Specimen Journal of CCL Secure

Moving into the digital dimension

A brief overview of digital currencies by Brian Lang

Ever since Bitcoin appeared in 2009, digital currencies have been in and out of the headlines. For the general public, digital currencies are closely associated with Bitcoin, but also with similar cryptocurrencies, such as Ethereum and Dogecoin amongst others.

Perhaps the most prominent feature generally associated with these virtual currencies is the rollercoaster volatility in their value that sees prices soar and plummet over very short periods.

For central banks, however, digital currencies represent a new challenge in how they oversee and manage money. Allied to well-known changes in the way in which cash is used, such as the growing use of contactless card payments in some societies, it’s hardly surprising that some central banks are investigating Central Bank Digital Currencies (CDBC) as a potential tool that reinforces their ability to support public-issued means of payment.

In this brief overview of the digital dimension, we take a look at some of the options that central banks are facing and some of the choices that some have already made, The Bahamas, for instance, is the first central bank to introduce a CDBC – the Sand Dollar.

What do we mean by ‘digital currency’?

Let’s start by defining the different forms of ‘digital currency’. In broad terms, a digital currency is a balance or a record that can be stored in a distributed database in the cloud, in an electronic computer hosted database, within digital files or within a stored-value card.

Digital currencies exhibit properties that are very similar to other currencies, but are purely electronic. They do not have a physical presence in the form of banknotes and coins. While banknotes and coins have always enabled instantaneous transactions to be completed at the physical location where the transaction takes place, digital currencies – in theory – enable instantaneous transactions to be carried out without the various parties involved being physically present.

Another typical characteristic of digital currencies is that they have – at least until now – been predominantly issued by private, non-State actors. This means that, while they share some of the features of a currency, most are not considered as legal tender.

List of Cryptocurrencies, Wikipedia, 22/06/2021 https://en.wikipedia.org/wiki/List_of_cryptocurrencies

How safe is digital money?

Existing payment systems transfer money that is backed by a central bank or issuing authority.

The commercial bank money used in existing payment systems is not risk free. Commercial banks can and do fail. But, the currency is supported by a central bank’s regulation and supervision, helping to ensure – via deposit insurance – that deposit holders are protected to some degree in the event of a failure.

This means that users of existing payment systems, which overwhelmingly use non-digital currency, can be confident that their money will retain its value, both while it is being used to make a payment, and while it is being held over time.

The same cannot be said of digital currencies such as Bitcoin, which is notorious for its volatile valuation. Paying for a coffee with Bitcoin, for instance, could mean that the value changes between the moment you order it and the moment you pay. Neither the vendor nor the purchaser could have complete confidence in the transaction.

Are ‘stablecoins’ the answer?

The volatility associated with cryptocurrencies such as Bitcoin has led some people to the idea of ‘stablecoins’. These are digital currencies that anchor their value by providing some form of backing, such as being anchored to the value of an existing currency. The issuers of a stablecoin, for example, could base the value on one unit always being worth one US dollar.

However, stablecoins may be linked to assets other than currency. Depending on the nature of assets backing the ‘coin’, and how they are held, the stablecoin may be unable to provide stability of value and redeemability at par back into commercial or central bank money. In other words, they can share some of the inherent instability of other digital currencies.

The stablecoins mooted so far, such as the Facebook currency Diem (formerly known as Libra) are intended for use in transactions currently processed by retail or wholesale payment systems.

Facebook’s idea is that their currency would operate like some existing private currencies or crypto assets and would be issued through a public ledger run on a blockchain. It would resemble e-money in that it will be distributed to end users electronically in exchange for funds denominated in fiat currencies.

The new currency would be issued by a group of commercial firms and non-profits – the Diem Association. This group would control the blockchain and collect the digital equivalent of seigniorage income. In reality, the Libra/Diem has been slow to get off the ground. The Diem Association (Facebook and 26 other companies) now expects to launch at some point in 2021, subject to gaining a payment systems licence from the US regulator. Two coins are planned to be issued – a stablecoin with a specific US dollar or Euro value, and a multiple currency coin linked to multiple local stablecoins.

Could this lead to private companies – or conglomerates of companies – acting as quasi-sovereign issuers of currency? And what are the implications for central banks?

The threat to central banks

The European Central Bank notes that public money is backed by a sovereign entity and a central issuance authority. Conglomerates of corporate entities, on the other hand, are only accountable to their shareholders and members.

Once concern is that corporate groups would have privileged access to private data that they could monetise, as well as complete control over the currency distribution network. There would be no global lender of last resort or deposit guarantee scheme to protect its holders’ interests during the any crises that either local or global economies may face in the future.

