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Author's profile photo James Zdralek

Cryptofiat – Central Bank Digital Currency (11th in the series)

What if the world ran on new classes of digital currency that are inflation resistant, create price stability, discourage bubbles and deflationary spirals? What if they could protect citizen’s savings without reducing liquidity when they save rather than spend?

This blog series examines issues and possibilities in the changing banking and monetary systems. Rapid change could occur in the near future due to the ongoing digital transformation. What are the possible outcomes? Which future will happen? How are you prepared?



Is Central Bank Digital Currency a stepping stone or just applying old ideas to new technology? Futures-backed currency, introduced in the first of this series of blog posts, is a type of currency that can pay interest direct to people holding the currency. This type of currency is entirely new and may address issues with sizing the money supply and controlling inflation. CBDC is a step in the right direction but there is much more to be done.

The Bank of Canada introduced the one dollar coin and the Loonie was born followed soon by the Toonie. Are we ready for the digital version? Will it be called the Digitoonie? Or, after several other countries have led the way, will it end up being called the MeToonie? There are wide-ranging options for applying Distributed Ledger Technology to fiat currency. New technologies remind me of the saying that when you have a hammer everything looks like a nail.  The design of solutions using new technologies typically focuses on the feasibility and viability, the technology and the profit, and rarely focuses on the desirability, the use cases and the people within the system that would be affected by change.


I see three cases where CBDC will have difficulty:

  • Fees charged by banks
  • Services that will need to be offered
  • Lost Interest when holding a balance

I see three cases where CBDC could be applied:

  • Improved email money transfers and online payments
  • Large digital wallets between enterprises managed by commercial banks
  • Stable digital currency for escrow services and international trade


The Fees

The cost of processing and handling cash will be more expensive than processing and handling a central bank digital currency. To be clear it will be cheaper but not free. As a bulk transfer from a merchant to a bank the assumption of a low fee is correct because the digital transaction is a simple confirmation but there is a scale issue. This is the same for bitcoin networks where, to be equally prioritized, the same fee is charged for a 5-million-dollar transaction as is charged for a five-dollar transaction.

Financial transactions on a typical network come at a cost whether that is a credit card, interact payment or any number of tap to pay options. Somewhere there is a fee being paid to keep the infrastructure available and secure. Cash is also an infrastructure. Automatic Banking Machines fees are paid by consumers while the armored services and coin services charged by the bank are paid for by the merchant. I’ve commented before about the cost of cash unfairly burdening the poor.  One of the myths of blockchain is that the decentralized transfer of assets without intermediaries would free people from the bonds of banks and governments. Unfortunately, the banks have been replaced with miners who collect fees and determine whose transactions they process first. The freedom of blockchain is not a freedom from fees. Most people do not care who they are paying fees to they care that money and banking is expensive and the fees should be eliminated or reduced.

The comments in the press of Bitcoin being gold 2.0 is correct in some sense. Using it for a daily transaction would be equivalent to the exaggerated situation of paying for a coffee with gold. No one would measure out the amount and attempt to perform an assay test. The practicality is lost on small mundane transactions. A regular coffee paid for using the same confirmation process of wallet to wallet transfer that would also be needed to confirm a million-dollar payment from the manufacturer to the merchant.

The Services

The issue of disappeared funds and who to call for a dispute is the reason a central bank would not become the service provider of wallets. The relationships between Central and Commercial Banks number in the hundreds or less per country. The issuance of CBDC to commercial banks and other entities registered with the Central Bank could handle relations with a government entity while the large front end staff of commercial banks can handle public relations with millions of digital wallet holders. The banks can compete between themselves to offer the best customer service and smoothest experience. Sloppy and rude service will lose out to better service in a competitive environment.

Competition would need to be regulated to ensure that the identities of the parties are verified to follow the Know-Your-Customer rules and reporting to governments based on Anti Money Laundering legislation. These will be added costs on top of managing customer service and processing the transactions on a shared ledger. This will result in charging fees in some way to cover the costs of these additions to the CBDC system.

This is a strategy that the industry may come to support. The Central Banks should focus on regulatory and monetary constraints. Dealing with traditional focuses of a central bank such as dead accounts.  When the destruction of a serialized amount of digital currency is proven can the central bank demonetize certain digital certificates? Can it reissue and refund amounts for parties who can make claims? These are processes that are already in effect for physical cash. This is the service portion that may include the central banks.

