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Rise of Banking With CBDC by Prasanna Lohar
Rise of Banking With CBDC by Prasanna Lohar
Rise of Banking
with CBDC
Author -
Prasanna Lohar,
Chief Innovation Officer, DCB Bank
November 2021
With the rise of alternative currencies (e.g., cryptocurrencies, NFTs, tokens of various kinds), central banks
face the challenge of maintaining control over the national financial systems. Money is getting more and
more digital, with and without the interference of national regulators, so the central banks of many countries
have decided to partake in the digital evolution instead of remaining the bystanders and observers thereof.
An additional factor in favor of new CBDC projects is the quick success of Asian CBDC projects, like those
launched by the Chinese PBOC and the banking authority of Singapore. With the backing of the central banks
of China and Singapore, these CBDCs are more appealing than crypto assets in terms of stability and
guarantees. Thus, to prevent the outflow of capital to other countries’ CBDCs, the USA and several European
countries have also launched CBDC research and development efforts.
Launching CBDCs, central banks give users a safer and more stable
digital currency option that may attract large funds back to the
national financial sector.
About Author
Prasanna Lohar
Head Digital Innovation Architecture, DCB Bank Ltd
TOP 50 CIOs, Top 100 Innovative CIOs, Digital Leader of the Year,
Top 20 BFSI Leaders,
Most 50 Payment Influential,
Leading Indian Blockchain & Fintech Forum
Table of Contents
Central Bank Digital Currency – Game Changers .................................................................................................................... 2
1.0 Background ............................................................................................................................................................................... 5
2.0 CBDC Fundamentals .............................................................................................................................................................. 6
3.0 Why CBDC?................................................................................................................................................................................ 7
4.0 Prerequisites for CBDC Implementation? .................................................................................................................... 7
5.0 Components of CBDC Implementation? ........................................................................................................................ 7
6.0 CBDC vs. Cryptocurrencies ................................................................................................................................................. 8
7.0 CBDC vs. Stable Coins ........................................................................................................................................................ 10
8.0 Types of CBDC Implementation? .................................................................................................................................. 12
9.0 CBDC Considerations ......................................................................................................................................................... 14
10.0 CBDC Design considerations........................................................................................................................................... 15
11.0 Why CBDC attention is picking up?.............................................................................................................................. 18
12.0 Benefits of CBDC .................................................................................................................................................................. 20
13.0 Drawbacks of CBDC ............................................................................................................................................................ 21
14.0 Best Practices for CBDCs .................................................................................................................................................. 22
15.0 CBDC Acceleration .............................................................................................................................................................. 24
15.1 THE INDIAN BANKING SECTOR .................................................................................................................................... 24
16.0 GLOBAL IMPLEMENTATION .......................................................................................................................................... 27
17.0 Concluding Remarks .......................................................................................................................................................... 29
18.0 References .............................................................................................................................................................................. 30
1.0 BACKGROUND
While the world grappled with Covid-19 in 2020, central bank digital currencies (CBDCs) quietly moved
forward, largely unremarked upon. By contrast, private cryptocurrencies such as bitcoin continued to
attract publicity
Central bank digital currencies (CBDCs) have recently emerged as a hot topic in the financial space. Banks,
Institutions, and governments are performing research and analysis on the economic and technical
feasibility of introducing a new form of digital money and its impact on monetary and fiscal policy.
A Bank of International Settlements report states that over 80% of central banks are already researching
CBDC. It begs the question: why are these institutions preoccupied with CBDCs? In this explainer, we'll
cover CBDCs, their importance in digital economies, countries exploring their use cases, and the road to
mass adoption.
To date, the impact of CBDCs on the national financial systems is perceived as positive and promising,
mainly in terms of monetary sovereignty and financial stability preservation. With the booming rise of
private payment networks, central financial authorities are losing control of financial flows increasingly
concentrated in the parallel monetary systems.
