Central Banks worldwide, from Europe to China, are actively developing their own digital currencies. Taiwan's Central Bank has been researching CBDCs since 2019, focusing on a retail payment-oriented platform. Although no official launch date has been set, a prototype for a "digital cash" system is already in development, designed for everyday public use and supporting digital voucher transactions.
This government-issued digital currency shares a digital form with cryptocurrencies, but they are fundamentally different. Here, we break down what a Central Bank Digital Currency is and how it contrasts with decentralized cryptocurrencies.
Latest Developments in Taiwan's Digital Currency
Taiwan's Central Bank unveiled its complete blueprint for a CBDC in a public hearing on June 10. The digital New Taiwan Dollar will adopt a mainstream "two-tiered platform architecture," where the Central Bank handles the underlying infrastructure, while commercial banks and electronic payment providers manage user-facing applications. This means the public can seamlessly use the digital currency through existing payment platforms.
Following this announcement, the Central Bank plans to initiate its first pilot in July, testing a "digital voucher" application in collaboration with the Hakka Currency. Despite these advancements, the bank has not yet confirmed a formal issuance timeline, and regulatory frameworks are still under discussion.
What Is a Central Bank Digital Currency (CBDC)?
A Central Bank Digital Currency (CBDC) is a digital form of a country's fiat currency, issued and backed by the national central bank. It holds legal tender status, meaning it must be accepted for payments and debts, and is supported by state credit. Functionally equivalent to physical cash, it exists purely in digital form. The primary goals of CBDCs are to enhance payment efficiency, reduce transaction costs, strengthen financial oversight, and address the rise of private cryptocurrencies.
Essentially, a CBDC is a digital representation of sovereign currency, centralized and regulated by the nation's monetary authority.
Taiwan began its CBDC research in 2019, establishing a dedicated task force. By June 2020, it completed a feasibility study for a "wholesale CBDC," followed by a retail CBDC trial in June 2022. According to a July 2024 report by Central Bank Governor Yang Chin-long, Taiwan has now progressed to the prototyping phase.
The current retail CBDC prototype platform supports various functions, including issuance, circulation, transfers, bill payments, tax payments, retail purchases, and conversions between cash, bank deposits, and CBDC. It also allows for automatic conversions and top-ups, paving the way for daily public use.
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Key Characteristics of CBDCs
- Centralized Issuance: Controlled directly by the central bank, unlike decentralized cryptocurrencies like Bitcoin.
- Balanced Anonymity: Designed with "controlled anonymity" to aid anti-money laundering (AML) and counter-terrorism financing (CFT) efforts.
- Diverse Technology: May utilize blockchain, distributed ledger technology (DLT), or traditional centralized systems.
How CBDCs Differ from Cryptocurrencies
CBDCs and cryptocurrencies like Bitcoin or Ethereum differ fundamentally in issuance, legal status, underlying technology, and purpose.
| Aspect | CBDC | Cryptocurrency (e.g., Bitcoin) |
|---|---|---|
| Issuer | Central Bank | Private entities or decentralized network |
| Legal Status | Legal tender | Not legal tender in most jurisdictions |
| Technology | Centralized or hybrid | Decentralized blockchain |
| Value Stability | Stable (pegged to fiat) | Highly volatile |
| Regulatory Approach | Enhanced oversight and efficiency | Decentralization and censorship-resistance |
| Examples | Digital Yuan, eNaira | Bitcoin, Ethereum |
Here’s a closer look at the core distinctions:
❌ Issuing Authority
The most significant difference lies in who issues the currency. CBDCs are centralized and issued by a central bank, whereas cryptocurrencies are generated by users through peer-to-peer systems.
Moreover, their value derivation differs. A digital euro, for instance, would be issued solely by the European Central Bank as a digital form of the euro, thus mirroring the euro's value. Cryptocurrencies derive value from market supply and demand, lacking backing by a legal entity. Some stablecoins, like the defunct Diem, were backed by corporate assets, but they remain distinct from state-issued currency.
❌ Technological Infrastructure
CBDCs may employ blockchain, DLT, or conventional centralized systems (e.g., China’s digital yuan uses a centralized ledger). Some CBDCs are designed with "limited anonymity," allowing central banks to trace transactions for regulatory purposes.
Cryptocurrencies rely on consensus mechanisms like Proof-of-Work (PoW) or Proof-of-Stake (PoS), emphasizing decentralization and immutability. While cryptocurrency addresses aren’t directly tied to identities, their public ledger allows for transactional analysis.
❌ Privacy and Regulation
Cryptocurrencies are renowned for enabling self-custody and permitting cross-border transactions without intermediary oversight. This allows data transfer with minimal restrictions.
