Bridging the Gap Between Analog Money and the Digital Economy

The future of money and central bank digital currencies.

Evamarie Augustine
Apr 7 · 4 min read
Photo by on Unsplash

A bridge can be defined as something that is built to overcome an obstacle. Central bank digital currencies — or CBDCs — are designed to bridge the gap between analog money and a digital economy and revolutionize payments by making them both faster and more efficient. These digital fiat currencies can also provide central banks with real-time data, giving them a better sense of what transactions are taking place in the economy and where.

As governments work on related projects, how will CBDCs operate and how will they interact with other digital currencies? The Bank for International Settlements (BIS) recently stated that “cross-border payments are inefficient, and technology can play a role in making them better,“ citing a “multi-CBDC (mCBDC) arrangement” as a possible option.

According to the BIS, a multiple CBDC (mCBDC) bridge is “a wholesale central bank digital currency (CBDC) co-creation project that explores the capabilities of distributed ledger technology (DLT) and studies the application of CBDC in enhancing financial infrastructure to support multi-currency cross-border payments.”

However, the BIS also noted that this would only be attainable if central banks incorporated cross-border considerations into their CBDC designs from the beginning.

As different countries develop their own forms of digital currency, some are using existing blockchains, while others are designing their own. Nir Kshetri, a professor at the University of North Carolina-Greensboro who teaches in the Department of Management, told Quantum Economics that “private blockchains are more efficient and may perform better than public blockchains in terms or privacy protection.”

Leading the CBDC race is China, which is forging ahead with its plans to launch its digital version of the yuan, called Digital Currency Electronic Payment (DCEP). So far, China has tested its digital currency in several regions.

The People’s Bank of China (PBOC) will use its own blockchain, which will “significantly reduce the development, deployment, operation and maintenance, interoperability and supervision costs of blockchain,” according to Shan Zhiguang, who works for China’s State Information Center as the director of information. China, already advanced in cashless payments such as Alipay and WeChat, is looking to further reduce the use of cash with the DCEP.

In the Middle East, the central banks of Saudi Arabia and the United Arab Emirates (UAE) announced the results of their proof of concept to test the viability of a shared digital currency between the two countries.

The project, entitled Aber (which means crossing in Arabic), was built using Hyperledger Fabric, a permissioned blockchain associated with Linux Foundation and IBM. Unlike China’s DCEP, which has been used in retail testing, Aber’s trial was limited to the central banks and participating banks.

Looking at currency interactions, Kshetri added that “by eliminating intermediaries, bridge technologies are likely to have a dramatic impact on currencies and markets by helping produce trust in parties involved in a transaction.” Through the use of a blockchain-based settlement interface, the assets on the distributed ledger are connected with the payment, thereby reducing risk.

Through the mCBDC, China is taking measures to connect the DCEP with other currencies and markets. In the project, which began in February 2021, the PBOC and the central banks of Thailand, the United Arab Emirates, and Hong Kong will explore a cross-border payment project using a digital currency.

The mCBDC Bridge aims to address cross-border fund transfer barriers, such as high costs, inefficiencies, and complex regulations. The project plans to develop a prototype for real-time cross-border foreign exchange transactions using distributed ledger technology.

DCEP’s interoperability with other tokens and blockchains would allow Chinese companies and their foreign trading partners to move money across borders without depending on U.S. dollars as an intermediary, said Kshtetri.

“By connecting China and other participating countries with other currencies and markets, the bridge technology — mCBDC Bridge — will improve efficiency in China’s international trade and make its supply chains highly efficient,” he added.

In Germany, the Deutsche Bundesbank announced a blockchain-based shared ledger facilitating a system in which payment and securities could be exchanged simultaneously. When the buyer and the seller confirm the transaction, the securities and money change hands, eliminating the need for a CBDC. Germany’s central bank has repeatedly expressed reservations about using a CBDC, claiming that harnessing one could contribute to maturity transformation.

Ripple and PayPal are also entering the CBDC arena. Ripple has advocated using its XRP Ledger as a bridge to move value from one CBDC to another, efficiently and in a frictionless manner. It should be noted that Ripple is currently the subject of a U.S. Securities and Exchange Commission (SEC) investigation.

Meanwhile, PayPal’s CEO, Dan Schulman, envisions his company’s digital wallet as a “perfect complement to central banks and governments to distribute those digitized forms of currency.”

After extensive testing, China is close to a ful launch of the DCEP. Meanwhile, the U.S. is just starting its journey. The Federal Reserve Bank of Boston is working with the Digital Currency Initiative to develop digital dollar prototypes, however, Fed Chair Jerome Powell has repeatedly said that the U.S. is in no “rush” to launch a digital dollar.

There is no denying that digital money is part of our future. As a majority of central banks investigate their options, where does the world’s current reserve currency — the U.S. dollar — stand?

This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.

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Quantum Economics

Analysis. Advisory. Money Management

Evamarie Augustine

Written by

Musing about markets, motherhood, mental health, and more (

Quantum Economics

Quantum Economics is a publication for all those who wish to gain a greater understanding of why markets move, what influences them, and how you can get ahead of it.

Evamarie Augustine

Written by

Musing about markets, motherhood, mental health, and more (

Quantum Economics

Quantum Economics is a publication for all those who wish to gain a greater understanding of why markets move, what influences them, and how you can get ahead of it.

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