Central Bank Digital Currencies for dummies – a quick guide into CBDCs from the Dutch Central Bank

Friday 24 July 2020 10:01 CET | Editor: Mirela Ciobanu | Interview

Harro Boven, Policy Advisor at the Dutch Central Bank: ‘The introduction of CBDC would involve a structural reform of the monetary system

Facebook’s Libra announcement in June 2019 has shaken up the finance industry, forcing regulators around the world to take a closer look at it. This has sped up analyses and projects around Central Bank Digital Currencies (CBDCs). Moreover, public attention focused once more on CBDCs projects amid fears that the Covid-19 virus might live on banknotes and coins.

Still, many experts are sceptical when it comes to the viability of these projects.

Most notable examples of initiatives come from China’s CBDC, known as Digital Currency Electronic Payment, or DCEP, and Sweden’s e-Krona.

It was reported that China’s four largest state-owned commercial banks have been developing and testing a wallet application that will be used to store, send, and receive the DCEP. The test phase is ongoing in four cities in China with selected commercial shops such as McDonald’s, Starbucks, and Subway as well as government entities to participate on the trial.

Back in December 2019, Swedish financial authorities announced they had embarked on a pilot scheme to test the feasibility of an e-krona, in partnership with Accenture. The pilot project will run until the end of February 2021. Still, there could be more tests: ‘There is currently no decision on issuing an e-krona, how an e-krona might be designed or what technology might be used’, according to Riksbank economist Gabriel Söderberg.

Still, central banks from countries such as Italy, Switzerland, Ecuador, South Korea have cancelled their CBDCs projects.

Before we delve too much into the topic, The Paypers has invited Harro Boven, Policy Advisor at the Dutch Central Bank, to present what are Central Bank Digital Currencies in general.

Why now the topic of Central Bank Digital Currencies (CBDC)?

The international debate on central bank digital currency has gained momentum. First, the announcement of the Libra initiative has made policy makers aware of the risks for monetary policy, financial stability, and competition that could emerge if such a crypto would become successful on a large scale. Second, the availability and use of a public form of money issued by the central bank has come under pressure due to the decline in use of cash, particularly in Scandinavian countries, Canada, and The Netherlands.

What is CBDC?

In the context of this article, CBDC is regarded as general purpose central bank digital currency, which has three elements 1) digital currency; 2) issued by the central bank; and 3) universally accessible. It is digital currency and therefore only exists electronically. It is central bank money, therefore a public form of money and thus is issued directly by the central bank. General purpose CBDC assumes general access for households and businesses.

CBDC is a third form of central bank currency in addition to cash and reserve accounts. Only banks, suppliers of market infrastructure, and governments may hold reserve accounts with the central bank. In effect, they already have direct access to central bank money. Those balances cannot be held by households or businesses and therefore do not constitute general purpose central bank digital currency. Cash does constitute central bank currency for general use, but is not digital.

Why might CBDC be useful?

There are a number of possible objectives for CBDC. Three potential rationales for CBDC are highlighted here.

CBDC could play a role in retaining public money for general use. The increasing adoption of user-friendly digital money reduces the demand for cash, currently the only public form of money. That could create a future scenario in which citizens only have access to private money, putting pressure on the one-to-one fungibility between public and private euros.

CBDC could also act as a back-up for the critical infrastructure in the payment system. Cash currently has a function as back-up during failures in non-cash payments. This function could come under pressure due to the declining use and acceptance of cash. If cash use continues to decrease, CBDC could serve as a parallel back-up and its role could gradually become more prominent.  The infrastructure for CBDC then has to be sufficiently separate from the current infrastructure to prevent both becoming disrupted.

In addition, CBDC could be designed to cater to the preferences of the public, relating to privacy and the use of data for public objectives. Some citizens and businesses value privacy when paying, as is the case with cash. Central banks could restrict the use of data generated by CBDC transactions to just that information required for public duties such as compliance with anti-money laundering legislation.

Who should be involved in providing the CBDC system?

The introduction of CBDC must provide a fit with the structure of the financial system, with the public and private sector each focusing on their own comparative advantages within their own mandate. The Eurosystem has exclusive competence to conduct the monetary policy in the euro area.  The introduction of CBDC in the Eurozone will thus fall under the tasks and responsibilities of the European System of Central Banks (ESCB).

