Should Central Banks Go Cashless?

Daria Kozhukhareva
Sep 21
4 min read

Central Bank Digital Currencies (CBDCs) are fast becoming one of the most discussed topics in the evolution of the global financial system. These digital currencies, issued and regulated by central banks, promise to transform how money functions, payments are made, and monetary policy is implemented. Countries around the world are experimenting with or developing CBDCs, motivated by potential benefits such as increased payment efficiency, improved financial inclusion, and enhanced control over monetary systems.

However, the prospect of moving towards a fully cashless society raises complex questions. Physical cash has long provided anonymity and freedom of choice, while digital currencies by nature require data collection and electronic infrastructure. This shift has significant implications for privacy, banking sector stability, and cybersecurity. This article explores the promises and pitfalls of CBDCs, aiming to provide a comprehensive understanding of whether central banks should go fully cashless.

What Are CBDCs?

CBDCs represent a new form of sovereign money, entirely digital but backed by the full faith and credit of the issuing government. Unlike cryptocurrencies such as Bitcoin or Ethereum, which operate on decentralized networks without government oversight, CBDCs are centralized and legally recognized as fiat currency. They can be designed as:

Fiat currency - is official money issued by a government that is declared legal tender but is not backed by a physical commodity like gold or silver.
Retail CBDCs: Accessible by the general public for daily transactions, potentially replacing coins and banknotes.
Wholesale CBDCs: Used exclusively by financial institutions for interbank settlements and large-scale transactions.

Multiple countries have begun experimenting with CBDCs. China’s Digital Yuan is among the most advanced, with pilot programs covering millions of users and multiple cities. The Bahamas launched the Sand Dollar in 2020, aiming to boost financial inclusion across its scattered islands. Sweden, where cash usage has drastically declined, is testing the e-Krona. Meanwhile, the European Central Bank and the U.S. Federal Reserve are conducting extensive research and consultations to explore CBDC design and implications.

CBDCs are envisioned to complement or gradually replace physical cash, integrating seamlessly with modern payment ecosystems while maintaining central bank control.

Benefits of Going Cashless with CBDCs

One of the most compelling reasons for adopting CBDCs is payment efficiency. The global cost of handling cash—printing, distribution, security, and processing—is estimated to be billions of dollars annually. CBDCs enable instantaneous transfers, 24/7 payment availability, and lower operational costs. They can reduce the reliance on legacy payment infrastructures and offer seamless interoperability domestically and internationally.

CBDCs also hold the promise of advancing financial inclusion. The World Bank estimates that over 1.4 billion adults worldwide remain unbanked, particularly in developing countries. Many of these individuals possess mobile phones even if they lack access to formal banking. CBDCs, accessible via digital wallets on smartphones or feature phones, could bridge this gap, offering safe, low-cost, and easy-to-use financial services.

Transparency is another advantage. By enabling a traceable transaction ledger, CBDCs can help combat illicit activities such as money laundering, tax evasion, and terrorism financing. Governments and regulators could enforce financial laws more effectively, enhancing overall system integrity.

Moreover, CBDCs can empower central banks with new monetary policy tools. For instance, they could distribute stimulus payments directly to citizens, or implement negative interest rates at the retail level more effectively. CBDCs could facilitate cross-border payments by reducing intermediaries and increasing speed and transparency, benefiting global trade and remittances.

Privacy Concerns and Surveillance Risks

Despite these advantages, privacy concerns loom large. Physical cash offers a level of anonymity and privacy that is difficult to replicate digitally. Every CBDC transaction inherently creates a digital footprint, potentially enabling governments or third parties to monitor individual spending habits in detail.

CBDCs vary in design. Account-based systems require user identification and enable transaction tracking, aiding regulatory compliance but sacrificing privacy. Conversely, token-based systems attempt to mimic cash's anonymity but face technical challenges in fraud prevention and anti-money laundering compliance. Emerging privacy-preserving technologies such as zero-knowledge proofs and differential privacy may help balance these needs by allowing verification of transactions without revealing user details. However, these technologies are complex and not yet widely deployed in production CBDCs.

Public trust will depend on clear, enforceable privacy safeguards, transparent data governance, and legal protections to prevent misuse of financial data. Without strong assurances, citizens may resist adopting CBDCs, limiting their effectiveness.

Impact on Traditional Banking

CBDCs risk disrupting traditional banking by offering individuals a risk-free digital asset backed by the central bank, which could draw deposits away from commercial banks. Reduced deposits may constrain banks' lending capacity, undermining credit availability and economic growth. To address this, central banks may impose caps on CBDC holdings per individual, require intermediated access, routing CBDCs through banks and payment service providers, design CBDCs with tiered functionality, limiting transaction sizes or anonymity levels.

These measures aim to maintain financial stability while leveraging CBDC benefits. Commercial banks can also integrate CBDCs into their service offerings, creating new digital products.

Cybersecurity and Operational Resilience

Digital currencies rely on secure, robust infrastructure. Cyberattacks such as hacking, distributed denial-of-service (DDoS) attacks, or software vulnerabilities could disrupt payment systems and erode confidence. Central banks must invest in cutting-edge cybersecurity defenses, continuous monitoring, and rapid incident response capabilities.

Distributed ledger technologies and redundant systems may enhance resilience. Any failure in CBDC systems risks widespread economic consequences.

Global Perspectives and Diverse Approaches

Different countries adopt distinct approaches reflecting cultural, political, and economic contexts. China’s Digital Yuan prioritizes strong government control and limited privacy protections, raising global concerns about surveillance and individual freedoms. The European Central Bank emphasizes privacy balanced with anti-money laundering regulation, engaging extensively with the public to design acceptable systems. The U.S. Federal Reserve conducts cautious research, focusing on privacy, accessibility, and technological feasibility without rushing to implementation.

Conclusion

CBDCs offer transformative potential to modernize money, improve financial inclusion, and enhance monetary policy. Yet, they bring significant challenges: protecting privacy, preserving banking system stability, and securing infrastructure. Policymakers must navigate these complexities carefully, designing CBDCs that serve public interest, respect individual rights, and maintain trust. Gradual adoption alongside physical cash is likely the most prudent path, allowing society to benefit from innovation without sacrificing choice and freedoms.