficiency gains for institutional transactions (Federal Reserve Bank of New York, 2022). The debate in the U.S. remains robust, encompassing concerns about privacy, financial stability, and the implications for the commercial banking sector. Congressional approval would likely be required for any move towards issuance.

6.4. The Bahamas: The Sand Dollar

The Bahamas made history by officially launching the Sand Dollar in October 2020, becoming the world’s first fully deployed retail CBDC. Its primary objective is to enhance financial inclusion across the archipelago nation, where geographical dispersion makes physical banking infrastructure costly and challenging to maintain. It also aims to improve the efficiency of payments and reduce cash handling costs.

Users access the Sand Dollar through authorized financial institutions (AFIs) via mobile apps or payment cards. The central bank issues the digital currency to the AFIs, which then distribute it to users. The Sand Dollar’s success offers valuable real-world lessons regarding CBDC adoption, technological implementation in small economies, and the practical challenges of promoting financial literacy and inclusion (Wenker, 2022).

6.5. Other Notable Global Initiatives

Beyond these prominent examples, numerous other countries are actively engaged in CBDC research and development:

  • India (e-Rupee): The Reserve Bank of India (RBI) launched wholesale and retail pilots of its e-Rupee in late 2022. Motivations include improving payment efficiency, fostering innovation, and reducing reliance on cash. The retail pilot has involved a significant number of banks and users.
  • Nigeria (eNaira): Launched in October 2021, the eNaira was the first African CBDC. It aims to boost financial inclusion, streamline remittances, and enhance payment efficiency. Despite initial challenges in adoption, it represents a significant step for digital currency in emerging economies.
  • Sweden (e-Krona): Driven by the rapid decline in cash usage, the Riksbank (Sweden’s central bank) has been exploring the e-Krona since 2017. Its motivation is to maintain public access to central bank money and ensure the resilience of the payment system in an increasingly cashless society. The e-Krona project is highly focused on exploring the legal and technical feasibility.
  • United Kingdom (Digital Pound): The Bank of England and HM Treasury formed a joint taskforce to explore a potential digital pound. While no decision on issuance has been made, the focus is on maintaining public trust in money, ensuring access to central bank money in a digital age, and enabling innovation. The design principles emphasize privacy and maintaining a two-tiered structure.
  • Canada (Project Jasper): The Bank of Canada has focused primarily on wholesale CBDC research, exploring the use of DLT for interbank settlements and securities clearing. This reflects a priority on financial system efficiency and resilience for institutional players.
  • South Korea: The Bank of Korea (BOK) has significantly expanded its CBDC research, exploring various use cases including financial inclusion and interoperability with private stablecoins (Bank of Korea, 2023; Reuters, 2025). South Korea’s high rate of crypto adoption (Financial Times, 2025) likely influences the BOK’s interest in providing a robust public digital alternative.

6.6. Cross-Border CBDC Initiatives

Recognizing the potential of CBDCs to revolutionize international payments, several multilateral initiatives are underway:

  • Project Dunbar (BIS, RBA, BNM, MAS, SARB): Explored the use of shared platforms for multi-CBDC international settlements, aiming to reduce costs and improve speed for cross-border transactions.
  • Project Mariana (BIS, BoF, MAS, SNB): Focused on exploring wholesale CBDCs for cross-border foreign exchange trading, demonstrating how tokenized FX could enhance efficiency.
  • Project mBridge (BIS, PBOC, HKMA, BoT, CBUAE): This project aims to build a multi-CBDC platform for wholesale cross-border payments, demonstrating its potential for real-world application in trade and remittances.

These global developments highlight a diverse range of approaches to CBDC design and implementation, reflecting unique national circumstances and priorities. However, common themes persist, including the pursuit of efficiency, financial inclusion, and monetary sovereignty, all while navigating the complexities of technological innovation and preserving financial stability.

Many thanks to our sponsor Panxora who helped us prepare this research report.

