Introduction

CBDC (Central bank digital currency) is money or a financial instrument for payments that has no physical state. You might think that CBDC is a cashless form of payment, but no, this technology has different innovations and is different from cash and non-cash finance. The only similarity between them is that they are issued by the Central Bank of the country.  

Any comparison or finding any similarity of CBDC with cryptocurrencies is also wrong. Their only similarity is that they function on blockchain, but crypto is decentralised and CBDC is centralised finance. However, the impact of CBDC on the financial systеm – cannot be overstated. CBDC innovations completely change the essence of money. For example, there are 2 kinds, payment security will be higher than it is now, etc. But like any new technology, the introduction of centralised digital currencies can have unexpected consequences. After all, even financial experts cannot predict the impact of CBDC on the financial systеm, especially the economy. But in our article, we look at the possible outcomes, development and future implementation of virtual centralised finance.

Current status of CBDC development

In 2024, more than 130 countries were developing their own digital currency, although the development itself has been underway since 2018. But China is officially considered the first country to issue digital money. The digital yuan was approved on 13 December 2021. The monetary policy of this country in relation to CBDC is extremely ambitious. The authorities introduce digital yuan not as an addition to the already existing cash and non-cash finances, but as a full-fledged replacement! The same attitude in the Russian Federation, although the introduction of the digital ruble was reported back in September 2023, it was never introduced. But in the EU, USA and Ukraine the attitude to CBDCs is different, as these countries want to introduce them as an addition, not a replacement.  At least for now.

In September 2021, after signing the relevant law, the NBU in Ukraine opened the E-Hryvnia project. In October 2022, in partnership with banks, the NBU created the concept of digital hryvnia.

In the second half of 2024, it is planned to launch a CBDC pilot project in Ukraine. The purpose of this is to assess the economic impact and understand whether there is a need to implement CBDC. Many developed countries will also start piloting their CBDCs.

CBDC potential for global finance

Global initiatives imply 2 types of CBDC: 

Wholesale is intended for spending by states and international organisations. Retail is for spending by legal entities and individuals (population).

Wholesale CBDC will reduce corruption, help fight money laundering and terrorist financing. Since all transactions will be recorded, regulation of spending will become easier, and if a minimum amount is lost that exceeds the amount of the fee, proceedings can be initiated at the same minute. It is not known if there will be privacy of transactions in CBDC, but it will definitely be inferior to anonymous cryptocurrencies. So CBDC’s role in the digital economy is to increase security and fight financial crime.

If you look at retail CBDC, there are pluses here too, for example with international payments. Nowadays, to transfer money abroad, you need to have an account in a foreign bank. And when transferring cash, the commission can be up to 14% and the waiting time is a couple of weeks. If you use CBDC, the commission is a couple of cents and the waiting time is a few seconds.

But these are not the only advantages of digital currencies. It will be possible to keep track of all spending in one place, rather than searching through bank apps, remembering where you put the notes, etc. Although the blockchain technology for CBDC does not claim to make the blockchain public, or maybe private, but the blockchain is bound to be immutable. Everyone will be able to verify their transactions and payments. So, the security of digital currencies is taken into account in its own concept.

But until such technology is unavailable, you can use our AnyExchangeBest service for international transfers. Already now we make i nternational transfers , delivering by courier the amount even in cash to almost any country. There is no need to convert cryptocurrency into cash.

Also, money can be programmed, making payments automatic. This is already a more technical issue, although it could threaten financial security and freedom.

Technological aspects of CBDCs

All CBDCs will function on a blockchain, which will be centralised. So the CBDC blockchain will also be private, although this is not specified in the concept. The issuer, validator and miner in Ukraine will be the NBU, in the US – the Fed, etc. 

Payments will be processed either by the central bank or the state. So, in case of losses, the user will know who to ask and who will reimburse him. If the user’s finances turn out to be CBDC, which used to be used for crime, the user’s reputation and possibly finances will be at risk of being blocked. Even then, assuming the user is innocent? The central bank will be responsible for making all the payments that led to this. 

By the way, if the CBDC operates on a private blockchain and is centralised, it would be possible to close a criminal’s account in a couple of clicks. There is no information about this in the concept of this innovation, but why not use it? Even if blocking is not provided as a function, it will be possible to create a blacklist of people whose payments the central bank will not process. The very possibility of such a situation already threatens human rights. This is the first problem that needs to be solved before the CBDC is launched. 

Advantages and challenges of CBDC

There is no doubt that CBDC has a number of advantages and is a technological innovation, the implementation of which cannot be stopped. But the challenges and risks of CBDC cannot be ignored.

Are the risks serious? – Renowned author Robert Kiosaki compared CBDC to “big brother” from George Orwell’s book “1984”. The governor of Texas has said that as long as he is governor, there will be no CBDC in his state. U.S. presidential candidates have stated that they will not impose CBDC.  

Possible blocking of accounts and invasion of privacy when all spending would be visible. With cash, there is simply no such problem. Even centralised stablecoins are harder to block: You have to write a formal request, provide proof and there is no guarantee that the issuer will block the criminal’s account. Is CBDC losing out to cryptocurrency and a technology as backward as cash? As it turns out, yes.