CBDCs are unlikely to prioritize this level of privacy. Central banks operate alongside tax authorities and regulators that require user data for AML compliance. Thus, CBDCs aim to merge the convenience of digital currency with the regulated, reserve-backed security of traditional banking.
It’s important to note that wanting privacy doesn’t imply engaging in illicit activities.
❌ Security
The cryptocurrency community places a strong emphasis on security. Despite notable cybersecurity incidents, the ecosystem has grown robustly, with attacks helping to stress-test and strengthen blockchain resilience.
CBDCs, however, might be vulnerable to broader attack vectors due to centralized points of failure. Central banks have spent centuries securing physical cash, but digital systems introduce new risks from state-sponsored actors or financially motivated hackers targeting centralized infrastructure.
❌ Core Objectives
Bitcoin emerged in 2008 as a response to the financial crisis, offering an exit from traditional banking and protection against inflation via a decentralized monetary system.
CBDCs represent almost the opposite ethos. While promising convenience and security, they reinforce the existing oligopolistic financial system rather than democratizing it.
In summary, CBDCs serve as a digital extension of sovereign currency, aligning with state policy goals. Cryptocurrencies represent a tech-driven innovation seeking to disrupt traditional finance. The two may coexist but serve distinctly different roles.
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Countries with CBDC Launches or Pilots
- China – Digital Yuan (DCEP/DC/EP): Piloting since 2019 in cities like Shenzhen and Suzhou, it’s one of the most advanced CBDCs, covering retail and cross-border trade.
- The Bahamas – Sand Dollar: Launched in 2020, it was the first nationwide CBDC, aimed at improving financial inclusion.
- Eastern Caribbean Currency Union (ECCU) – DCash: Introduced in 2021 for member states, facilitating cross-border payments.
- Nigeria – eNaira: Launched in 2021 to enhance financial inclusion and streamline government services.
- Sweden – e-krona: In pilot phase since 2021, addressing declining cash usage.
Other Key Initiatives:
- U.S.: Researching a digital dollar, with some state-level pilots.
- E.U.: Planning a digital euro for potential launch between 2026 and 2030.
- India: Began a digital rupee pilot in 2022.
- Japan: Exploring CBDC use in cross-border payments after completing pilot phases.
- Canada: The "Jasper Project" focuses on a wholesale CBDC for interbank settlements.
Progress varies globally, with many countries still in research or pilot stages. For the latest updates, refer to reports from the Bank for International Settlements (BIS) or respective central banks.
Advantages and Disadvantages of CBDCs
Benefits of issuing a CBDC like the digital New Taiwan Dollar include:
- Improved Payment Efficiency: Reducing the cost and time required for transactions, especially cross-border.
- Financial Inclusion: Providing digital payment tools for the unbanked population.
- Innovative Policy Tools: Allowing more direct implementation of monetary policies, even in negative interest rate environments.
- AML and Regulation: Enhancing financial monitoring through transaction traceability.
- Addressing Crypto Challenges: Offering a state-backed digital currency to maintain monetary sovereignty.
However, CBDCs also pose risks and controversies:
- Privacy Concerns: Potential erosion of financial anonymity, requiring a balance between regulation and individual rights.
- Technical Security: Vulnerabilities to cyber-attacks and system failures.
- Impact on Traditional Banking: Potential to accelerate disintermediation, affecting commercial banks.
Currently, over 100 countries are exploring CBDCs, indicating their potential to reshape the global financial landscape.
Frequently Asked Questions
What is the main goal of a CBDC?
The primary goal is to modernize the financial system by providing a secure, efficient, and state-backed digital payment method. It aims to improve payment systems, enhance financial inclusion, and offer a regulated alternative to private cryptocurrencies.
Can a CBDC replace cash?
While designed to complement or eventually replace physical cash in some economies, the transition depends on public adoption, technological infrastructure, and ensuring access for all demographic groups, including those uncomfortable with or without access to digital technology.
Is my privacy at risk with a CBDC?
CBDCs are designed with "controlled anonymity." Small everyday transactions might offer privacy similar to cash, but larger transactions would likely be traceable by the central bank to prevent illegal activities. This is a significant shift from the anonymity of physical cash.
How does a CBDC differ from a stablecoin?
A CBDC is issued and backed by a central bank and is legal tender. A stablecoin is issued by a private company and is typically pegged to a fiat currency or assets. Stablecoins are not legal tender and rely on the issuer's credibility and reserves.
Will CBDCs eliminate cryptocurrencies?
No, they serve different purposes. CBDCs are sovereign money in digital form. Cryptocurrencies offer decentralization, censorship resistance, and programmability. They are likely to coexist, appealing to different user needs and philosophies.
When will Taiwan's digital currency be launched?
There is no official launch date yet. The Central Bank is currently focused on testing and developing the technological and regulatory framework. Public pilots and further announcements are expected before any full-scale rollout.