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Central Bank Digital Currency and Digital Fiat Currency: What You Need to Know


In this article, you'll learn about central bank digital currencies and their role in the crypto industry

Key Takeaways:

  • CBDCs are a digital form of fiat money. They are established as money by government regulation and serve as an electronic record or digital token of the issuing country’s official currency.

  • Most noticeable difference between CBDCs and a traditional cryptocurrency is decentralization.

  • There are two types of CDBC: retail and wholesale CDBCs.

  • CBDC and cryptocurrencies of all kinds (including stablecoins) will coexist. They provide different forms of settlement and the two forms of currencies address different issues and audiences.

Cryptocurrency adoption is on the rise and attention in the industry—from Main Street to Wall Street—is at an all-time high. To no surprise, the increased attention has translated to cryptocurrency market capitalizations breaking new highs during mid-October, which reached a total market cap exceeding 2.5T USD.

As outside capital continues to pour into crypto markets, demand continues to rise for not only popular cryptocurrencies like Bitcoin and Ether, but also stablecoins like USDT and USDC which are pegged 1:1 to the US Dollar.

However, these stablecoins are also facing increasing scrutiny and opposition from central banks worldwide, many of which view their existence as a threat to government monetary policies. As a result, Central Bank Digital Currencies (CBDCs) have experienced a recent increase in support and development. But what exactly are CBDCs? And how do they fit in the world of crypto? 

Introducing CBDCs, Stablecoins, and Digital Cash

At its most basic level, CBDCs are a digital form of fiat money. They are established as money by government regulation and serve as an electronic record or digital token of the issuing country’s official currency. Like fiat money (e.g. US Dollars, Chinese Yuan, Brazilian Reais), CBDCs are backed by the full faith and credit of the issuing government – which serves in stark contrast to a “traditional” cryptocurrency that is completely decentralized and not backed by any government. 

For those less familiar with the cryptocurrency and electronic payment spaces, CBDCs, stablecoins and digital cash are quite similar to each other. However, all three still share distinct qualities, which makes it essential to understand the key differences between them. 


As we approach the final months of 2021, there are more than sixty stablecoins with a market cap exceeding more than 130B USD. Frequent crypto traders and transactors will recognize the top coins – USDT, USDC, BUSD, DAI, UST, and TUSD, which collectively make up more than 96% of total stablecoin market capitalization. 

Unlike CBDCs, which are backed by the government, stablecoins are backed either by the represented currency’s physical holdings or a mixture of currencies and other assets. Issuers of the USDT stablecoin once claimed that a reserve existed to back each USDT issued 1:1. However, this stance has since shifted to a claim that their reserves are now composed of traditional currency and cash equivalents, and from time to time, may include other assets and receivables from third-party loans.

Digital Cash (Electronic Cash)

Across bank accounts all around the world are electronic currencies, which, if operating under the rules similar to the United States, are backed by the bank’s reserves. Under the US system, banks operate under a system known as fractional-reserve banking, where the bank reserve only needs to hold a fraction of the bank’s deposit liabilities.

When transferring payments from one party to another utilizing electronic cash, these transfers take place on existing financial infrastructure, and not on the blockchain – as is the case for both CBDC and stablecoins.

CBDCs can be viewed as more “risk-free” than digital cash, and depending on your perspective on decentralization, more risk-free than stablecoins given that many have not been particularly transparent.   

Furthermore, CBDC has the power to simplify the implementation of monetary policy in an economy where countries and central banks are exploring Distributed Ledger Technologies (DLT) via CBDC use case and applications.

What are the Main Differences Between CBDC and cryptocurrencies?

Perhaps one of the most noticeable differences between CBDCs and a traditional cryptocurrency is decentralization. While the majority of cryptocurrencies are decentralized, all CBDCs are centralized – managed, controlled, and owned completely by the currency’s issuing government and/or monetary authority.

In practice, centralization of an issued CBDC means that the planning and decision-making mechanisms associated with the currency are concentrated in a particular point within the system.

Therefore, not only would a country’s central bank make all of the decisions related to any CBDCs held by the people, but they could do so at will and at any time. While this may not seem different from the existing physical currency system,  digital fiat introduces new elements of control which could be exercisable by central banks. In particular, CBDCs are effectively programmable money, which means that governments could create money that digitally expires. 

Along with this centralization is the loss of anonymity that traditional cryptocurrencies provide to its holders. Unlike Bitcoin and ETH, which can be acquired anonymously via peer-to-peer exchanges or directly between wallets, CBDC’s centralization would create an ecosystem where central banks can tie and track movements of its digital currencies between users, businesses, and entities. Even physical cash today gives users the ability to transact anonymously. 

