The Deeper Inner Workings of Digital Currencies: Central Bank Digital Currency

How did the concept of CBDC emerge as a response to Bitcoin and blockchain technology? What are the two distinct developmental paths set for CBDCs and their respective focal points and impacts? How has blockchain technology influenced the development of CBDCs, particularly in terms of payment technologies and models? What global experiments have been conducted that involve CBDCs? What are the details and significance of China's retail and wholesale CBDC model experiments? In this chapter, we discuss the development and potential of CBDCs, with a focus on their responses to Bitcoin and blockchain technology. We identify two main driving forces behind CBDCs: financial crises leading to digital legal tender issuance by central banks and the advent of blockchain technology through Bitcoin. These also delineate two paths for CBDC development: efficiency-focused “wholesale” and public-oriented “retail” models. We further highlight the role of blockchain in CBDCs, particularly in innovative payment technologies. Moreover, we examine China's CBDC experiments, emphasizing the importance of their dual approach incorporating both retail and wholesale models, that is strongly connected to China's significant role in the global development of digital currencies and its exploration of technological and regulatory aspects. The author's fundamental perspective is the revolutionary potential of CBDCs, especially in the context of cross-border payments and the international monetary system. He believes that while domestic applications of wholesale CBDCs primarily enhance the settlement efficiency, international applications could lead to significant structural changes in the global financial system.