Finally, the launch of CBDCs is seen as a positive step forward in the innovation of national banking sectors
and introducing new digital infrastructures in response to the broader pressures of technological progress.
In simpler terms, CBDC is short for Central Bank Digital Currency, an electronic form of central bank money
that citizens can use to make digital payments and store value. A CBDC offers three main elements:
• A digital currency
• Universally accessible
Thus, a central bank digital currency (CBDC) is an electronic form of cash that can be exchanged much like
you exchange traditional “money”. In the case of CBDC, a central database ultimately controlled by a central
bank issues the currency and provides every “e-dollar” or “e-yuan” with a unique serial number to identify
it.
CBDC is indeed reasonably similar to the bills in your wallet. But storing and transacting with physical
currency is very inefficient and tedious. A digital representation of that value would be much more
convenient and efficient.
“The Central Bank Digital Currency (CBDC) is a legal tender and liability of
a nation's central bank in the digital form. It is denominated in a sovereign
DEFINE CBDC currency and appears on the balance sheet of a nation's central bank.”
3. Effective Governance
The basic notion of a digital currency (replacing the need for paper notes and coins as a means of exchange
with computer-based money-like assets) dates back more than a quarter of a century. Early efforts at
creating digital cash—such as DigiCash (1989) and e-gold (1996)—were issued by central agencies. The
emergence of Bitcoin in 2009 dramatically altered this model in two important ways: by establishing a
decentralized (blockchain-based) ledger for transaction execution and record keeping, and by creating a
(now) widely traded currency outside the control of any sovereign monetary authority. Thousands of
similar decentralized cryptocurrencies now exist, collectively generating billions of dollars in global
With the large share of modern transactions conducted online via digital wallets and mobile banking, one
might find the CBDC concept confusing. Let’s consider its key distinctions from fiat currency and
cryptocurrencies to delineate the CBDC’s spot in the modern financial system, both national and
international.
1. Fiat money is physical money issued by the central bank in the form of banknotes.
2. Digital money is the equivalent of fiat money that a person can exchange with the authorized bank,
with the sum of assets not changing.
3. Crypto money is a distinct type of asset separate from the traditional banking system, with crypto
coins available for the exchange for money or other value but not regulated with any central
financial authority.
4. CBDC is a cryptocurrency equivalent of digital and fiat money, having the same technological
infrastructure with crypto assets but at the same time backed by the central banking regulator. In
this way, CBDC is fundamentally different from cryptocurrencies in terms of the issuer authority as
it poses no risks to investors and holders in terms of tremendous volatility and loss of value.
is a cryptocurrency that is not regulated, while CBDC is completely regulated and monitored by the
monetary authorities of a nation. That means to say Stablecoin is decentralized while CBDC aims at being
centralized.
1. Price stability
One of the biggest advantages of holding stablecoins is that during token development, it is designed to be
backed by a national currency like US Dollar, Euro, or physical assets like gold or oil. Thus, stablecoins
offer a kind of stability to the highly volatile crypto market. That is why most of the DeFi lending
Stable coin development is done on the distributed ledger technology (DLT). For example, TrueUSD is a
USD-backed ERC20 stablecoin, which means it is built on the Ethereum blockchain. Developed on the
blockchain, it eliminates the need for banks or central bodies to keep issues like double spending and
manipulation in check.
3) Remittance
The use of blockchain in stablecoins makes them a suitable asset for enabling a borderless financial
system. The stablecoins attract lower transaction fees and shorter transfer times, making global financial
inclusion possible.
Stablecoins can be custom programmed to meet the needs of the users. For example, a stablecoin can be
used to transfer USD value or gold value or it can be designed to be used as branded stablecoins. This is
Central banks are trying their hands at DLTs to issue central bank digital currencies. That’s because
stablecoins have proved that there exists a lot of opportunities in the space. While these do pose a threat to
the popularity of stablecoins, the fact is that stablecoins have an edge over CBDCs.
