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Central bank digital currency: pros and cons

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The way we spend and receive our money is changing. Gradually people are using physical cash less and less as payments technology is progressing and advancing at rapid speed.

With this in mind, many central banks across the world have been considering and testing the introduction of central bank digital currency (CBDC).

We’ve outlined the pros and cons this would have on individual citizens and the impact on the wider economy.

What is central bank digital currency?

Central bank digital currency is money that a central bank, such as the Bank of England, can produce. It is completely digital, so no coins or notes are involved and is managed on a computer or another electronic device.

If the Bank of England introduced a CBDC, the value of the pound sterling would remain the same, a £20 note would still hold the same value as £20 via a central bank digital currency. The Bank of England has looked into moving forward and developing the future of finance in the UK but has made it clear that cash will still circulate. This is to ensure individuals can continue to choose how to pay for something and is inclusive to all UK citizens.

How does central bank digital currency differ from cryptocurrency?

Cryptocurrency is a digital currency that is organised in a decentralised system, it has no overarching authority. The value of cryptocurrency can fluctuate and is primarily used in stocks and investments. However, very few businesses use cryptocurrency for transactions. CBDC is different in that it is verified and recorded through a central bank and the value of the currency won’t change, £5 will remain £5!

How would a CBDC society in the UK look?

Currently, the Bank of England is in a ‘research and exploration’ phase for a UK CBDC. Worldwide central banks are testing and developing their digital currencies, especially after the increasing popularity of cryptocurrency.

China began a pilot in April 2020 and aim to have eCNY or digital yuan used this year. Citizens are able to download the digital yuan wallet app or store their money on a physical card.

The Bahamas launched the sand dollar in October 2020 and this was the first nationwide CBDC in the world. Due to the geography of the country, a large proportion of the population struggled to find access to financial services resulting in 20% not having a bank account.

Sweden is in a testing phase to launch a digital currency in e-krona. The main objective in their testing phase is ensuring inclusivity for elderly citizens and those with disabilities to be able to navigate financially in a society like this.  

In the UK, people are already living cashless in their day-to-day lives. The Bank of England has made it clear that for as long as the public want cash and bank deposits, a CBDC will work alongside this rather than scrapping physical cash altogether.  

Pros of CBDC

Enhance financial inclusion

Having a CBDC could expand the accessibility to digital cash accounts and develop payment services. For individuals who live in remote areas or developing countries, have low incomes or whose needs are not met via the traditional banking system could have easy access to a banking account and have the barriers of entry into the financial system reduced.

Reduce threat posed by non-bank currencies

There has been an influx of large corporations and tech firms introducing their own currencies, for example, the Diem currency, which is partly owned by Facebook and is redeemable on shopping sites such as Amazon. Central banks have become increasingly worried that individuals will become dependant on these ‘systematic stable coins’ as the Bank of England describes them. Having a safer tool for the public to store their money and rely on the central bank via a CBDC would reduce these worries.

Improving the payment systems efficiency

A CBDC would benefit the speed and processes of the payment systems, including faster settlements in large values, cross border payments and the ability for central banks to credit household CBDC accounts. The ability to potentially deliver electronic change would benefit many ways in which we pay for day-to-day things, such as parking! In 2017, the Bank of Korea held a trial for a coinless society where citizens were able to deposit their change onto a prepaid card rather than accepting the change from a purchase. This resulted in the country saving almost €36.7 million.

Advance the accuracy of monetary policy

Monetary policy is the ability for the government or the country’s central bank to influence how much money is in the economy overall and how much it costs to borrow. Introducing CBDC can improve the effectiveness and productivity of monetary policy as the changes and impact of interest rates can be more direct on businesses and households rather than the dependency on banks making loans. As all transactions and credit is traced, keeping track of the flow of funds is a significant benefit for a CBDC.

Cons of CBDC

Direct competition for banks

If the popularity for individuals to move their deposits from commercial banks to the CBDC holdings increases over time, this will put pressure on banks and lead to loss of funding for the institutions. This could lead to a knock-on effect for businesses and households as the banks may not be able to make loans.


As every transaction and deposit has a digital footprint, there is a view that a society with CBDC could reduce the privacy of citizens. However it is important to note the Bank of England will be subject to the same rules as any institution regarding privacy and rules around GDPR. If CBDC was to be introduced, a country could run the risk of increased financial crime, illegal activity and online fraud.

Paragon Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England number 05390593. Registered office 51 Homer Road, Solihull, West Midlands B91 3QJ. Paragon Bank PLC is registered on the Financial Services Register under the firm reference number 604551