Central Bank Digital Currency

Many countries are now purusing the projects of publishing digital currency for use in their economy and this is quite a big endeavour which has to consider not just the technology model but also the economic model. In this post we will outline some of the benefits of the central bank digital currency and some features of it that may lead to authoritarian use of it.

Money is digital already

Most countries including developing ones have embraced digital payments of various types in their day-to-day use. Money is just an information on the network. In India peer-to-peer transfer of money is facilitated by Unified Payment Interface system. All transactions done through UPI are recorded in the central bank ledger as well. The major hurdle in making UPI purely democratic is that users need to link their bank account to send/receive money. I wish it worked like MPesa in Kenya. The use of currency notes is declining for legal purposes all over the world and the Swedish central bank has released a report about issuing E-krona in its country. European Union is also reasearching about issuing digital Euro. These currencies are called as central bank digital currencies in short CBDC. The Bahamas is also working on a project called Sand Dollar.

Traditional cash

Before we delve into the digital currencies it is better to take a look at the way cash is created, circulated, destroyed, and reused. Cash is printed on the authorization of central bank in most countries. The general public does not have a say in how much cash a government can print or mint. This is the sad reality of democracy. According to some estimates US has printed close to $5.8 trillon of money out of thin air since the start of COVID crisis and compare that to China whose global trade for 2021 was worth $6 trillion. Now compare this, on one side the most developed nation has created $5.8 trillion cash out of thin air and on other hand the biggest developing economy has produced $6 trillion worth of global trade. This should show which country is more disciplined in finance.

The central bank prints money and provides it to bank and banks give it as loan to industries and people and then the cash is withdrawn and circulated in the economy. The first problem here is that banks are the intermediaries that need a fees from consumers to provide services. This forces people who want to receive money from government for various subsidies and benefits to open bank account. This is done to  benefit the banks to leverage loan limits. The traditional cash provides the users with anonymity. This is very valuable. This also has a dark side where money is illegaly stashed and removed from circulation. The other problem with traditional cash is that it can be faked easily. Government has to abandon the use of such currency notes via demonitization. In India many people think that first demonitiazation was done by Honorable Prime Minister Shri. Narendra Modi in 2016 but in reality it was done by former Prime Minister Moraji Desai.

A interesting story about currency notes circulation in China is that during COVID times money received from hospitals were destroyed in some parts of the country and issued new ones in that place to prevent further spread of COVID.

Central Bank Digital Currency

When central bank starts to issue the digital currency it will be transferred to the banks and then to the companies and people. The governments can now track how much money is in each account since money is digital now and all transactions leave a digital trail and there by anonmymity of the user is not protected. If the government comes up with a solution for digital currency that does not use blockchain then they need to figure out how to prevent digital duplication of money. The reality is that most governments now agree that blockchain is the solution to the digital currency. This is where we see that transformation of internet from internet of information to internet of value. In blockchain each currency can be uniquely identified and tracked and each account can be scanned for the amount they are holding. Governments must provide some form of anonymity in CBDC world for users.

The government can also restrict the use of money for some purposes. In US there is a card called health savings account card. When you try to buy an item that is other than medication with the HSA card the point of sale terminal will decline the transaction or apply only the relevant items in the cart. Similarly government will restrict the use of subsidies only for the intended purposes only. The fear that general public have even in developed countries is that the big tech companies have already made Privacy Protection an oxymoron and now government may join hands with them and create an Orwellian society where anything and everything is tracked. The reality is we are already in this state now because of the proliferation new technologies from big techs.



Let us look at the blockchain infrastructure that may be needed to run an economy on the central bank digital currency. Should the blockchain be private, public or permissioned? The answer to it is it should be combination of networks that are private, public and permissioned. Central banks need a network that must be public to know when a currency was created by it. This account on the blockchain must be known to the public and that public must be empowered to scrutinize the creation of money.

A network of permissioned blockchain must be created for authorized banks to join the network of banks regulated by the central bank. This network will do all the process related regulations like NEFT settlement details, RTGS settlement details, Know Your Customer process and others regulatory reporting. Even the details of the customers who hold bank accounts must be submitted in this permissioned blockchain to central bank.

A private network of blockchain must be created for a bank and its customers to use that provide the necessary privacy to it account holders. There must be a bridge that acts as a withdrawal of money from this private network that equivalent will be transferred to their pseudo-anonymous account on the public blockchain. This is for simple use case. But the point is that to run a new digital economy we need all three types of blockchains to be at the heart of the economy.


Governments should not run their economy only based on CBDC. It should run on the hybrid mode of traditional cash and CBDC. In the next post I will explain how stable coins are a viable alternative to CBDC and also a tough question that should countries give up printing money or their financial sovereignity in the modern globalized economy? If your answer to the question is no then you are right. The tug of war in adopting Euro and giving up native currency is still a challenge for members of European Union.


Founder & CEO

H.Thirukkumaran has over 20 years of experience in the IT industry. He worked in US for over 13 years for leading companies in various sectors like retail and ecommerce, investment banking, stock market, automobile and real estate He is the author of the book Learning Google BigQuery which explains how to build big data systems using Google BigQuery. He holds a masters in blockchain from Zigurat Innovation and Technology Business School from Barcelona Spain. He is also the India chapter lead for the Global Blockchain Initiative a non-profit from Germany that provides free education on blockchain. He currently lives in Chennai India.

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