CBDC can be designed as a locally stored digital value, but in practice it will probably be an account with the central bank. Locally stored CBDC, for example on a smart card, known as value-based CBDC comes with serious drawbacks due to the risk of hacks, loss, challenges in preventing money-laundering, lack of centralised control of the system, and lack of an identity. This explains why almost all digital payment systems used on a large scale work with credit balance in an account.

An account-based CBDC infrastructure would focus on a ledger with balances and transactions in CBDC (Bank of England, 2020). The central bank manages the infrastructure and determines standards, security, and solidity. Intermediaries would be given access the core ledger through Application Programming Interfaces (APIs). Using this interface, intermediaries could develop user-friendly applications with which consumers and businesses can make CBDC payments.  Payment functions such as identification, authentication, and validation could also be performed by the private sector.

In our reference design, transactions from CBDC accounts may only be initiated by regulated operators so that the role of the central bank as the bank of professional operators is guaranteed. This access mechanism is comparable with access to a payment account by third party operators as currently regulated in the revised Payment Services Directive (PSD2). This allows the private sector to compete for convenience and drive the demand for CBDC.

A design of CBDC that has little overlap with the infrastructure for payments in commercial bank money is most valuable as fall back option. But this option is also the most expensive. This requires greater understanding of the costs for such a parallel payment infrastructure.

What is the potential impact of CBDC on financial stability?

CBDC could accelerate a bank run. The demand for a public and secure form of money generally increases in times of uncertainty for precautionary reasons. During a financial crisis, that substitution may happen too fast and consequently banks see their funding slip away and the risks to stability increase. Such a substitution effect also plays a role with cash but with CBDC it could be much faster because of the absence of physical restrictions on withdrawing and storing.

CBDC could affect the funding base of banks by substituting bank deposits, which could increase banks’ dependence on market funding. A stronger dependence on market funding makes banks more vulnerable to unexpected changes in market conditions. There are degrees to this effect, of course, e.g. it could be mitigated in case banks replace deposits with long-term market funding or central bank funding.

CBDC could affect commercial banks’ potential to cross-sell profitable products if customers were to switch to CBDC entirely.  Banks use the payment account as an anchor to offer and grant higher-margin products such as mortgages and personal loans. Customers switching to CBDC entirely could make cross-selling harder for banks, which in turn could put pressure on their profitability.  Structural pressure on profitability could ultimately jeopardise the banks’ prudential obligations.

To mitigate these risks, CBDC should be designed in such a way that it encourages substitution up to the publicly desired amount of CBDC and discourages substitution above that. Control measures can be devised through quantity and price. The central bank may charge an unattractive fee if the amount of CBDC per person, household or business exceeds a particular level. Under normal circumstances this could keep levels of CBDC within reasonable limits. More far-reaching control measures - such as an absolute ceiling - may be needed in order to dampen demand spikes in times of crisis.  Because behavioural responses are hard to predict and the effect may be considerable, it makes sense to consider a gradual introduction of CBDC.


The introduction of CBDC would involve a structural reform of the monetary system. The debate should therefore be seen on a long horizon. However, in a society where digital technology is becoming the norm, it is key that a public form of money remains available. CBDC could play this role.

Watch out for our next instalment of Central Bank Digital Currency series, that discusses not only the potential CBDCs hold but also the hidden risks, especially in terms of privacy.


Bank of England (2020), ‘Central Bank Digital Currency. Opportunities, challenges and design’, Bank of England Discussion Paper. 

De Nederlandsche Bank (2020), ‘Central Bank Digital Currency: Objectives, Preconditions and Design Choices’, DNB Occasional Study. 

About Harro Boven

Harro Boven is a Policy Advisor at the Dutch central bank. This article is based on the Occasional Study (DNB, 2020) that he co-authored with Peter Wierts.



About De Nederlandsche Bank (DNB)

DNB is the Dutch central bank, financial sector supervisor and resolution authority. DNB is committed to a stable financial system: stable prices, solid financial institutions, and properly functioning payment transfers. In the fulfilment of all its tasks, DNB puts into practice its mission: working on trust.

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Keywords: Central Bank Digital Currency, CBDCs, Covid-19, digitalisation, cenytral banks, crypto, cash decline, bank account, financial stability, Harro Boven, DNB
Categories: Blockchain & Cryptocurrencies | Cryptocurrencies
Countries: World
This article is part of category

Blockchain & Cryptocurrencies