We have seen what is money, currency, digital currency, central bank digital currency and their categories in the first and second parts of this 3-part blog series. Thank you for staying with me for this long. You have inspired me to complete this 3-part blog series. In this final part I shall risk expressing my own views about what choices do central banks have regards CBDC and whether banks will be relevant in the world where CBDC is extensively used.

Choice of CBDC

Central banks across the globe see the value for digital currencies. However, each central bank is interested in addressing different problems using the digital currency. Sweden, for example already has most of the transactions within the nation happening electronically. So, their purpose for CBDC is likely to counter the unregulated electronic currency forms such as crypto-currencies and maintain stability of the financial system.

However, India has vast amount of cash in circulation as a proportion of total transactions, though the electronic payments infrastructure is growing stronger rapidly. So, the Indian central bank will be interested in reducing the cash in circulation and spread the benefit of instant transfer of funds to as many as possible. Thus, the technology infrastructure and the choice of CBDC will vary significantly based on the objectives for roll out of CBDC of the respective Central Banks.

Influencers for the success of CBDC

Convenience – Convenience of use is the most important influencer of adaption. Credit cards, Whatsapp, UPI payments (in India) are all proof that ease of use and improved convenience ensure adaption. Countries like Sweden, Japan have already removed frictions in payment significantly. Therefore, CBDC may not improve their ease of payment much. Urban India too has made major strides in ease of payments. However, semi-urban and rural India can benefit from CBDC rollout, provided the end points of CBDC focuses on ease of use and convenience.

Anonymity – Under the centralized CBDC infrastructure, all transactions irrespective of the value pass through the central banks systems. Privacy and anonymity concerns are at an all-time high. CBDC may be perceived as another surveillance initiative of the Government. However Central Banks may utilize the public distributed ledger approach to authenticate transactions and hence maintain anonymity.

Safety – The sense of touch and feel is fundamental to human psychology. All of us have been used to touching and feeling physical cash. It is only in the last few years that most of the nations have gone predominantly digital on financial transactions. The switch to totally digital currency may take a while to accept.

Speed – Speed of settlement, especially of high value transactions can work in favor of CBDC as it has huge economic advantage for individuals and the economy.

Role of banking systems with CBDC

Banks have played many different roles in the economic activity of all countries. Deposit taking, converting short term deposits to long term borrowings, reliable and responsible credits, transaction facilitation through payment settlements, trusties to transacting parties, distribution of Government grants to authenticated target recipients, providing lawful traceability of financial wealth and funds, ensuring sufficient liquidity in the system, to name a few.

Banks have been one of the significant vehicles through which central bank has distributed money, controlled liquidity, tweaked inflation (through interest rates), controlled flow of funds into and out of the country, and monitored value transfers for taxation. The central bank has utilized the vast network of decentralized technology infrastructure created and upgraded by all the banks over years to achieve all of the above.

Retail CBDC in theory does not need the banking network for any of the above, as the Central Bank can create a monolithic technology infrastructure and retail end points to interface directly with the public. However, this is easier said. There are many challenges to this approach. A single massive technology infrastructure that will grow along with the economy, and in fact drive the economy of a nation is a humongous challenge and a big risk to the nation. This infrastructure needs to be fail-proof and 100% tamper proof. Further, creating end point interfaces such as mobile solutions to roll out all possible use cases involve constant innovation and evolution. Banks and Fintech’s are best placed to deliver such innovations as there is inherent value for them to innovate. Therefore, it is my view that retail CBDC can serve the desired objectives by involving the banking and Fintech infrastructure than eliminating them.

Wholesale CBDC serves the purpose of electronic settlement of large value transactions between private (corporate) entities. Here again, the banking system goes beyond settlement of transactions alone. They play the role of trustees between parties with products such as Letter of Credits, Bank Guarantees etc. Besides, banks gather a lot of soft data about the participating entities through a combination of system data and human relationships which can neither be quantified, nor automated. This soft data is infused into decision systems for rational decision processes. CBDC may utilize distributed ledger to transform legal contracts into rules with event-based auto-triggers for transaction completion. However, it is near impossible to gather and infuse soft data in the decision process if Central Banks have to roll out wholesale CBDC by eliminating the banking system. Therefore, once again, it is my view that CBDC cannot afford to eliminate the banking network to rollout wholesale CBDC.


Central Bank Digital Currency is a paradigm shift to the financial world. One that can be equated to the advent of mobile phones in the world of land line phones, or smartphones in the world of feature phones. The distributed ledger technology and cryptocurrencies have forced the Governments across the world to bring radical technological shift to their financial systems in order to stay relevant. The Fintech world must be commended for being such an influence. However, the central banks and the banking system stand for a lot more than liquidity and money management. Therefore, it will be a case of gross oversight to suggest that traditional banks are under threat of extinction with the advent of CBDC.






I thank Mr. Prashant Maroli for reviewing and enriching this blog.