7. Implications for Monetary Sovereignty and Financial Stability: Navigating a New Frontier

The introduction of CBDCs carries profound implications for two bedrock principles of central banking: monetary sovereignty and financial stability. Their careful design and implementation are crucial to harness their benefits while mitigating potential risks.

7.1. Reinforcing Monetary Sovereignty in a Digital Age

Monetary sovereignty refers to a nation’s exclusive right and capacity to issue, control, and manage its national currency, thereby enabling the central bank to conduct independent monetary policy. In an increasingly digital world, this sovereignty faces challenges from various fronts:

  • Rise of Private Digital Currencies: The widespread adoption of private cryptocurrencies or foreign stablecoins could lead to ‘digital dollarization’ or ‘cryptoization,’ where a foreign digital currency becomes a de facto medium of exchange within a country. This could undermine the domestic central bank’s ability to control its money supply, influence inflation, and manage financial conditions, effectively ceding monetary control to foreign entities or private actors. A national CBDC provides a sovereign, state-backed alternative, ensuring that the primary form of digital money remains under national control.
  • Maintaining Policy Effectiveness: A national CBDC ensures that the central bank’s monetary policy tools remain effective. By providing a direct liability of the central bank, a CBDC ensures that the base money of the economy remains firmly within the central bank’s purview, allowing for direct and efficient transmission of policy decisions. This is particularly relevant for managing liquidity in the financial system and influencing interest rates.
  • Geopolitical Influence: In a geopolitical context, the issuance of a widely adopted CBDC by a major economic power could enhance its currency’s international standing and influence, potentially reshaping the global financial architecture and the dominance of reserve currencies. Conversely, countries that lag in CBDC adoption might find their financial systems more susceptible to external digital currency influences, impacting their economic autonomy.

7.2. Bolstering and Challenging Financial Stability

Financial stability refers to a state where the financial system is able to facilitate the efficient allocation of resources and the assessment and management of financial risks, even in the face of adverse shocks. CBDCs present both opportunities and challenges to this stability:

Potential Benefits for Financial Stability:

  • Enhanced Resilience of Payment Systems: As discussed, a CBDC can serve as a robust, alternative payment rail, increasing the overall resilience of the national payment system against disruptions such as cyberattacks or failures in commercial bank infrastructure. This diversification of payment methods reduces systemic risk by ensuring continuity of critical financial services.
  • Improved Crisis Management: In times of financial crisis, a CBDC could enable the central bank to act as a more effective lender of last resort by providing a direct mechanism for injecting liquidity into the economy or directly to distressed financial institutions. This could bypass traditional bottlenecks in the commercial banking system, allowing for faster and more targeted interventions.
  • Better Data for Macro-Prudential Policy: With appropriate safeguards for privacy, the data generated by CBDC transactions could offer central banks more granular and real-time insights into economic activity and financial flows. This enhanced data visibility could improve the effectiveness of macro-prudential policies, allowing regulators to identify and mitigate systemic risks more proactively.

Potential Risks to Financial Stability:

  • Accelerated Digital Bank Runs: The ease with which funds can be transferred from commercial bank deposits to a risk-free CBDC account could lead to faster and potentially more severe bank runs during periods of financial stress. This ‘liquidity drain’ could destabilize commercial banks, necessitating rapid and substantial liquidity provision from the central bank, potentially testing the limits of existing frameworks. Mitigation strategies such as holding limits and tiered remuneration are crucial to manage this risk.
  • Cybersecurity Vulnerabilities: A national CBDC system would be a critical piece of national infrastructure, making it an attractive target for sophisticated cyberattacks by state-sponsored actors or criminal organizations. A successful attack could severely disrupt payment systems, undermine public trust, and have widespread economic consequences. Designing the system with robust, multi-layered cybersecurity protocols, continuous threat monitoring, and resilience mechanisms (e.g., offline capabilities, backups) is paramount.
  • Systemic Risk from Centralized Failure: If the CBDC system is heavily centralized, it could become a single point of failure. Any significant technical malfunction, outage, or cyber breach could have systemic repercussions across the entire economy, affecting all financial transactions. A balanced approach to decentralization, robust disaster recovery planning, and resilient infrastructure are essential to counter this risk.

