Introduction to Central Bank Digital Currencies
The Central bank digital currencies (CBDCs) are emerging as a practical way to extend secure, government-backed digital payments to more people in developing economies. This innovation is designed to offer broader payment access without weakening commercial banks’ capacity to gather deposits and provide credit. Success depends on design features that open the system to new users while protecting the stability of the financial sector.
The Role of Banks in the Financial Sector
Banks remain the backbone of financial intermediation. They transform deposits into loans, operate payment systems, and fund economic activity. If a large share of deposits were to shift into CBDC wallets, banks could face higher funding costs and reduced lending capacity. This potential deposit migration risk means a CBDC would ideally function as a payment option rather than a direct substitute for bank accounts.
Designing CBDCs for Stability and Access
One safeguard is a tiered account structure that links balance and transaction thresholds to user verification levels. Small-value accounts, with simplified onboarding for those lacking formal identification, can meet everyday payment needs. Larger accounts require full know-your-customer (KYC) checks and stricter limits, ensuring high-value transfers do not drain bank liquidity. By combining caps on holdings with daily transaction ceilings, central banks can broaden access without triggering large-scale shifts of funds.
Key Features of CBDCs
Another stabilising measure is to keep CBDCs non-interest-bearing. Without interest as an incentive, users are less likely to move funds from savings accounts purely for returns. This design keeps CBDCs focused on payments while banks remain the primary holders of deposits. Offline transaction capability can further widen access. Using secure cards, QR codes, or near-field communication, transactions can proceed without an Internet connection. This is especially valuable in rural or low-connectivity regions, allowing people to make and receive payments reliably without depending on constant network access.
Integration and Adoption
Integration with existing systems is equally important. In a two-tier distribution model, the central bank issues the CBDC, but banks and licenced payment providers handle customer accounts and services. This structure keeps established institutions at the centre of the financial system while ensuring the CBDC is widely usable. Encouraging adoption also means lowering barriers for both merchants and individuals. Businesses benefit from affordable acceptance devices such as QR code-based payment apps or low-cost card readers and simple registration, especially when the CBDC fits smoothly into existing point-of-sale systems.
Real-World Examples and Governance
Pilots such as Nigeria’s eNaira and the Bahamas’ Sand Dollar highlight that technical reliability, merchant integration, and user experience are as critical as policy goals. In Nigeria’s case, more than 840,000 retail wallets were reportedly in use within the first year, alongside over 100,000 merchant wallets. Ongoing governance and monitoring give central banks the ability to track liquidity movements, spot early warning signs, and adjust CBDC parameters when needed. Real-time oversight helps maintain stability while inclusion goals are pursued.
Future Developments and Conclusion
Looking ahead, CBDCs may incorporate advanced functionalities such as programmable payments, cross-border settlement that links different national payment systems, and automated settlement for recurring transactions. Maintaining the balance between expanded access and a stable banking sector will remain the guiding principle for these developments, supported by scheduled design reviews and ongoing feature updates to adapt to market conditions. In conclusion, the successful implementation of CBDCs depends on careful design, integration with existing financial systems, and ongoing governance to ensure stability and accessibility. By achieving this balance, CBDCs can play a significant role in extending secure and reliable digital payment options to more people, especially in developing economies.
