As central bank digital currencies (CBDCs) make headlines across the globe, there’s a lot of confusion about what they really are, and what they aren’t.
Top 10 most common misconceptions
Here are the 10 most common misconceptions encountered writes Neira Jones Advisor, NED, Keynote Speaker, Author.
1. CBDCs Are the Same as Cryptocurrencies
A widespread misunderstanding is that central bank digital currencies are simply another form of cryptocurrency. In reality, CBDCs are fundamentally different.
They are digital versions of sovereign currency, issued and backed by central banks, making them legal tender.
Cryptocurrencies such as Bitcoin are decentralised, not backed by any government or central authority, and are subject to significant price volatility. CBDCs, by contrast, are designed to be stable and regulated, functioning as digital cash rather than speculative assets.
2. They Will Replace Cash and Bank Accounts
Another common myth is that CBDCs will completely replace physical cash or that everyone will be forced to hold accounts directly with the central bank.
In practice, most central banks envision CBDCs as a complement to cash, not a replacement. The intention is to provide an additional, digital payment option, particularly as cash usage declines, while still preserving access to physical money for those who need it.
Furthermore, most CBDC models do not require individuals to have accounts directly with the central bank; instead, distribution is likely to occur through existing financial institutions or intermediaries, maintaining the current two-tier banking system.
3. They Need Blockchain Technology to Function
A common misconception is that CBDCs must use blockchain or distributed ledger technology (DLT) to operate. In reality, while some CBDC projects do experiment with blockchain, it is not a technical requirement.
Many central banks are exploring or implementing CBDCs using conventional, centralised systems due to concerns about blockchain’s scalability, performance, and maturity for national payment infrastructures.
For example, China’s digital yuan (eCNY) ultimately uses a centralised structure for its core system, despite early blockchain trials. The choice of technology depends on the specific goals and requirements of each central bank, and both blockchain-based and traditional architectures can support a CBDC.
The key is that a CBDC is defined by being a digital liability of the central bank, not by the underlying technology.
4. They Will Eliminate Privacy and Enable Government Surveillance
Privacy concerns are a major source of scepticism. Many people believe that CBDCs will allow governments to monitor every transaction, eliminating financial privacy. While CBDCs could technically enable greater oversight, central banks and policymakers are actively exploring privacy-preserving technologies and frameworks.
Many proposed CBDC designs include tiered privacy levels or privacy-enhancing technologies to balance regulatory needs with individual privacy rights. The actual degree of privacy will depend on specific design choices and national regulations, but blanket surveillance is not an inherent feature of CBDCs.
5. They Are a Panacea for Financial Inclusion
A prevalent misconception is that CBDCs will automatically solve financial inclusion challenges by giving unbanked populations access to digital money.
In reality, while CBDCs could provide new avenues for participation in the financial system, significant barriers remain. Issues such as lack of trust in financial institutions, a preference for cash, and limited access to digital infrastructure (like smartphones and reliable internet) mean that CBDCs alone are unlikely to fully address financial exclusion.
6. They Will Instantly Transform or Disrupt the Financial System
Many believe that the introduction of a CBDC will immediately revolutionise or destabilise the financial sector, replacing existing payment systems and crowding out private innovation. However, CBDCs are expected to coexist with current forms of money and payment systems, not replace them overnight.
Central banks are designing CBDCs to complement, not undermine, the broader financial ecosystem, and most experts agree that all payment methods, including credit cards, cryptocurrencies, and cash, will continue to compete/ co-exist for the foreseeable future.
7. They Are Inherently Retail “Public Money” for Everyone
A common misconception is that all CBDCs are designed for use by the general public as digital cash. In reality, most of the successful CBDC projects currently in operation are wholesale CBDCs, which are used exclusively by financial institutions for interbank settlements and large-scale transactions.
Retail CBDCs, intended for everyday use by individuals and businesses, are still mostly in the pilot or early adoption phase, with only a few live examples worldwide.
8. They Will Be Programmable Money Used to Control How People Spend
There is a widespread fear that CBDCs will be “programmable money,” allowing governments or other authorities to dictate or restrict how individuals spend their funds (for example, limiting purchases to climate-friendly goods or blocking certain transactions).
In practice, while CBDCs could technically enable some programmability for legitimate purposes (such as automating tax payments or social benefits), most central banks have stated that they do not intend to use CBDCs to control or limit consumer spending. The focus is on providing a digital equivalent of cash, not on imposing spending controls.
9. They Will Immediately Lead to Bank Deposit Flight and Destabilise the Financial System
Some believe that introducing a CBDC will prompt people and businesses to withdraw all their funds from commercial banks and transfer them to central bank accounts, potentially threatening the stability of the financial system.
In practice, central banks are well aware of this risk and are aiming to design CBDCs with safeguards such as holding limits, tiered interest rates, or distribution through existing banks. These measures are intended to provide a digital alternative without undermining the current banking sector.
10. They Are Just Like Existing Digital Bank Deposits or Prepaid Cards
It is often assumed that CBDCs are no different from the digital money already available in bank accounts or on prepaid cards. However, CBDCs are a direct liability of the central bank, unlike commercial bank deposits or prepaid cards, which are liabilities of private institutions.
This distinction means that CBDCs carry no credit or liquidity risk, theoretically offering a better level of safety and trust compared to private forms of digital money.
So, next time you hear wild claims about CBDCs taking over the world, remember: the reality is far more nuanced, and a lot less dramatic. As central banks explore the future of money, separating fact from fiction will help us all navigate the digital currency conversation with a bit more clarity (and a lot less panic).
If you want no hype and just facts, Neira will be delivering the brand new CBDC 101 Live Course on 25th June 10:00 – 13:00 (UK) via Zoom.
Register at https://neirajones.thinkific.com/courses/CBDC101
Check out her books:
https://www.amazon.co.uk/Understanding-Payments-Whistle-Stop-Tour-Thought/dp/1032631341/
https://www.amazon.co.uk/Beyond-Payments-Centralised-Decentralised-Everything/dp/1032758651
— https://www.amazon.co.uk/Z-Payments-Practical-Glossary-Forgetful/dp/1032903139
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