Lost Interest

In addressing the retail usage of CBDC the daily use case of a coffee must be analyzed. Behind the cash register in a retail shop are a multitude of integrated pay systems. Credit cards, debit cards and smartphones all tap the same spot to pay.  Like any payment method the vendor is the one who pays the near 2% transaction fee to the financial service agency. The service providers often disallow any price difference to using other payment methods. For example, discounts for using cash will often get a business in trouble with their payment provider.

How would digital cash be treated at these pay terminals? Why would someone opt to use it when either debit or credit will be for the same amount and accessible from the same spot. Maintaining a balance in a CBDC would be foolish since the interest will be lost and no improvement in convenience is apparent to an end user. I’ve commented previously on how silly the behaviors and expectations are and why dead money is bad.

Improved Email Money Transfers

In one possible scenario, commercial banks can supply individuals with wallet addresses for accepting CBDC deposits. Any CBDC sent to the wallet is deposited into the individuals regular saving account and starts to earn interest. The CBDC deposit is transferred to the bank’s asset accounts and can be sent to the CB or used as the reserve requirements or capital ratios for the bank. The same with payments. The account holder at a commercial bank can make a payment to a vendor or another person through a digital wallet address. The vendor sends a wallet address and an amount requested to the customer who can then use their commercial bank to send CBDC to that address on their behalf. The funds would be debited from the savings account that is bearing interest, exchanged for CBDC and sent to the address requested. People would not hold CBDC but they make use of it as a medium of exchange. The transit times when CBDC is not on a commercial banks accounts would be the confirmation block time for the shared ledger but the main wallets holding CBDC would always end up being large commercial banks. No one else would want to hold on to the currencies as they are not interest bearing.

Large Digital Wallets

Another likely use case of a CBDC is as a competitive product to the large value transfer system, LVTS, in Canada or similar systems in other nations. This would be useful for entities that are outside the central bank echelon of major commercial banks. These would not be long lived accumulations in merchant’s digital wallets. Merchants see cash as an aberration. Cash should be deposited and collecting interest as soon as possible or paying off debts at the moment they are due. When the debt is due in the future and the cash is at hand most merchants will buy a bond or other instrument exchangeable for cash at the moment that the debt is due.

Commercial banks will exchange CBDC with merchants as a transacting medium which will return to these same commercial banks as deposits enabling them to meet their reserve requirements at the end of the day.

Stable Digital Currency for Escrow

If the commercial banks can maintain the Anti Money Laundering and Know Your Customer rules, then wallet ownership for international commerce is a possible third use of CBDC. It can be used as a stable currency for smart contracts between parties that don’t trust each other and need an escrow service that can store large values. The most likely usage would be for short periods of time because CBDC, just like cash, will not earn interest. A service that might spring up from the introduction of CBDC is a CBDC Bond. A digital version of a bond that can be locked into a smart contract escrow service that will be converted at a specific time to CBDC. This scenario would certainly be used in international trade for letter of credit scenarios. It would be up to Central Banks to determine if they are willing to become a medium of international trade and reap the seigniorage from a larger base.


Like roads, the government should specify the standards, but the service delivery of building roads should be left to industry to compete, innovate and bring new solutions that are cheaper to build and last longer but still meet the government requirements.

The blockchain-as-a-service offered by SAP will be well positioned to offer assistance and an infrastructure to the commercial banks. As well, our relationships with the businesses of the world position us well for helping manage financial transactions and trade. On top of the down to earth practical applications, SAP has some interesting futurist concepts in the paper linked below that address interest, inflation and helping the unbanked. Stay tuned for additional examples of how this theory can help.



This blog series will be a forum to discuss different concepts and areas where these theories can be applied. Subscribe to stay informed.

Read more about the future of money: Full article. 



The Team

The SAP Canada Ideation Centre’s mission is to help Canadian leaders of business, academia, government and non-government organizations develop a deeper understanding of the digital forces driving the economy today. Ideation Centre members strive to bring forward made-in-Canada fact-based arguments that challenge decision makers to think about the potential of organizational shifts that were not possible in the past. The Ideation Centre is fueled by thought leaders from the Industry Value Engineering team at SAP Canada. This diverse team of industry and value advisors helps organizations of all sizes and industries take advantage of technological innovations to create incremental economic value by adopting new business models and optimizing business processes, from the back office to the boardroom, farm to storefront, mine to operating room, etc.



The Author

Over his decades-long career in the high tech industry, James Zdralek has concentrated on usability, user research and design thinking while building a reputation as a visionary innovator. Merging his expertise in product design, human behavior, and economics, and through his focus on improving accounting tools, James envisions ideas that can drive tectonic shifts in financial and monetary systems. He holds a bachelor’s degree in Industrial Design, a masters in Psychology, and a diploma in Professional Accounting.

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