CBDC, DLT, and cryptocurrency – the three formidable forces defining future digital economies

Rajashekara V. Maiya, Vice President and Head, Business Consulting Group, Infosys Finacle, spotlights on the potential role of CBDCs in the digital transformation journeys of financial institutions and the many opportunities for banks.

About 20,000 people in St Vincent and the Grenadines were evacuated when the island’s volcano La Soufrière erupted in April. Fortunately, their rebuilding and recovery efforts received timely support through DCash – a digital currency that people could use for payments and other banking transactions through a smart device.

Only a month earlier, the Eastern Caribbean Central Bank (ECCB) had launched the world’s first retail central bank digital currency (CBDC) within a currency union. It has since extended its blockchain-based DCash in 5 member countries including St Vincent and the Grenadines.

Although the idea of digital cash was first mooted in the 1980s, digital currency as a concept has gained wider acceptance in the past few years. In future, it might well lead to the next major disruption in financial systems, worldwide. As the IMF reports in its latest paper, central banks in a hundred countries are now exploring the idea of Central Bank Digital Currencies (CBDCs) for general public use.

While CBDCs would serve as digital banknotes in the digital economies of the future, their increased acceptance is closely linked with the rise of distributed ledger technologies (DLT) and cryptocurrency in financial circles. Here we examine their impact and potential role in the digital transformation journeys of financial institutions.

The security net of DLT

Recently, IBM reinforced its commitment to test and validate Hyperledger – an open-source project aimed at developing blockchain-based distributed ledgers – at a population scale. Such contributions by business leaders are reinforcing the case for DLT.

In the past, hasty or badly planned digitalization served to heighten concerns of cybersecurity for financial institutions. Today, for a bank undertaking digitalization, DLT is proving to be a safe bet as it puts these concerns to rest while addressing possible vulnerabilities in the system. As a technology, it is becoming foundational – secure by nature and design, quick to deploy, highly reliable, easy to scale and more affordable too. In fact, infrastructure that has been constructed on DLT is considerably cheaper than comparable technologies of the past.

Furthermore, DLT is driving innovation in banking transactions in the form of smart contracts. With the surge in digital banking transactions after the pandemic struck, banks have realized the urgency to move processes online entirely. Aiming for paperless, quicker and convenient interactions, everything from account opening and onboarding to loan approval and disbursement as well as account closures are done digitally. By introducing smart contracts into the mix, DLT is ensuring that the traditional paper-based contract is replaced by a secure digital format that is tamper-proof and properly authenticated. It leaves no room for fraudulent or dubious activities such as duplicate financing of invoices – a distributed network ensures all digitized bills are scanned and verified before being processed for payment.

Decoding cryptography

Over the years, there have been many barriers to the acceptance of cryptocurrency as a viable option to traditional currency. The central premise of cryptocurrency is that it is not governed by any central bank or government entity. Nor does it hold securities or gold reserves that are typical of traditional banks. There is no visibility into who owns or uses these currencies. Frequent incidents of fraud have created negative reports around cryptocurrencies among the general public. As a result, the promise of cryptocurrency remains shrouded in scepticism by regulatory authorities around the world.

However, there is hope for the future of these currencies – as the technology underpinning cryptocurrency has immense potential to unlock several benefits for financial institutions. Contrary to popular assumptions, cryptography offers greater security of transactions and relationships with corporate and retail customers while mitigating the risk of fraud, considerably.

Despite the fears over cryptocurrency, central banks in countries such as the Bahamas, China, Nigeria, India, the United States are considering the idea of their own digital currencies, with greater seriousness. In fact, a survey by the Bank for International Settlements found that 86 percent of central banks were studying the potential of CBDCs, 60 percent were experimenting with it, and 14 percent were launching pilot programs.

What is leading this change in perspective? While the idea of government-issued currency in digital form is not new, DLT and cryptocurrency have led to an ocean of innovative possibilities in digital banking.

CBDC – the future backbone of a digital economy

Governments and banks – both stand to gain. They can collaboratively or as individual entities, use CBDCs as an effective instrument to improve transparency, tax payment, and stem the flow of black money in the shadow economy. This can lead to the birth of cleaner, healthier, balanced and better-regulated economic growth for the country.

The greatest appeal of CBDCs, however, is how easily they can replace every format of banking that existed before. Person to person, person to merchant, person to government, merchant to merchants, government to governments – CBDC can be used instead of traditional currency. This wide-sweeping replacement has the potential to save costs of printing, maintenance and nationwide distribution that are all inherently expensive. Circulating currency notes at a country level, certain economies that are particularly susceptible to counterfeit notes can feel more secure as cryptography protects their digital currency and regulatory bodies will gain greater control over the currency that is in circulation. Individual banks will no longer need to run the expenses of replacing soiled/damaged physical currency or stocking up on crisp new paper money for their ATMs or branches.

Digital currency can help governments make better headway in terms of financial inclusion

bringing into their gamut, the grossly underbanked segments of society. It is particularly relevant for Africa, South Asia and many such regions that do not have the wherewithal to put up physical banks for their masses. They can leverage their existing mobile and internet connectivity to offer the latest payment/banking solutions in the form of CBDCs, QR codes, UDID etc that are completely digital.

International remittances for cross-border payments currently involve heavy charges.  Banks can consider building a fully digital format using cryptocurrency that will remove these charges and make it more affordable for their customers.

What then is the future of digital banking?

There is no denying that CBDC, DLT, and cryptocurrency can unleash considerable opportunities for banking institutions – the speed and affordability of DLT, the fraud and risk mitigation capabilities and security of cryptography, the regulatory nature of CBDC. The three in combination can become a truly formidable force in securing digital economies of the future.


  1. https://www.imf.org/en/News/Articles/2022/02/09/sp020922-the-future-of-money-gearing-up-for-central-bank-digital-currency
  2. https://www.bis.org/about/bisih/topics/cbdc.htm
  3. https://www.globalgovernmentfintech.com/dcash-digital-currency-to-aid-islands-recovery-from-volcanic-eruption/