Basics of CBDC: Is it Emerging As Credible Alternative To Traditional Currency?

Thu, Nov 10, 2022 9:55 AM on Economy, National, Exclusive,

Basics of CBDC.

Recently CBDC has been making quite a buzz in financial news. Since the whole population will be affected by it if adopted, everyone should be familiar with the term and its features. Here is a humble attempt to simplify this financial innovation.

A Central Bank Digital Currency (CBDC) is a digital version of cash issued by a country’s central bank with its value pegged to the national currency. It is the same as usual Physical Rupee note (Traditional Currency) but in a digital format and maintained directly at Central Bank. CBDCs are at infancy around the globe and their features cannot be defined exactly, but they are expected to have characteristics of:

  • Underlying Collateral.
  • Legal Tender.
  • Centralized Network.
  • Lower cost and higher efficiency.

How does CBDC differ from Traditional currency notes?

CBDC comes with a non-physical form existing in the digital network only and it will be fully editable.

Without any tangible appearance, CBDC exists on the computer networks of Central bank, intermediary institutions, and owners of CBDC. Also, the CBDC can be programmed by the central banks to restrict the purchase of certain goods or may come with expiry period. Gold, silver, and foreign reserves are kept as security for Traditional currency meanwhile it is the Traditional currency itself that is kept as security by central banks for CBDCs.

Why is a bank deposit not CBDC?

One may initially conclude that the money deposited on banks or loaded on wallets has a similar feature of CBDC. But they are quite different. A CBDC enjoys the same claim upon Central Bank as the physical cash note. However, the bank deposits are mere promises by the financial institution to give physical cash note or fulfil transfers upon our request. Normally financial institution do not have problem in fulfilling that promise, hence the difference between physical currency and bank’s promise seem to be very blur. But if the financial institution or wallet service provider ceases to function and becomes bankrupt it won’t be able to fulfil the promise, leaving us with a promise of certain sum but no physical notes.


As more economically developed countries move towards becoming cashless societies, CBDC appears to be the natural successor of traditional bank notes. CBDC aims for financial inclusion, convenience of use, decreased maintenance cost, lesser financial crimes, cross-border integration, and many more.

CBDC intends to include all citizens of the nation including those who live in remote regions and were previously deprived from traditional banking networks.

A former Executive Director of Currency Management Department of Rastra Bank was quoted saying it cost around Rs 40 Crores annually to print new monies. Other than the initial development expenditures, recurring maintenance cost will be much cheaper on CBDC project.

Previously blacklisted by Financial Action Task Force during 2009 to 2014, recent reports also suggests that Nepal is at verge of being blacklisted for having inadequate laws and feeble authority to monitor money laundering. This risk of money laundering can be largely reduced if every transaction of money is recorded on Rastra Bank’s central ledger.


Like every new innovation, CBDC also comes with its own sets of demerits and suspicion.

Lack of transparency, Privacy issues, chances to Hacking and Inability to use are the demerits to individuals.

Meanwhile risk of deposits flight from banks, operation failure, Cyberattacks and counterfeits are the notable disadvantages to the financial institutions.

A risk of individual privacy loss looms over the future of CBDC as all money movement will be visible to government authority. Such data if remain un-protected can be misused by the person in power for their own personal gains or simply because they can do it.

Sophisticated infiltration and counterfeit appears to be the prominent threat to the CBDC. No matter how tight the security features are, digital network always have some form of loopholes which make them corruptible.

Deposit flights from Banks will be at faster rate than slow ATM withdrawal in case of in- convenient economic news. This poses significant threat to the current banking practice of deposits and loans.

In a country long marred by weak laws and inefficient administration, the imagination of robust CBDC system is little more on fantasy side than reality. Imagine we have an emergency at hospital and the operation cannot proceed just because CBDC system failure won’t initiate deposit transactions.

Cryptocurrency Vs CBDC:

Cryptocurrencies are digital money generated by a non-sovereign decentralized system. Maintained in large decentralized networks, Cryptocurrencies have no formal credibility other than user’s trust on the coin. Also, Cryptocurrency are highly fluctuating in nature and are mostly used as an asset class instead of means of exchange.

However CBDC is issued by a sovereign central bank and will have equal value as of the traditional notes. Unlike Cryptocurrencies, CBDC functioning on centralized network cannot feature anonymity in transactions as central bank can tie and track movements of digital currencies between all users. Also, CBDC won’t face the excess swings of high and lows as observed on the Cryptocurrencies. 

World Scenario

105 countries, representing above 95% of world’s GDP are exploring the CBDC project. Fueled by restricted physical cash transactions during Covid and the recent Cryptocurrency Boom, otherwise prudent Central Banks are obliged to develop CBDC or risk loosing rein over monetary system.

Worldwide status of CBDC program as provided on the tracking website is:



For Nepal:

Nepal Rastra Bank has been actively working on the research of CBDC and has already published a concept Report for public consultation. While CBDC may have many potential benefits on paper, Central Bank shall determine whether it has compelling demand in the national context or not.

Adoption of a CBDC is a paradigm shift for any country’s financial structure requiring an overhaul of the entire economic setting. Considering the needs of the Nepalese economic context Rastra bank shall issue a suitable model of CBDC and establish secure infrastructure with strict guidelines and continuously foster new innovation, free from privacy issues so that people can trust new money and usher into the modern age of digital currency.

-CA Saman Raut