Bitcoin may be hailed as “digital gold,” but it actually isn’t backed by gold, silver, precious metals, or any other commodity. In fact, BTC’s value (and the value of most cryptos) derives from holders trusting the Bitcoin network and its decentralized natures. On the other hand, CBDCs are backed by the full faith and trust of the issuing government, just like physical fiat currency. While cryptocurrencies and CBDCs are backed by intangibles – ultimately trust is critical for the currency holder. 

What are the Different Types of CBDC?

Not all CBDCs can be categorized in the same way. There are two types of CBDCs, wholesale and retail. Wholesale CBDCs are used for transactions between banking institutions. On the other hand, retail CBDCs facilitate the transfer of funds between consumers.

Wholesale CBDC

With wholesale CBDCs, financial institutions can conduct and settle transactions via interbank payments, which could expedite and automate cross-border transfers. While this may not sound much different than what is possible today, current settlement systems primarily work in single jurisdictions or only with one currency. In a wholesale CBDC model, which would leverage all of the advantages of the blockchain and its related technologies, transactions would be faster, smoother, and possibly more reliable.

Retail CBDC

Retail CBDCs are for the people. Quite simply, one can consider them to be a form of digital cash, issued and backed by the full faith and trust of the issuing country’s monetary authority. Unlike digital cash today, which a bank issues, retail CBDCs are issued by the government.


With all of this talk of CBDCs, you may be surprised to learn that only five CBDCs have been launched so far, with the Bahamas leading the way via the introduction of the sand dollar. However, many of the most powerful countries in the world are well on their way to releasing their own CBDC soon. China, Sweden, France, Japan, Turkey, Switzerland, Saudi Arabia, and Thailand are either deep in development of such a solution, or already piloting their first version.

CBDC Use Cases: Digitize Cash and Coin

As similar as they may appear on the surface, digital and physical cash are vastly different from CBDCs. One of the advantages of CBDCs has to do with the fact that it operates on the blockchain. Today, the transfer of fiat from one person to another, or one entity to another, relies on antiquated financial systems and online railways. These outdated systems have their limitations, including restrictions on the number or types of currencies which they may support. Lastly, these systems do not run 24/7 – as individuals and businesses alike need to go through the bank during normal business hours to execute transfers.

On the blockchain, not only are the intermediary banks not needed, but access is available 24/7, 365 days a year. Further, blockchains support transactions in multiple currencies, with settlement done in potentially minutes (versus days under the traditional method).

Far and wide, businesses and the people would benefit. Under such a system, people would have the ability to conduct transfers within and outside of their country, at any time of day, with near instant settlement when compared to today’s legacy systems.

Can They Co-exist ogether?

In many ways, CBDC and traditional cryptocurrencies are polar opposites, differing 180 degrees on many key aspects of what each offers:

  • Centralization vs decentralization

  • Onymous vs. anonymous

  • Private and permissioned (blockchain) vs public and permissionless (blockchain)

  • Trusted vs trustless

But are they truly mutually exclusive of each other, and does choosing one mean denying the other?

In today’s world, while fiat money may reign supreme – remember that there are multiple types of currencies out there (USD, EUR, CNY, to name a few). Further, fiat is not the only store of value that can be transacted and transferred. Commodities such as gold, silver, bronze, oil, and others can also be traded between parties to settle obligations.

In the end, it is more than likely that CBDC and cryptocurrencies of all kinds (including stablecoins) will coexist. In addition to providing different forms of settlement that may be more preferable for the parties transacting, the two forms of currencies address different issues and audiences.

Established financial institutions will be happy to transact in CBDC, putting faith in the security of the private blockchain and the fact that a country’s government backs the CBDCs of interest. On the other hand, an ordinary citizen may prefer stablecoins or other cryptocurrencies, putting more trust in the blockchain technology than in a government which may be viewed as unstable by its constituents.


While CBDCs and cryptocurrencies are born from the concept of digital currencies, each possesses distinguishing traits and features which cater to a particular user’s needs. Each user, business, and entity will need to evaluate the different features and determine which digital currency suits their needs.

As the world continues to push forward into new frontiers, one thing is almost certain – digital currencies and digital assets will continue to play a larger role. 

Knowing this general trend, economies in the emerging markets can consider CBDCs as a way to spur financial digitalization, while advanced economies can consider digital currencies as a next generation tool to facilitate and improve upon existing monetary policies.

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