The CBDC will be issued by the central bank. As a result, the banks will always have some kind of control
over the CBDCs. On the contrary, the decentralized stablecoin offered by bodies like Maker Decentralized
Autonomous Organization (or MakerDAO) is emblematic of the fact that the stablecoins can be driven by
2) Limited use
It is believed the CBDC will be used mostly for transactions between financial institutions within a
country whereas private stablecoins like USDT, TrueUSD can be used as a general-purpose currency
across borders.
It’s a fact that governments will ensure their CBDC’s are always backed by fiat currency. The fiat is prone
to manipulation like quantitative easing which will impact the price of CBCD, thus exposing it to the same
However, stablecoins can be backed by real-world assets like gold, oil, and more. This will ensure the
The main advantages of stable coin development are steady value, margin trading opportunities, value
stability, and censorship resistance. At Antier Solutions, we enable the development of secure, efficient, and
trustless stablecoins backed by fiat currency or any commodity. Right from the ideation to the final product,
Retail CBDC, based on distributed ledger technology, is traceable, anonymous, and available around the
clock. It offers possibilities for interest rate applications, as well. Due to these advantages, a retail central
bank digital currency focuses, in particular, on supporting the general public. Additionally, it helps lower
There are two possible variants of retail CBDCs are possible, depending on the type of access they provide:
1. Value- or cash-based access: This system involves CBDCs that are passed onto the recipient
through a pseudonymous digital wallet. The wallet will be identifiable on a public blockchain and,
much like cash transactions, will be difficult to identify parties in such transactions.
2. Token- or account-based access: This is similar to the access provided by a bank account. Thus,
an intermediary will be responsible for verifying the identity of the recipient and monitoring illicit
activity and payments between accounts. It provides for more privacy. Personal transaction data is
shielded from commercial parties and public authorities through a private authentication process
Wholesale CBDC increases payments and security settlement efficiency while resolving liquidity and
counterparty risk issues. It’s a great fit for financial institutions which have reserves deposited in a central
bank. With their capability to improve wholesale financial systems' speed and security, even central banks
consider wholesale central bank digital currency a favored alternative to existing systems today.
CBDC - TYPES
3. CBDC must be accepted as a means of payment by all sizes of business and by the government
4. Must not introduce the risk of destabilising the financial sector & mechanisms to give effect to
policy decisions regarding its supply & movement
5. Consumers must be able to own and transact in CBDC without the need for a bank account
6. Consumers & businesses must be provided with channels to obtain or return CBDC in exchange
for cash & commercial bank money
7. It must enable instant peer-to-peer transfer of value without clearing and settlement in today’s
terms
Despite numerous differences between crypto-assets and CBDCs, the latter still share much of the digital
infrastructure with blockchain-based coins and tokens. Thus, most central banks embarking on the CBDC
projects consider the available technological options from the blockchain industry to base their projects
on. Once the CBDC project is planned, its creators need to determine several critical features for CBDC
design, including the models, infrastructure, and access options for the concrete CBDC.
Layer 1 : Is it
available to regular Layer 2 : Is the
people or only technology
banks / Realtime ? centralized or
Does it bear decentralized?
interest or not?
10.1 Architecture
The choice of models for the CBDC technical architecture deals with the issue of intermediation, i.e., who
will be the primary holder of CBDC funds. Here, two options are possible –
1. The one-tier option presupposing the CBDC account location with the country’s central bank.
2. The Two-tier model presupposes two kinds of intermediation, one of the central banks and the
Experts praise the one-tier model for its simplicity and high ease of use, as the direct model ousts the need
for any intermediaries in the CBDC transaction process. However, following this model is connected with
some serious limitations hindering its adoption in real life. First, the additional workload connected with
KYC/AML compliance checks, account storage, transaction processing, and audits may become
disproportionate for the current infrastructure of central banks. Second, the CBDC users will enjoy privacy
in terms of not sharing their details with private banks but will lose privacy concerning the government as
the central bank-processed CBDC transactions will be disclosed to the governmental officials. Third, the
one-tier model presupposes the transfer of significant financial amounts from the traditional banking
system to the CBDC sector, which is also connected with harmful effects on the banking sector. Thus, the
one-tier model is currently regarded as less workable than the second option.