Also, CBDC technology requires electricity. So, in case of a blackout, the entire economic sphere of one area will be paralysed. In order to prevent this, it is necessary to have backup generators in every building, and to introduce CBDC only as a supplement. After all, if there is a power outage, only cash can be the answer.

After the CBDC pilot project, it is necessary to conduct a thorough analysis, listen to experts and make a decision. If there is no interest, it may not even be introduced, people will not use it.

A negative example is Nigeria. In Nigeria, restrictions on cash withdrawals were introduced, and the next day there were popular unrest. In addition, a couple of months after the introduction of CBDC the currency of Nigeria depreciated almost twice, and for the next 10 months (from June 2023 to May 2024) even more. Thus, the country’s currency has depreciated threefold in less than 2 years. 

Such problems can only be solved by a tight monetary policy regarding the issue and issuance of CBDCs so that there is no inflation. A transparent systеm to inspire confidence. As well as a clear regulation and regulatory framework that should be in place before CBDC issuance.

Regulation and legal aspects

In early 2022, Ukraine introduced a law regulating digital assets. At that time it was about cryptocurrency, but this law is not suitable for regulating CBDC. In addition, if the law does not enjoy popular support – CBDC will remain, at best, an interesting and unsuccessful experiment.

We need to target cryptocurrency legislation. After all, despite future taxes, the public’s interest in it has not waned.  Technology has other disadvantages before cryptocurrency, but legislation should cover these disadvantages. For example, encrypt all full names, because in case of data leakage people’s privacy will suffer. 

Bank secrecy and CBDC sound like mutually exclusive things. So the regulatory framework should take into account both the interests of banks and the concept of CBDC. Then coexistence of CBDC and banking systеm is possible.

The regulation should be designed in such a way as to protect consumers. After all, no one will use CBDC in case of possible blocking, low level of protection and long transactions. But they plan to introduce an innovation that is connected with all spheres of life.

Perhaps the regulation should limit the power of the issuer and monitor the issue. Otherwise, the project will not be successful.

International co-operation and standards

The relevance of CBDC appeared in 2023, particularly because of the world situation. The world has split into 2 camps: Pro-American and pro-China. The 2 superpowers have powerful economies and are tacit heads in their organisations, for the US the G7, for China the BRICS.

The risk of an open clash is unlikely, although mutual sanctions and their tightening could complicate international payments in today’s systеm, as dollars and yuan are among the world’s reserve currencies. The SBDC will help circumvent these restrictions. 

Let’s take cryptocurrencies and fiat as an example:

In China, buying Bitcoins with dollars is illegal, but you can buy USDT with dollars. After buying USDT, you can safely buy Bitcoin.

With CBDC, the situation may look like this: Let’s say the exchange of Digital Yuan for digital US dollars, directly – prohibited by either party. However, both are co-operating with the EU. For the exchange, it is possible to exchange Digital Yuan for Euros, and Euros for Dollars, or vice versa. 

There’s a problem here, too: Partnership. After all, if there is no crosschain bridge between cryptocurrencies – you’ll have to do more complex financial transactions. But CDBC requires not only technology, but an international partnership. In other words, for private and public partnerships between countries at the CBDC level, we need two different types of virtual currencies, retail for companies and wholesale for governments, as well as at least interest in the partnership.

Prospects and future of CBDCs

CBDCs have huge prospects despite their possible problems. After all, CBDC is not an experiment but quite a working option, they can learn from the negative example of cryptocurrencies and avoid their mistakes. In addition, crypto-enthusiasts will be the first ones willing to test CBDC. Why. – CBDC solves the blockchain trilemma, it does not have to choose between decentralisation, scalability and security.

However, it should not be introduced as a complete replacement for the existing financial systеm. After all, in that case the banking sector would simply disappear. Let the state banks remain, but the private international banks will simply disappear. But these banks are the hearts of the financial systеm, regulating the flow of money. If they are forced out, international financial communication will become worse, banks will go underground, and the shadow economy will increase. And one of CBDC’s goals is to reduce it.

Conclusion

CBDC is an extremely promising technology. The role of CBDC in the digital economy is hard to overestimate. It carries many benefits for both the global economy and the public. In addition, it can be built on the basis of post-quantum cryptography and anticipate the problems that cryptocurrencies have had with experience.

But along with that, this technology contains dangers. If it fails, there could be unlimited issuance, leading to inflation. In another case, the economy of the entire sector, where digital currency is 70%+ of all finance, will be paralysed. People will distrust supervision and control of their spending, even automatic payment of taxes and bills. So, it is necessary to start integration gradually, to prepare a legal framework that will protect consumers. And if we start the implementation – with income from the top officials of the states.

Positive examples of integration inсlude the stablecoin, which was created with a link to the Ukrainian hryvnia. And US presidential candidate Robert Kennedy promised to transfer the entire budget in the US to blockchain. This is not a full-fledged integration, but steps that will make CBDC integration easier.