There are also concerns that high volume transactions settled in stablecoins could affect the underlying currencies on which they’re based, as well as factors such as monetary aggregates, policy objectives and intermediate targets.

Enter the Central Bank Digital Currency

Digital currencies – whether in the uncontrolled form of Bitcoin or the asset-based form of stablecoins – appear to be becoming established as part of the financial landscape. So, it’s hardly surprising that central banks are looking into what their response should be.

One option is to initiate a digital currency that is operated by central banks themselves.

A central bank digital currency (CBDC) is fundamentally different to a cryptocurrency such as Bitcoin. It is a currency that is supported by a central bank in the same way that the bank supports banknotes and coins.

A CBDC would require the creation of infrastructure so that it can be used to make payments. This infrastructure includes everything from the database on which CBDC is recorded, through to the applications and point of sale devices that are used to initiate payments.

A CBDC would, in effect, offer its users another way to pay or to accept payments, in addition to cash or card-based transactions.

A survey of 39 central banks carried out by Central Banking in 2020 showed that most central banks have no immediate plans to issue a CBDC, but an important number plan to issue CBDCs within five years. Financial inclusion, payment efficiency and less reliance on cash are cited as the key drivers behind the consideration of CBDCs.

Major concerns are seen as security and bank disintermediation, along with legal impediments, regulatory issues, and technology barriers. One third of respondents stated that while they are not conducting research into CBDCs as a strategic priority, they are seen as a relevant issue.

Facebook to Launch Diem Cryptocurrency, Nasdaq, 18/06/2021 https://www.nasdaq.com/articles/facebook-to-launch-diem-cryptocurrency-amid-rising-digitalization-2021-05-18

What does a CBDC look like?

A CBDC can be distinguished from reserves or settlement balances held by commercial banks at central banks.

There are already real-world examples of a central bank digital currency. The first, the Sand Dollar, was launched in October 2020 and is issued by the Central Bank of The Bahamas through authorised financial institutions (AFIs). The Eastern Caribbean Central Bank soon followed with their own CBDC.

The challenges of providing financial infrastructure across a group of islands was one of the driving factors behind the launch of Sand Dollar in the Bahamas. The Governor of the central bank, John Rolle, said in an interview with Bloomberg: “In an island geography it’s very hard to provide financial services through a physical channel. The cost considerations have meant that banks in some cases refused to service some of our rural ‘family islands’. Those communities can eventually piggyback off this [digital] infrastructure to communicate and interact with traditional financial-service providers. That’s not something that we will see on Day 1, but that infrastructure is there, and the regulatory structure is there. It will be possible for financial institutions to confidently provide services through these digital channels, and we now have the safety of a settlement mechanism, the Sand Dollar.”

One of the world’s biggest markets, China, is already testing a digital renminbi in ten regions: Shenzhen, Suzhou, Chengdu, Xiong’an, Shanghai, Hainan, Changsha, Xi’an, Qingdao and Dalian.

Regardless of the size of the market, every CBDC faces the same design choices.
Should there be wide access to the currency or should it be restricted to some extent?
What level of anonymity should be built into the system? Should there be any limits – opening hours – to when the system is available for use? Should deposits bear interest?

As the Bank for International Settlements pointed out in their Markets Committee report on CBDCs in 2018: “The many different potential forms of CBDC each have different implications for payment systems, monetary policy transmission as well as the structure and stability of the financial system.

Central Banks Shift Focus to Retail CDBCs, Central Banking, 11/05/2020, https://www.centralbanking.com/fintech/cbdc/7542766/central-banks-shift-focus-to-retail-cbdcs

How the Tiny Bahamas Beat Global Giants in the E-Currency Race, Bloomberg, 20/05/2021, https://www.bloomberg.com/news/articles/2021-05-20/the-bahamas-central-banker-explains-why-its-sand-dollar-led-the-way

Money is typically based on one of two basic technologies: tokens of stored value or accounts. Cash and many digital currencies are token-based, whereas balances in reserve accounts and most forms of commercial bank money are account-based.”

The same report went on to point out that “A key distinction between token- and account-based money is the form of verification needed when it is exchanged. Token-based money (or payment systems) rely critically on the ability of the payee to verify the validity of the payment object. With cash the worry is counterfeiting, while in the digital world the worry is whether the token is genuine or not (electronic counterfeiting) and whether it has already been spent. By contrast, systems based on account money depend fundamentally on the ability to verify the identity of the account holder”.

So far, there are two main CBDC variants, wholesale or general purpose (retail) versions. The wholesale variant limits access to a predefined group of users, while the retail variant is widely accessible.