The two-tier model’s principles allow CBDC users to hold their digital assets in private banks or non-
banking institutions (e.g., FinTech organizations). Under this model, the central bank assumes an obligation
to audit the private banking service providers and ensure that the proper amount of CBDC is held on the
user accounts. In this way, the central bank is freed from the need to deliver banking services to the
population, retaining only the responsibilities of a central regulator and security guarantor.
10.2 Access
As it comes with any other financial solution, the issue of user access to funds is one of the critical design
considerations surrounding CBDC development. The central banks need to determine an approach to
ownership authentication, which, given the specifics of digital cash, can be conducted in two ways – from
• It relates to the confirmation of user access to, and ownership of, specific amounts of CBDC. In this
way, the owner that has access to a digital wallet is automatically authorized to conduct
transactions with their assets, which guarantees a degree of anonymity similar to that of
cryptocurrencies.
• Token-based approach is much more promising in terms of financial inclusion, it undermines the
KYC/AML regulations related to financial transactions, thus hindering money auditing and opening
• It follows the path of traditional money, requiring the conventional confirmation of user identity
• The account-based approach is much safer in traditional banking terms, yet it is not consistent
with the financial inclusion philosophy behind CBDC. Thus, central banks still need to negotiate the
costs and benefits of each approach to make the CBDC projects workable and beneficial for the
target population.
In terms of CBDC transactions, central banks currently have two options – using their central databases or
resorting to the innovative distributed ledger technology (DLT). Using the central database would liken
CBDC transactions to those with fiat money. At the same time, the implementation of DLT technology makes
CBDC transactions much more flexible and scalable, though coming with certain overhead costs and new
technology adoption issues. Overall, the positivity about DLT use is higher, meaning that the innovative
Almost every central bank speech about CBDCs at some point mentions cryptocurrencies, and a
fear that Bitcoin and the like will play a larger role in payments.
Stable coins are cryptocurrencies designed to have a completely stable value by being backed 100
percent by purportedly safe and liquid assets. The most notable example is Facebook’s Diem, the
rechristened Libra.
3. Fear of China
Certainly, a major motivation of many foreign central banks is China’s plans for DCEP. There is no
1. CBDCs combine the strengths of fiat money (safety and stability) and cryptocurrencies (privacy and
decentralization).
2. CBDCs give greater access to cash in countries with large unbanked populations.
3. Wholesale payments are likely to get easier and more affordable with CBDCs.
4. With CBDCs, electronic benefits payments can become much more efficient and accessible for the
needy populations.
5. Cross-border payments are likely to get cheaper and more manageable with CBDCs.
6. CBDC as digital currency possesses greater resilience than fiat money today.
7. CBDCs are a perfect variant for those wishing to explore alternative currencies but skeptical about
crypto assets.
2. The anonymous nature of CBDC poses challenges for KYC/AML authorization, thus increasing the
3. CBDC launches are still surrounded by data privacy concerns, with all design models having critical
privacy flaws.
4. CBDC projects often come with the concentration risks, meaning that they may become a real threat
5. CBDCs, given their exclusive digital nature, are vulnerable national security objects, with the risk of
a hacker attack to destroy the CBDC system being more realistic than any external damage to fiat
currency is.
7. CBDCs are still very costly in terms of development and launch because of the high expenditures on
On the one hand, many commercial banks consider CBDCs as a threat to their prosperity because the outflux
of finance from the traditional banking system to CBDC is inevitable. CBDC is a cheaper and more efficient
medium for transactions and payments, which presupposes its appeal to large populations and increasing
competition between banks working with fiat money and CBDC-processing FinTech companies.
