CBDC – a subscription model for money

From tokens to… digital tokens

We came a long way from the barter as a mean of exchange. People started using banknotes in China around 700 A.D. Marco Polo brought the idea to Europe in XIII century and first paper money was issued by Stockholm Bank in 1661. Fiat currency (either commercial or governmental) is mostly computerized records and can be created from thin air with cash ratio, loans etc. (once dollar was tied to the gold reserves until 50 years ago). Would Central Bank Digital Currency (CBDC) end bankers monopoly or give them and governments more power and control?

XXI century brought new ways to pay for goods – mobile payments and virtual currencies. The biggest subset of virtual currencies are cryptocurrencies like bitcoin or ether. They promise no central authority , immutable ledger of transactions, and have international appeal. As new addition to the world of money, they still have some things to iron out. There is the constant volatility compared to fiat currencies, fees are too high and the method of keeping bitcoin ecosystem running is really power hungry. The incumbents (altcoins) are getting better and better in removing those hurdles. By now, cryptocurrencies are probably known to most of the people interested in economy. Major obstacle remains – their supply is not tied to economic activity, as fiat currencies are.

Governments didn’t know (and still don’t), what to do with this new money/exchange tokens. They would usually ban “alt” money without having tight control over it. Stifling the innovation of financial markets and spirit of competitiveness are the reasons why it hasn’t happened in the West.
Few countries, like China banned the crypto exchanges, while others are adopting bitcoin, like El Salvador. Looking at market capitalization, bitcoin is on 16th place, after Thailand. But for few years now, there is also a talk about digital currency which would be created by central banks and bankers claim it would drive “cryptos” out of the market.

The way to compete with cryptos

The definition says: Central bank digital currency (CBDC) uses an electronic record or digital token to represent the virtual form of a fiat currency of a particular nation (or region). A CBDC is centralized; it is issued and regulated by the competent monetary authority of the country. Apparently 86% of central banks are actively researching the potential of CBDCs, 14% were deploying CBDC pilot projects. Countries like UK, US, Canada, Thailand, Sweden and Singapore are “looking into the possibility” of introducing digital currency. China is already doing trials, more on that below.
So why is it so important? We already living in mostly cashless society. The reasons vary – for Russia, CBDC would facilitate settling accounts without regards for sanctions. Some claim digital currency could be distributed more quickly to people’s pockets in case of let’s say stimulus payments. The banks fees could also disappear.

Randal K. Quarles, member of the US Federal Reserve’s Board of Governors and its Vice Chair is sure that US fiat currency dominant role in international financial transactions won’t be challenged by CBDC (or cryptos for that matter). He is citing stable value over time, ease of exchange, rule of law and credible monetary policy as the strength of the US dollar.

CBDC could function as means to send and receive funds to citizens account and those not maintained by government – more digital equivalent of cash. It would represent a claim against the Federal Reserve, but it be transferred from person to person (like a banknote) or through intermediaries. The latter solution would have to implement safeguards against money laundering, which would raise privacy issues. Right now banks are facilitating services like authorization, dispute resolution already, but by imposing “Know Your Customer” (KYC) rules, our privacy is almost non-existent.

China is ahead

China seems firmly on board with the idea of CBDC. One trial has already finished in Suzhou City, near Shanghai. It was part of a bigger test targeting 500k people in 11 Chinese regions. 70.7 million transaction reached $5.3bn in value. Chinese version is permissioned blockchain (People’s Bank decides who can use it). The digital yuan is a legal tender and will have to be accepted by merchants. Right now some accept only Wechat Pay or Alipay – commercial and private payment systems.
Apparently there is also offline mode where payments can happen without internet access. There’s going to be retail and wholesale version of digital yuan according to white paper released (in Chinese). Nationwide rollout is expected ahead of the 2022 Winter Olympics in Beijing.
So, why is Chinese Communist Party (CCP), so eager for digital currency? It’s quite obvious really. It will thwart corruption, give the party central control over money supply and financial markets, which got a little out of control (Jack Ma from Alipay / Ant Group, publicly criticized Chinese regulators and then the IPO was blocked and he has “disappeared” for a while).
CBDC is a way to get granular insight of where, when and to whom the money is moving. Unless shockingly CCP will implement some privacy rules…

Chinese government wants to expand it’s international monetary influence and use of yuan in Asia and beyond. People’s Bank of China Digital Currency Institute set up a joint venture with SWIFT (biggest network facilitating international payments). It has joined the Multiple Central Bank Digital Currency Bridge, a cross-border payments project initiated by the Hong Kong Monetary Authority and Bank of Thailand (United Arab Emirates are part of it too).

Future ahead

Considering how quickly we are moving towards “cyberworld”, digital currency is inevitable. Being late to embrace CBDC’s could mean losing the race. Cryptocurrencies, Web3/Fintech are a danger to sluggish central banks. On the other hand while CBDC seems like an improvement, it could be another instrument of surveillance and control. Unless proper safeguards are in place.

Among unlikely allies (for me at least), who endorse the idea of CBDC, is a former finance minister of Greece Yanis Varoufakis. In this post he explains benefits of CBDC’s, mentioning how privacy could be preserved:


“it is possible to anonymise central-bank accounts with digital tags that only an independent ombudsman, a post created in the spirit of a new separation of powers, can trace to physical persons”

Looks like a quite important job. Who will wield it and how it will stay free of influence? Countries will fight over dominance in this space introducing their own coins (with different models and properties). They will also need private contractors to implement a blockchain or whatever technology will be used on big scale. Errors while quite certain, may prove costly. I’ll stay skeptic, but to be fair, in small country like Estonia, government pulled off digital transformation almost flawlessly and with respect to people’s privacy.


Will CBDC usher new way of banking, shifting power from establishment, or it will just be another tool for stricter financial control over people (for example, money that can only be used for specific purpose or time expiration).
Government in the middle of every transaction, with powers to not only “print” but also change the properties of currency?

As per usual only time will tell, but eagerness of governments and bankers isn’t a good sign (unless you believe in their acumen and good nature). CBDC seems also like a subscription model – you don’t own the money anymore and ToC can change at any time.

Post scriptum
  1. The Bahamas was one of the first nations to issue a CBDC, launching a cryptocurrency – Bahamian sand dollar.
  2. There is a 1st Edition CBDC Index published in April 2021 by PwC.

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