## Digital Currency Systems: How Do CBDCs Work?

The era where cash in your pocket loses its physical form and exists only on smartphones or computers—such a scenario is already approaching reality. With over 130 countries worldwide developing central bank digital currencies (CBDCs), it’s worth reconsidering what CBDCs are and how they might impact the future of finance.

## CBDCs as an Evolution of Fiat Currency

A CBDC is essentially a digital version of a country’s fiat currency issued and managed by the central bank. Unlike existing currencies like the US dollar or euro, CBDCs are fully backed by government credit and the authority of the central bank. This is similar to the concept of fiat currency, which only has value because the government declares it to be money, but the key difference is that CBDCs are in digital form.

While cryptocurrencies like Bitcoin operate independently on decentralized networks, CBDCs are entirely centralized. This characteristic allows for seamless integration into existing financial systems and enables more direct implementation of monetary policy.

## Two Operational Forms of CBDC: Retail and Wholesale

CBDCs are categorized based on their user base.

**Retail CBDC** is used by consumers and general businesses, accessed via digital wallets or mobile apps. It can be further divided into account-based CBDCs, managed through accounts at the central bank or authorized intermediaries, and token-based CBDCs, which can be transferred peer-to-peer just like physical cash.

On the other hand, **Wholesale CBDC** is designed for financial institutions such as commercial banks and payment processors, focusing on improving the efficiency of large-value transactions and interbank settlements. It is particularly effective in reducing costs associated with international remittances.

## Challenges and Realistic Risks

Implementing CBDCs involves significant challenges. Privacy concerns top the list; unlike physical cash, which offers anonymity, digital transactions could be subject to government surveillance. Cybersecurity vulnerabilities are also a major concern. Breaches or hacking of CBDC systems could undermine trust in the entire financial system.

The impact on the existing banking sector must also be considered. If consumers shift deposits directly from commercial banks to CBDC wallets, banks’ lending capabilities could be restricted. Additionally, the implementation requires substantial investment in technological infrastructure, regulatory frameworks, and public education.

## Expected Benefits of Implementation

Despite these challenges, the benefits of CBDCs justify the costs. By enabling direct transactions between the central bank and users without intermediaries like banks, settlement times are shortened, and transaction costs are reduced. Global mobile payments are projected to exceed $26.53 trillion by 2032, and CBDCs are expected to accelerate this trend.

Financial inclusion is another significant advantage. According to the World Bank, about 1.4 billion adults worldwide do not have bank accounts. CBDCs could provide access to formal financial services for anyone with a smartphone, enabling remittances, savings, and basic transactions.

It can also make the implementation of monetary policy more effective. Managing money supply, controlling inflation, and even introducing negative interest rates could become more direct. Furthermore, since all transactions are recorded on a traceable digital ledger, CBDCs can help prevent money laundering, tax evasion, and other financial crimes.

## Global Frontline: CBDC Deployment Status by Country

Understanding what CBDC is requires looking at real-world examples. The Bahamas became the first country to launch a CBDC, "Sand Dollar," in October 2020. Followed by Jamaica ("Jam-Dex," July 2022) and Nigeria ("e-Naira," October 2021).

In Asia, efforts are even more active. China is conducting large-scale pilot tests of the digital yuan (e-CNY) in multiple cities. India launched the "Digital Rupee" project in November 2022, with plans for further expansion. Russia is developing the "Digital Ruble," and Brazil is working on "Drex," which entered testing in March 2023.

Advanced economies are also exploring CBDCs, with Sweden ("e-krona"), South Korea ("Digital Won"), and the United Arab Emirates ("Digital Dirham") running pilot projects. The Eastern Caribbean Currency Union (ECCU) offers "DCash," serving multiple island nations, indicating regional approaches are also possible.

## Fundamental Differences from Cryptocurrencies

To understand what CBDC is, comparing it with cryptocurrencies is unavoidable. Cryptocurrencies like Bitcoin (BTC, currently $92.87K) and Ethereum (ETH, currently $3.21K) operate on decentralized blockchains without a central authority. This provides high privacy and freedom but also results in significant price volatility.

In contrast, CBDCs are backed by government authority, offering stability and trustworthiness. As regulated digital payment instruments, maintaining the integrity of the financial system is a top priority. In other words, while cryptocurrencies offer freedom and potential high returns, CBDCs guarantee stability and official legitimacy—complementary roles.

## Conclusion: Preparing for the Digital Currency Era

CBDC is not just digital cash; it symbolizes the evolution of the entire financial system. While offering benefits such as dramatically improved payment efficiency, expanded financial inclusion, and more effective monetary policy, it also necessitates careful consideration of privacy, cybersecurity, and financial stability.

As countries accelerate CBDC development, a comprehensive approach that minimizes risks while maximizing benefits is essential. The future of money is almost certainly digital, and CBDCs will play a central role in shaping that future. For investment decisions, thorough research and consultation with experts are highly recommended.