On the other hand, CBDCs launched via the two-tier model in some countries represent an additional
opportunity for growth and service coverage expansion for private banks. The major determinant of
embracing the transition to CBDCs is for banks to innovate their infrastructure, adopt innovative
technology, and react to the CBDC launch proactively with cutting-edge payment and settlement systems.
CBDC storage is an issue of financial architecture primarily concerning the authorized exchange of fiat
currency for CBDCs. If the national CBDCs are one-tier, only the central bank can issue this currency to users
and store it. If the CBDCs are two-tier, the central bank authorizes multiple actors, including commercial
banks and FinTech organizations, for the CBDC transactions and storage.
At present, two approaches to acquiring CBDC are considered by most governments planning the CBDC
launch – a direct exchange of government bonds for CBDC and direct CBDC purchases for cash. The first
method presupposes a more centralized and government-controlled process of CBDC dissemination, while
the second one is much more liberal in terms of the population access to the CBDC funds.
The regulatory environment for third-party providers of services involving CBDC is determined within each
country depending on the overall financial sector’s regulations and rules. However, under any conditions,
the central bank remains the ultimate authority licensing third parties for operations with CBDC, including
Methods of preparing for the CBDC introduction vary depending on the CBDC design specifics chosen by
each separate central bank. Thus, the launch of interest-bearing CBDCs would force banks to offer better
interest rates on conventional deposits to retain clients. A more nuanced relationship between fiat money
and CBDC within the state financial system is also expected to pose challenges for liquidity management.
However, with proper digital innovation and infrastructural changes, most banks are likely to benefit from
CBDC adoption by getting more clients and expanding their outreach to previously unbanked and
underbanked populations.
A digital Rupee will help the RBI achieve financial inclusion, shift to a resilient and cashless society, and
reduce the cost of printing and handling cash ; Currently, there is a wide disconnect between the number
of bank accounts and the number of mobile phone connections, with there being 1.2 billion mobile phone
connections but only 582 million bank accounts CBDC could possibly help bridge this disconnect as users
would only require internet connection and a mobile phone and not a bank account.
The Indian banking sector is one of the largest networks of banks in the world, catering to more than 80
percent of India’s population. It consists of 18 public sector banks, 22 private sector banks, 46 foreign
banks, 56 regional rural banks, 1,542 urban cooperative banks, and 94,384 rural cooperative banks. A
general-purpose CBDC has the potential to disrupt this intermediary network. Thus, RBI must assess
thoroughly and adopt a cautious approach as it would have wide-scale ramifications on financial inclusion
and employment
“Politics will be central to the success or failure of CBDC development. Political decisions will need to be
made on the values of the payments system to be adopted by users—a CBDC will be the primary factor in
the allocation of resources after all”
With DCEP, China aims to develop an alternative to US Dollar as a reserve currency, retain monetary
sovereignty and counter the possible growth of Libra. India too should jump on the bandwagon so as to not
be left far behind.
2014 A more recent example was Ecuador’s Sistema de Dinero Electrónico in 2014.
Neither Avant nor Dinero Electrónico used blockchain. Bakong used a form of blockchain called
Hyperledger Iroha
PRIVACY - CBDC makes it easier for governments to view transactions. However, most governments can
already access records of financial transactions. The real threat to the privacy of using physical cash comes
if introducing CBDC is combined with bans on physical cash.
Privacy will be a concern. Cash payments afford citizens some anonymity and privacy, which CBDCs may
not be able to provide
The implication is that a thoughtless implementation of CBDC without mitigating actions could have a
drastic and adverse effect on the economy. It is probably one of the biggest reasons why central banks have
not yet jumped at the opportunity to create a digital currency that would have legal tender status but are
running analyses on how to solve the problem best.
There is not yet one final answer on how to mitigate the effect of CBDC on loans and banks' balance sheets.
There are quite a few approaches to tackling this problem, and the real answer might lie in a combination
of them.
