Voice of the Industry

Where money comes from and where it is going

Wednesday 29 November 2023 08:06 CET | Editor: Mirela Ciobanu | Voice of the industry

Dr. Michael Salmony, CEO of Payments Innovation Consulting, launches The Paypers' Central Bank Digital Currencies (CBDCs) series, exploring the evolution of money from traditional banknotes to digital CBDC.

How is money created and distributed?

We all know that money is now largely digital, so the printing of notes and shipping them around physically in armoured trucks and putting them into ATMs is no longer the dominant distribution system. But - and this may be a surprise to many (even some bankers) - most of the money no longer even comes from the central bank. It is actually created by commercial banks. Although these high street banks cannot create money in the way central banks do - for example, they can't print bank notes - they do create money: every time they issue a loan for EUR 10,000 maybe they only need to have EUR 1000 of real central bank money. The rest is created out of thin air digitally using ones and zeros in their computer. This ‘fractional reserve banking system’ has largely worked well since the 1600s.

However, in the last few years, we have seen money created in entirely new and different ways using crypto and blockchain and DLT. Some people say this comes even more out of thin air and is only based on ‘trust’ in new (sometimes actually not so trustworthy) actors and trust in maths/algorithms (which very few people fully understand but still choose to trust).

But one thing is clear: that the money is no longer being created and distributed by only central banks. It is now being created by several different actors (central banks, commercial banks, and non-banks) and is also being distributed by many actors who often weren’t in the system before. We will not talk about Bitcoin and other new cryptocurrencies here since more than enough has been written about them elsewhere. Here we want to focus on CBDC (central bank digital currency) a new kind of money that is being created by the central banks. One could say the Empire strikes back. It is now the original source of money, the central banks, which are creating a digital version of cash to be used in our economy.



The original impulse for central banks to think about CBDC came on one side from technology (like DLT and tokenisation) and, maybe more significantly, through the Libra shock. Facebook started thinking publicly (and ham-handedly introducing) their own system of money which would be distributed through the Facebook apps around the world between users. This is of course highly threatening to the established banking system, to the role of central banks, to the sovereignty of the money supply, and has raised many legitimate concerns by those who do not want Mr. Zuckerberg controlling their economy. So, the response by the Central banks has rightly been to ban/regulate these kinds of threats but also to think about a state-driven alternative, the creation of a central bank - based digital currency.

This means that they will issue digital money, pass that on to the commercial banks, who then pass it on to the users. This actually sounds like the traditional way in which bank notes were created and distributed - and it is. CBDC is essentially digital cash.

Proponents of CBDC see a number of advantages in this. Indeed 32 different advantages are named in the current global debate:

This is surely a reason for concern: if one is trying to solve 32 different things at once, then one probably isn't going to be solving anything at all.


Global approaches

The ECB is more focussed and ‘only’ pursues six goals:

(Some of these are doubtful: we already have unprecedented innovation and digitisation in payments; access to public money (cash) is in no immediate danger since the volume of cash in circulation is forever rising*; adding yet another initiative to the already existing thrusts toward a pan-European payment solution is maybe not helpful; etc.)

In any case, other regions have other approaches. Around the world over 100 central banks are seriously investigating this topic. Many are doing largely pointless technology pilots (the technology is not the problem). Some countries have forged ahead and have actually already launched their digital currency. For example, the Bahamas (Sand Dollar), Nigeria (eNaira), and China (eYuan).

The reason the Bahamas introduced digital central bank cash is that traditional printed cash was not working well. The Bahamas consist of an archipelago of 700 islands, and they have hurricanes in the area, so distributing physical cash with boats and aeroplanes is clearly incredibly inefficient and dangerous. Thus, a digital form of cash, i.e., electronic central bank money, distributed via electronic networks, is clearly a major boon.

In Africa, some countries are engaging in CBDC as an answer to crypto. The government was seeing, with justified concern, that the population was increasingly adopting crypto and (often not so stable) stablecoins. Either by falling for the hype or because they were not trusting their local unstable currency.

This state, like many others, wanted to retain control of the money system and protect the population from doubtful crypto players.

Thirdly, to take the final example, China has been doing CBDC ‘pilots’ for many years now and has millions of people and merchants using it. Some say this is a policy to escape sanctions and to undermine the dominance of the dollar by spreading its currency digitally along the intercontinental silk roads. Some say the motivation is more sinister: to increase surveillance. For an autocratic state, it is, of course, a thorn in their side to see people paying each other with anonymous paper banknotes - whereas if you have electronic cash then you can trace who is paying who, which is very advantageous if you want to do a social score and keep tabs on the behaviour of your population. In Europe, we fortunately have different ideas about privacy.

