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Central Bank Digital Currencies. A revolution in money and blockchain (?)

Read this article about central bank digital currencies

Money is typically defined according to three properties: [1]

  1. It’s a unit of account — things are priced in it (in the UK, things are priced in pound sterling).
  2. It retains its value — its purchasing power doesn’t dramatically change over time (i.e., you’d expect a loaf of bread to cost the same amount in money in a few months as it costs today).
  3. It’s a medium of exchange — people accept it for goods and services.

If we take the most popular cryptocurrency in the world currently, Bitcoin, can we say that it fits the properties of money? Take a few minutes to think about that before continuing with this article.

Let’s examine the three properties of money as they apply to Bitcoin:

  • Are things priced in Bitcoin — not really — we don’t talk about the price of everyday items in Bitcoin.
  • Does Bitcoin retain its value — not really — it’s extremely volatile, and it often has moves of 10% or more with respect to pound sterling.
  • Can you use Bitcoin as a medium of exchange — while some retailers may accept it, many businesses do not.

Therefore, we can’t say that the revolution we’ve seen with Bitcoin and other cryptocurrencies on the blockchain has succeeded in its original aims — to create a new form of money that did not rely on having trust in a centralised/third-party to function. Currently, Bitcoin has utility as a new financial asset — something to invest in – and certainly has useful properties when combined with a traditional financial services portfolio (stocks and bonds). [2]

So, if Bitcoin and cryptocurrencies aren’t going to revolutionise money in the short run — will blockchain serve the purpose it was created for? For now, the answer may be in a new form of money, a new form of cash, that numerous central banks around the world are experimenting with that may revolutionise something that hadn’t changed since the year 800 AD when the Tang Dynasty created paper money in China. [3]

Central banks have been spurred by the rise of technology companies offering consumers and businesses new payment experiences via electronic forms of money (e-money) and indeed the rise of cryptocurrencies like Bitcoin and new stablecoins (a stablecoin is a blockchain-based cryptocurrency where typically one unit of the stablecoin is backed by one unit of fiat currency, i.e., 1 USDT is equal to 1 USD). Cash usage, in general, has also been in decline, and the Covid pandemic has accelerated this.

However, why do central banks care about any of this? In short, this is because central banks are (usually) responsible for the financial stability of a country’s monetary system. Therefore, when you have new forms of “money” and payments emerging that central banks don’t control or influence, it can threaten this stability. Besides, central banks’ ability to pursue other goals aside from financial stability is also threatened by the adoption of currencies outside of their sphere of influence and competitors with central bank money.

Central banks have been experimenting with a complement to cash in response to this challenge, referred to as Central Bank Digital Currency, or CBDC. CBDCs, depending on their design, would effectively be a digital form of cash and have a spectrum of cash’s properties (for instance, though not necessarily, properties of privacy and anonymity), together with the advantages of digitisation and legal tender, as well as some promising new features in relation to cross-border payments and the facilitation of monetary policy.

Many central banks have been thinking about using blockchain in the design of their CBDCs. This is because blockchain’s properties as a distributed ledger, enable decentralisation and permissioned configurations and support both account and token-based access. This all makes it an attractive technology for the deployment of CBDC. CBDC as an application of blockchain would be the most impactful use case of this emerging technology. CBDC design, experimentation and deployment are still at an early stage. Nevertheless, many central banks worldwide are consulting with industry and running pilot projects for this new form of money that may be facilitated by blockchain technology.

CBDCs would mean that consumers, businesses, and the financial services industry would be using a radically new form of money on a technology that would indirectly achieve some of the purposes for which blockchain technology had been originally created. CBDCs could unlock many new business models and initiate a new wave of innovation in financial technology amongst financial services firms who would need to support, integrate, and maintain this new form of money and new fintech firms who would be able to create new business models from this new technology. Other potential benefits include the promotion of financial inclusion, the programmability of monetary policy, and the improvement of the speed and efficiency of cross-border payments.

For those taking this course in the UK, the Bank of England is consulting on how best to configure and deploy a CBDC, whether on a blockchain or not. I’d encourage you to learn more about what may become blockchain’s most impactful use case by far. [4] For those who say that blockchain has not garnered institutional adoption, this use case demonstrates that if the bastion of guarding the UK’s monetary system is looking at utilising it, more widespread adoption will surely come!

This article was written by Nikhil Vadgama and Juan Ignacio Ibanez, Programme Director of the MSc Financial Technology and Research Associate, University College London Centre for Blockchain Technologies.


1. Money in the modern economy: an introduction. Available from: [cited 2014 Q1].

2. A Modern Portfolio Theory Case for Bitcoin. Available from: [cited 13 June 2019].

3. A History of the World. Ming banknote. Available from:

4. Central bank digital currencies. Available from: [cited 08 September 2021].

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