A CBDC will require the creation of infrastructure so that it can be used to make payments. This infrastructure includes everything from the database on which CBDC is recorded, through to the applications and point of sale devices that are used to initiate payments. CBDC would offer users another way to pay and to accept payments.

What do central banks think?

Central Banking’s 2020 survey of 39 central banks showed that they are more likely to launch a retail CBDC than a wholesale variant. Central banks that implement CBDCs will then have to choose whether to offer the currency in the form of a token or enable accounts to be opened directly with the central bank.

The survey results showed that 53% of banks preferred economy-wide access, with 42% considering making accounts available directly to the public. A token-based model is the most popular option, with tokens held in a digital wallet.

Percentage of total payments in the UK by volume

The Bank of England issued a discussion paper CBDC in March 2020. At the time, the bank said:

“We are in the middle of a revolution in payments. Banknotes — the bank’s most accessible form of money — are being used less frequently to make payments. At the same time, fintech firms have begun to alter the market by offering new forms of money and new ways to pay with it.”

“A CBDC could provide households and businesses with a new form of central bank money and a new way to make payments. It could ensure that the public has continued access to a risk free form of money issued by the central bank, which may be especially important in the future as cash use declines and new forms of privately issued money become more widely used in payments.”

Bank for International Settlements, Market Committee Report, March 2018 https://www.bis.org/cpmi/publ/d174.pdf

Central Bank Digital Currency Discussion Paper, Bank of England, March 2020, https://www.bankofengland.co.uk/-/media/boe/files/paper/2020/central-bank-digital-currency-opportunities-challenges-and-design.pdf?la=en&hash=DFAD18646A77C00772AF1C5B18E63E71F68E4593

Unlike banknotes, CBDC would be electronic, and unlike reserves that are currently only available to commercial banks and some financial institutions through the Bank of England’s Real-Time Gross Settlement Service, the CBDC would be available to the wider public.

Although the bank “has not yet made a decision on whether to introduce CBDC”, any such system would be denominated in pounds sterling, leading some – including the current Chancellor of the Exchequer Rishi Sunak – to dub the potential currency ‘Britcoin’. In other words, “£10 of CBDC would always be worth the same as a £10 banknote. Any CBDC would be introduced alongside — rather than replacing — cash and commercial bank deposits.”


Meanwhile, in June 2020, the Bank of Canada outlined its thoughts on ‘designing a CBDC for universal access’.

One key message was that a CBDC should be as accessible as cash, using multiple formats such as conventional online and mobile technologies, as well as custom devices or even solutions that depend use no devices, such as a Universal access Device (UAD).

A UAD would be low cost, issued by the bank to ensure maximum inclusion and be non-dependent on internet access or power, enabling both online and offline transactions. It would also be usable by people of all ages, people who are blind or partially sighted, people with low income and/or no bank accounts, and people living in remote locations.

The elephant in the room: sustainability

While Bitcoin and other digital currencies are generating noise in the media, they’re also generating heat elsewhere. The electricity needed to power Bitcoin annually is more than the amount used by Argentina, according to research by Cambridge University scientists at the Cambridge Centre for Alternative Finance.

Bitcoins are ‘mined’ by computers intensively carrying out complex calculations. Large Bitcoin mines are banks of computers set up exclusively to mine Bitcoin. Worldwide, Bitcoin mining is estimated to consume over 130 terawatt-hours (TWh).

Designing a CBDC for universal access, Bank of Canada, June 2020,

Bitcoin consumes ‘more electricity than Argentina’, BBC News, 10/02/2021


• There is clearly considerable impetus for central banks to move forward plans to provide retail CBDCs.

• There are many ‘hurdles’ or challenges for central banks in providing CBDC’s – design, platform, disintermediation, accessibility, resilience, security, legal impediments, regulatory issues and technology, to name the most obvious ones.

• CBDCs are likely to be introduced alongside — rather than replacing — cash and commercial bank deposits.

• A retail CBDC will compete with cash and its success or otherwise is likely to depend on how closely it can duplicate the inherent attributes of cash, universality, acceptance, security, and anonymity.

• Any assessment of the viability of CBDCs needs also to take into account the environmental impact of digital currencies.


Brian Lang
Central Bank Advisor
Wellington, New Zealand

Brian Lang joined the Reserve Bank of New Zealand in 1962, holding a number of senior appointments at the bank including Head of the Currency Department from 1990 until his retirement from the bank in 2006. Some of his key achievements including the modernisation of New Zealand’s banknotes and coins, including new designs and – in 1999 – the polymerisation of the currency. Since retiring, Brian has provided support and advice to many central banks through CCL Secure’s Support Services.