Written by Richard Wee and Sai Ganesh

What is CBDC?

CBDC is short for Central Bank Digital Currency. They are digital currencies issued by central banks. However, the issuance of the nation’s legal tender determines their worth. They resemble cryptocurrencies, with the exception that the central bank sets their value, which is equivalent to the nation’s fiat currency.

How is it regulated?

CBDC’s are regulated by central banks as they are to meet the nation’s requirements for commercial banking. In this modernised era, the regulations of the central banks would be more specific as now there are more data breaches and concerns about privacy. 

Issues created with the emergence of CBDC’s

With the emergence of CBDC in this modernised era, there will always be a few downsides. The first of all, would be the stability of the financial system, in which during a financial crisis, there might not be sufficient central bank liquidity to support withdrawals. 

Secondly, will be its monetary policy influence. In a world where technology and artificial intelligence is growing, the need  for policies are fundamental these days. Monetary policy is implemented by central banks to affect spending, lending, interest rates, inflation, and employment rates. The ability of central banks to have a beneficial economic impact must be ensured.

Next, one of the main motivations for cryptocurrencies is privacy. To monitor financial crimes, authorities would need to intrude into CBDCs to the proper extent; surveillance is further significant since it aids in the fight against terrorism financing and money laundering. While on the other hand, hackers and fraudsters have targeted cryptocurrencies. The same group of hackers would probably be drawn to a digital currency that was issued by a central bank. Therefore, strong measures would need to be instilled to avoid system penetration and the theft of assets and information.

Issues Addressed by CBDC’s

While there are cons of CBDC’s, there will also be pros. Firstly, CBCD are  free from credit and liquidity risks, which eliminates the threat to third parties from situations like bank collapses or bank robberies. The central bank is responsible for any remaining systemic risk. Besides that, it has lower cross-border payment cost, which can minimise high cross-border transaction costs by simplifying intricate distribution networks and boosting intergovernmental collaboration. In addition, this would support the international role of the Dollar, in which to sustain and defend the dominance of the US Dollar, which is still the most widely used currency worldwide, albeit claims of other nations dethroning the Dollar.

On the further note, this aims for financial inclusion in which removes the expense of setting up a financial system in a nation to give the unbanked populace access to the financial system. Moreover, this expands access to the general public and can provide a direct link between users and central banks, doing away with the need for pricey infrastructure.

How to Use CBDC’s

For example, China forbids private cryptocurrencies, but the nation has nonetheless experimented with digital money. In reality, the most sophisticated market application of CBDC to date was developed by China’s central bank, the PBOC. Banks in the private sector handle the distribution and upkeep of these accounts for users in China’s CBDC e-CNY experiment.

Moreover, PBOC started testing e-CNY through app and wallet-based payments for governmental services, retail, travel, and other consumer lifestyle use cases in the latter part of 2019. The pilot’s first launch took place in four cities, and it quickly spread to include five more. By May 2022, the e-CNY pilot had processed 260 million transactions totalling more than RMB 83 billion through 4.5 million merchant wallets

Early analysis of the CBDC experience in China revealed the following possible advantages. Firstly, promotes monetary inclusion. It is not necessary to have a bank account to use e-CNY. Six authorised state-owned banks offer digital wallets that customers without accounts can download and use. The Know-Your-Customer (KYC) protocols are supported. Like other blockchain-based cryptocurrencies, CBDC enables users to identify themselves to banks by using specific digital fingerprints. This aids banks in staying away from engaging with shady characters, which can prevent their involvement in fraud and other illegal actions like money laundering. Lowers the cost of compliance for banks. Banks might save money on transaction monitoring and reporting if they adopt CBDC. Streamlines government initiatives. The delivery of subsidies, such as employee transportation, may be streamlined through e-CNY.

The analysis above can be used as a guideline for Malaysia as for CBDC’s in Malaysia it is still in terms of growing and not so stable yet as compared to countries like China and the United States of America. Hence, In Malaysia, banks are reportedly embracing features like KYC and QR payments, and CBDC claims that business is expanding there. When the epidemic hit, this was all put to greater use and even till today in terms of CBDC’s, the situation in Malaysia is getting better day by day and the progress is stepping up. 

CBDC vs Normal Currency

Central banks were created as a result of the requirement for a centralised financial system, and according to American economist Michael D Bordo, they serve three main purposes ‘price stability, stable real economy, and economic crisis prevention’.

Albeit, cash is still commonly utilised, it is less common to find it in bank vaults as well as in your wallet. This is primarily due to the rise in popularity of electronic payments and the fact that banks are not allowed to hold significant amounts of cash on hand. Without intentionally leaving a paper trail, it is challenging to track cash expenses. You can still spend your money without anyone knowing how or where you spend it. . Since all of your transactions are tracked and available to a central authority, CBDCs will function significantly differently.

You might be asking what distinguishes CBDC’s from traditional digital banking? Since when is the majority of banking digital? The difference is that the government is not able to randomly snoop on or meddle with your bank account. If the world changes, the financial privacy you currently enjoy will probably vanish, and CBDC tracking will probably become commonplace.

CBDC tracking may also be the initial step. What prevents them from exploiting such information for financial gain when your money is under the full control and view of a single central authority? Even small transactions may be subject to taxation, while ‘undesirable transactions’ may be entirely prohibited. Your freedom to use your money whatever you like could be restricted or even revoked at the whim of an authority.


In gist, CBDC does have both  positive and negative sides but there is still room for improvement.  Respective governments could also make regulations to strengthen and protect the CBDC. Furthermore, this will allow advancement for the future and make payments seamlessly.

Published on 19 June 2023


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