For example, banks could transparently offer their customers that they deposit their CBDC so that they can
use the capital for loans. The customers could choose to expose themselves to the risks we discussed above
in exchange for interest, but they would do so well-informed and willingly.
Another approach would be for the banks to take out loans from the central banks to fund their customers'
loans. Banks use such sources of capital already, and it would be primarily.
It is only a matter of time until the analyses provide the right combination of measures to implement.
The main reason people would prefer CBDC over a bank account is that CBDC is not at risk when banks fail.
The removal of that risk would be beneficial to individuals and the economy alike.
Furthermore, the transfer of money across banks and country boundaries becomes much more
straightforward. Various bank systems would not need to interact with each other to facilitate such
payments. All that is required is an update of the record at the central bank. This simplicity makes the
process faster and cheaper.
Early CBDC experiments took place in Finland in the 1990s and Venezuela in 2018, but a long list of national
governments and central banks are now rushing to develop digital forms of existing currencies in order to
The United States is considering a digital dollar, following a hearing by the Senate Banking Committee in
In October 2020, a group of seven central banks including the US Federal Reserve, the Bank of Japan, the
European Central Bank, BIS (Bank for International Settlements), the Swiss National Bank, Bank of Canada,
Sveriges Riksbank in Sweden, and the Bank of England, indicated an intention to assess the feasibility of
Other significant countries are considering or beginning to implement CBDCs including China and Russia
as well as a host of smaller nations including South Africa, Uruguay, Barbados, Switzerland, Thailand and
1. A central bank digital currency is the virtual form of a country's fiat currency.
3. CBDCs promote financial inclusion and simplify the implementation of monetary and fiscal policy.
5. Although they aren't formally being used, many countries are exploring the introduction and use of
Central banks have been providing trusted money to the public for hundreds of years as part of their public
policy objectives. Yet the world is changing. To evolve and pursue their public policy objectives in a digital
world, central banks are actively researching the pros and cons of offering a digital currency to the public
(a "general purpose" central bank digital currency (CBDC)).
Given the considerable efforts and attention that central banks are dedicating to central bank digital
currencies, they will become a reality soon. Introducing CBDCs to the world will help boost crypto adoption
as people will have access to the platforms to convert cryptocurrencies into legal tenders. Moreover, it will
also help in the financial inclusion of the bankless population.
CBDCs will have far-reaching implications on the future of finance, including the buying and selling of digital
assets and securities. However, the question is when? This answer will rely on the foundations of a
dedicated legal framework to facilitate the transparency, distribution, and issuance of a digital form of
money by global governments. As regulators and central banks take concrete steps in the direction of
establishing CBDCs, the world will begin to embrace digital currencies as a standard.
18.0 References
1. https://www.bis.org/
2. https://hedera.com/
3. https://www3.weforum.org/docs/WEF_Central_Bank_Activity_in_Blockchain_DLT.pdf
4. https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp
5. https://www.pwc.com/gx/en/industries/financial-services/assets/pwc-cbdc-global-index-1st-edition-april-2021.pdf
6. https://www.actuaries.org.uk/system/files/field/document/Understanding%20CBDCs%20Final%20-%20disc.pdf
7. https://www.brookings.edu/wp-content/uploads/2020/07/Design-Choices-for-CBDC_Final-for-web.pdf
8. https://www.payments.ca/sites/default/files/paymentscanada_centralbankdigitalcurrency_thefundamentals_2020.p
df
9. https://www.bankofcanada.ca/2020/06/staff-analytical-note-2020-10/
10. https://daml.com/blog/engineering/what-is-a-central-bank-digital-currency-and-why-should-people-prefer-cbdc-
over-bank-accounts
11. https://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/CBDC22072021414F2690E7764E13BFD41DF6E50AE0AE.PDF
12. https://hbr.org/2021/10/what-if-central-banks-issued-digital-currency
13. https://www.antiersolutions.com/stablecoin-vs-cbdc-who-is-positioned-to-win/