Thus, to return back to the ECB, we recently witnessed the decision by the governing Council to finalise the rulebook and select providers to develop the platform and infrastructure. Thus, the European CBDC will not be launched for another two years, if at all.

Indeed, it is heartening to see that most central banks are taking their time to think this very complex topic through (see below) and not rush into what can be a very expensive, highly disruptive venture with a high likelihood of failure (for example, none of the above mentioned early CBDC launches are doing well).



Initially, central banks were very optimistic and were forging ahead, hoping to solve many problems at once. Now a more cautious approach is setting in. It is clear that a number of issues first need to be solved. For example, how to engage the whole ecosystem. So far, we have only looked at the interests of the central bank - but in order to make a new form of money work, the whole of the ecosystem (commercial banks, merchants, infrastructure providers, acceptance providers, merchants, and not last the users) also need to be engaged and motivated. This dimension has so far been largely under-examined.

But it is clearly critical that, for example, commercial banks feel motivated to support the distribution of this new digital currency. That is currently not the case because the commercial banks are being asked to distribute the money, manage the wallets, do the KYC, onboard users, answer hotlines, resolve disputes, etc. - but will not get any money for this. Indeed, the move to central bank money will reduce their liquidity (the spectre of a bank run to a risk-free asset) and thus hit them where it hurts the most, their core business of lending. All this is hardly motivating so there is an urgent need to figure out how to motivate this critical market segment. If your local bank does not feel like taking part, CBDC will not be distributed, and we have a global flop.

Just to mention one more example: the end user will have to understand why he suddenly has a Bank of England pound as well as a Barclays pound in his pocket. That is going to be a hard sell and very hard to explain.

The money people have in their account is already guaranteed to EUR 100,000 - what is the need for a ‘risk-free’ state currency which I can only use for up to EUR 3,000 and for which I will not get any interest?  Why do I need a DEAN next to an IBAN?

If no one understands this, there will be no users of CBDC and it will be no use.

Merchants are likely to be the easiest to convince. At last, they will have an electronic payment solution that works in the same way across Europe, across all channels, is settled instantly, and does not incur expensive card/PayPal fees.



A new form of money is emerging. Many questions still need to be answered, so the time has clearly come for all to engage in this future topic. Let us not start with the technology, but with the problems that we aim to solve. Let us engage all critical stakeholders to make it work. Let us find a sustainable business model for all. Let us have clear and significant advantages, for citizens, merchants, commercial banks, governments – or let us not do it at all.

Maybe the fiat banking system that we have created and honed and tuned over decades is not so bad after all. Let us tune this further – by tokenising, by making transactions more seamless across Europe and the globe, by reducing fees, by enhancing fraud defence with better identification, by bringing in more third-party innovations – not by introducing a new parallel form of money unless it has real, significant advantages for everybody.


Stay tuned for our next instalment!


* Some find this surprising, thinking that cash is in decline. The use of cash for payments is in decline in some areas, but cash in circulation is rising steadily almost everywhere, faster even than GDP growth, see e.g. EU https://www.ecb.europa.eu/stats/policy_and_exchange_rates/banknotes+coins/circulation/html/index.en.html


About Dr. Michael Salmony

Michael is an internationally recognised leader in the strategy of business innovations in digital and financial services. He is a board-level advisor to major international banks, industry associations, and regulators across the world (e.g. World Bank in Central Asia, Board Member of Fintech Africa, FinTech Istanbul, Advisory Board Member to Mastercard in Latin America, etc.).


He regularly holds keynotes at global conferences and leading universities and has published much own original work which has been extensively quoted and translated into many languages.

Currently, he is the CEO of Payments Innovation Consulting.


About Payments Innovation Consulting

Payment Innovation Consulting is a specialised consultancy focusing on regulation and technology-driven payment innovations with a special focus on Open Banking/FinTech, Digital Finance, CBDC/Digital Money. We work with all stakeholders: central banks/regulators, commercial banks, neo-banks, consultancies, third parties, associations, solution providers, payment processors, card organisations, corporates, and merchants. To these, we offer services of Business Consultancy, Market Research, and Training in the areas of innovation in payments.


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Keywords: CBDC, banks, mobile payments, cash, DLT, network tokenisation, financial crime, financial inclusion
Categories: Banking & Fintech
Countries: World
This article is part of category

Banking & Fintech