Part 4 – Central bank digital currency

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While Parts two and three of this series focused on the nature of stablecoin cryptocurrency systems, Part four explores the increasingly popular central bank digital currency (CBDC) system as an alternative to the contemporary fiat system. Unlike stablecoins, where the philosophy of money poses a direct challenge to the fiat systems reliance on banks as the primary issuers of money, CBDC engages a similar trust philosophy to the contemporary fiat system in that it relies on the central bank as the primary issuer of money. However, as suggested by the name of the system, the reliance on “central banks” in the CBDC system is far greater than it is in the contemporary fiat system. While distinct economic conditions, objectives, and requirements across jurisdictions will impact CBDC design, a CBDC system generally departs from the contemporary fiat systems reliance on commercial and correspondent banking. The consequences of this departure will have significant legal and economic implications. The following focuses on the concept of CBDC in comparison to the contemporary fiat currency system and explores some of the designs through which CBDC may be implemented. It is important to note that the discussion on CBDC is not new; evolving needs of financial markets and the rise of permissionless cryptocurrencies has prompted many central banks to conduct experiments involving CBDC.1 Accordingly, this section borrows from existing literature, and aims to provide its reader with a comprehensive understanding on what CBDC is and how it may be implemented.

What is CBDC

Conceptually, CBDC would perform the same function as traditional fiat currency; each unit would act as a mode of payment, a store of value, and unit of account. However, each unit would be digital and issued exclusively by a central bank. These features distinguish CBDC from the traditional system in a number of ways.

CBDC’s digital form distinguishes it from cash. CBDC’s universal accessibility distinguishes it from the current system of reserve balances in that anyone would potentially be able to hold a master account with the central bank (today, only designated commercial banks and certain financial institutions can hold such accounts).2 Moreover, the central banks increased control over issuance of CBDC could replace the function of commercial bank deposits by enabling the central bank to issue CBDC direct to end-users. However, such functionality depends on the design of the CBDC and the underlying technology that enables its distribution and verification.

First and foremost, the design of a CBDC will be based on the objectives and motivations of the central bank.3 Generally, there are two design formats for CBDC: token based or account based. The implementation of either design requires careful consideration of the technological infrastructure desired to support the CBDC’s distribution; this infrastructure can be centralized or decentralized. In an account-based centralized infrastructure, the central bank would play a much more substantial role; whereas in a decentralized infrastructure, the central bank would delegate certain responsibilities to intermediary financial institutions (much like the commercial and correspondent banking models we have today). In a token-based system, centralization or decentralization generally refers to the validation scheme for CBDC payments because every user would be responsible for holding the CBDC in their own wallets (as opposed to accounts held at banks). In a token-based centralized infrastructure, the central bank would be the primary validator of token issuance and distribution. In a token-based decentralized infrastructure, the central bank would share responsibility over token issuance and distribution with other designated entities.

Token-based vs Account-based CBDC

If the technology underlying the CBDC is token based, distribution of the currency will involve the transfer of an object of value (the unit(s) of CBDC) from one wallet to another. Cash and bitcoin are examples of token-based systems. Accordingly, the focus of verification for token-based CBDC is the object transferred (the token). Verification of token transfers relies on the sender’s ability to “verify the validity of the payment object”.4 With cash the worry is counterfeiting, whereas with digital currency, the worry is whether the token is genuine or not (electronic counterfeiting) and whether it has already been spent (double spending).5 The token-based approach would therefore require a form of distributed ledger technology for verifying the chain of ownership in each token and validating payment transactions, without requiring the direct involvement of the central bank or a designated clearing house.6

If the technology underlying the CBDC is account based, distribution of the currency will involve the transfer of a claim recorded on one account to another. Current examples are of commercial bank accounts and master bank accounts, which are those accounts held with the central bank. Accordingly, the focus of verification for account-based CBDC are the identities of the account holders.7 Verification of transfers in an account-based system depends on establishing appropriate safeguards against identity theft, fraud and unauthorized transfers from valid accounts.8 Central banks would process each payment by debiting the sender’s CBDC account and crediting the beneficiary’s CBDC account.

Centralization vs Decentralization

Policymakers will have to determine whether they prefer a centralized or decentralized technological infrastructure for the distribution of CBDC.

Centralization refers to a CBDC system where the central bank is the exclusive controller of token distribution or account management. In a token-based system, if the central bank opts to directly oversee and manage the CBDC, it would assume responsibility as the sole validating node for the technology that facilitates token distribution; this would reflect greater centralization. In an account-based system, centralization refers to circumstances were the central bank assumes responsibility as the administrator of all accounts. Accordingly, the central bank is responsible for verifying the authenticity of account holders. 

Decentralization refers to a system where the central bank delegates responsibility to other parties. In a token-based system, this means delegating responsibility to other parties (like commercial banks) to participate as nodes in the technological infrastructure that facilitates the distribution and verification of token-based transactions. If the central bank opts to delegate responsibility for validation, it could rely on as many entities as it wants to act as nodes to protect against double spending and ensure the integrity of the ledger.9 In an account-based system, decentralization refers to the degree in which other entities are responsible for managing accounts. Again, the central bank could choose to delegate responsibility to however many entities it wants.

It is important to note that in any CBDC system, the role of the central bank increases because only the central bank can create more money. Today most money creation is “outsourced” to commercial banks, which create deposits when they extend credit, in accordance with interest rates set by the central bank. Accordingly, it is likely that CBDC will lead to a degree of disintermediation in the financial system, the extent of which depends on how centralized or decentralized the CBDC system becomes.

The next two parts in this series evaluate stablecoins and CBDC currency systems against three essential public policy objectives: maintaining financial integrity, securing financial stability and managing monetary policy.


  1. In a recent survey conducted by the Bank for International Settlements 70% of the responding central bank participants reported current or imminent engagement with CBDC work; Christian Barontini & Henry Holden, “Proceeding with caution – a survey on central bank digital currency” (2019) Bank for International Settlements, online: https://www.bis.org/publ/bppdf/bispap101.pdf [https://perma.cc/B3B2-H35Z].
  2. This is a possible feature of CBDC, although not one that is universally agreed upon.
  3. Some central banks, such as the Bank of Canada, have undertaken research to explore the concept of “wholesale” CBDC, which is a restricted-access (as opposed to widely accessible) digital token for interbank payments or securities settlement. This research focuses on general purpose CBDC, which is widely accessible, and concerns retail payments.
  4. Committee on Payments and Market Infrastructures, “Central Bank Digital Currencies” (2018) Bank for International Settlements, online: https://www.bis.org/cpmi/publ/d174.pdf at 4.
  5. Ibid.
  6. Michael D Bordo & Andrew T Levin, “Central Bank Digital Currency and the Future of Monetary Policy” (2017) National Bureau of Economic Research, online: https://www.nber.org/papers/w23711.pdf at 6. [NBER, 2017]
  7. Margaret E. Tahyar et al, “The Case Studies: Central Bank Digital Currency” (2019) Harvard Law School CSP045, online: https://www.academia.edu/39237778/Harvard_Case_Study_Central_Bank_Digital_Currency at 10. [Harvard Case Study, 2019]
  8. Ibid.
  9. Ibid at 11.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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