7.3. Legal and Regulatory Frameworks: Laying the Groundwork

The introduction of a CBDC necessitates significant legal and regulatory adaptations. New legislation may be required to formally define the CBDC as legal tender, establish its status as a central bank liability, and clarify the roles and responsibilities of all participants in the CBDC ecosystem (e.g., central bank, commercial banks, payment service providers, and users). This includes:

  • Legal Tender Status: Ensuring the CBDC is legally recognized as a valid form of payment for all debts and obligations.
  • Data Protection and Privacy Laws: Adapting existing privacy regulations or enacting new ones to govern the collection, storage, and use of CBDC transaction data, striking the necessary balance with financial integrity requirements.
  • AML/CFT Compliance: Developing robust frameworks for combating money laundering and terrorist financing within the CBDC environment, considering the design choices related to anonymity.
  • Cross-Border Regulatory Harmonization: For international payments, the absence of harmonized regulatory frameworks across jurisdictions could hinder seamless cross-border CBDC transactions. International cooperation is essential to develop common standards and legal interoperability.

These complex legal and regulatory considerations underscore that a CBDC is not merely a technological innovation but a fundamental shift in the very nature of money, requiring comprehensive societal and legislative consensus for its successful and safe implementation.

Many thanks to our sponsor Panxora who helped us prepare this research report.

8. Conclusion: The Future of Money in the Digital Era

Central Bank Digital Currencies represent a profoundly transformative development in the global financial landscape, holding the potential to redefine the nature of money and its interaction with society. They offer compelling opportunities to significantly enhance the efficiency, speed, and cost-effectiveness of domestic and international payment systems, potentially driving down transaction costs for consumers and businesses alike. Furthermore, CBDCs stand as a powerful tool to promote financial inclusion, extending access to secure and affordable digital payment services to underserved populations, thereby fostering broader economic participation and facilitating direct, efficient government disbursements.

Crucially, CBDCs enable central banks to reinforce and maintain monetary sovereignty in an increasingly fragmented digital currency ecosystem. By providing a stable, sovereign-backed digital alternative to private cryptocurrencies and foreign digital currencies, they ensure that the national currency remains the bedrock of the financial system, allowing central banks to effectively implement monetary policy and safeguard financial stability. Moreover, the underlying technology of CBDCs can foster significant innovation in financial services, paving the way for new business models and programmable money applications.

However, the implementation of CBDCs is not without its complexities and risks. Central banks must meticulously navigate critical design choices concerning their structure (wholesale vs. retail, account-based vs. token-based), the delicate balance between user privacy and regulatory oversight, and the underlying technological architecture. The potential for disintermediation of commercial banks, the implications for financial stability, and the paramount need for robust cybersecurity measures demand careful consideration and proactive mitigation strategies. The risk of faster digital bank runs and the creation of a single point of failure necessitate resilient designs and adaptable regulatory frameworks.

Ongoing research, extensive public discourse, and the myriad of diverse pilot projects currently underway worldwide will continue to inform the evolution of CBDCs. These real-world experiments provide invaluable insights into technical feasibility, user adoption, and macro-financial implications, shaping best practices and revealing unforeseen challenges. There is no one-size-fits-all approach; the optimal design and rationale for a CBDC will invariably depend on a nation’s unique economic structure, existing payment landscape, regulatory environment, and policy objectives.

Ultimately, CBDCs are more than just a technological upgrade; they represent a fundamental reconsideration of how money functions in a digital age. Their successful and responsible integration into the financial system has the potential to usher in a new era of financial innovation, efficiency, and inclusion, profoundly shaping the future of money for generations to come.

Many thanks to our sponsor Panxora who helped us prepare this research report.

References

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