Can Central Banks Fully Adopt Smart Contract Features in Their CBDCs?
Written by Maria Luiza Campos
The way we pay, save, and invest is undergoing rapid transformation. By 2022, two-thirds of adults globally had made or received a digital payment, underscoring how digital finance is now the norm. As private cryptocurrencies and blockchain-based assets like NFTs continue to grow in popularity, central banks are under pressure to innovate. At the heart of this digital innovation lies one key technology: “smart contracts”. But can central banks “fully” adopt these features in the development of Central Bank Digital Currencies (CBDCs), or are there inherent limitations?
Understanding Smart Contracts
Smart contracts are self-executing programmes that run on distributed ledger technology (DLT), such as blockchain. They allow money or assets to move automatically when certain conditions are met. This goes far beyond simple automation (like direct debits), offering unprecedented flexibility and efficiency.
In the private sector, smart contracts underpin much of the $60 billion decentralized finance (DeFi) market (DeFiLlama, 2024). The key here is that smart contracts allow trusted transactions and agreements to be executed between disparate and anonymous parties without the need for central authorities, legal systems, or external enforcement mechanisms.
They enable innovation but also introduce risks, including code vulnerabilities, regulatory gaps, and the potential for anonymous, untraceable transactions.
CBDCs: Public Digital Money, with Constraints
Today, 134 countries, representing 98% of global GDP, are exploring or piloting CBDCs. These digital currencies aim to provide a state-backed alternative to cash and privately issued digital money, combining the efficiency of digital payments with the trust and oversight of public institutions.
Theoretically, central banks “can” adopt smart contract features into CBDCs to enable programmability, giving governments and users more control over how money is spent or distributed. However, full adoption of DeFi-style smart contracts raises multiple challenges that question how far this integration can go.
Four Key Limitations to Full Smart Contract Adoption in CBDCs
1. Financial Stability and Account Limits
One of the key considerations for CBDC development is to avoid disrupting the current financial system. Unchecked, programmable CBDCs could encourage consumers to transfer large balances from commercial banks to CBDC wallets, increasing the risk of a "digital bank run".
To mitigate this, central banks like the “Bank of England” have proposed account caps (£10,000–£20,000 per person). Yet most smart contract systems, like Ethereum, are designed for unrestricted use, supporting limitless accounts and fund flows. These features directly contradict the control measures needed for CBDCs. As Siebenbrunner and Taudes (2024) argue, traditional smart contracts are “practically incompatible” with the account limitations required for financial stability.
2. Latent Funds and Ownership Risks
Smart contracts often lock funds until conditions are met, but when users lose access (e.g. forgetting private keys) or when contract logic fails, funds can become "latent", frozen with no clear ownership. In DeFi, such issues have led to billions in losses.
CBDCs, as public money, cannot afford such ambiguity. Central banks must guarantee that users retain legal ownership of their assets and that funds are always recoverable, something not inherently possible with full smart contract models.
3. Privacy vs. Compliance
Blockchains offer pseudonymity, allowing transactions without revealing real-world identities. While this appeals to privacy-conscious users, it clashes with anti-money laundering (AML) and counter-terrorism financing (CTF) rules from the government's perspective.
For instance, regarding the Digital Euro, the majority of Europeans showed a desire for digital cash to offer privacy similar to physical cash. Yet central banks must monitor digital transactions to ensure regulatory compliance. Experimental models like the European Central Bank’s “anonymity vouchers” offer limited private transactions but stop short of full anonymity, making it difficult to replicate the privacy features of existing smart contracts within a CBDC framework.
4. Adoption and User Expectations
Smart contracts also enhance usability by enabling programmable features that consumers and businesses may expect from digital money. Yet even with such potential, real-world CBDC adoption has faced implementation hurdles.
China’s e-CNY has over 120 million wallets, but accounts for less than 0.2% of currency in circulation. In Nigeria, 98.5% of eNaira wallets were inactive one year after launch. Unless CBDCs can match the utility, flexibility, and user experience of private sector solutions, including smart contracts, they risk limited uptake.
A Middle Path: Programmability with Guardrails
Rather than replicating the full decentralised architecture of smart contracts, many central banks are exploring controlled or limited programmability. For instance, the European Central Bank is piloting “conditional payments” in its digital euro project, where funds can be transferred only when certain verified conditions are met, but under strict oversight and regulatory compliance.
To support this approach, the Bank for International Settlements (BIS) promotes the concept of “embedded supervision”. Embedded supervision means that regulatory checks and compliance mechanisms are built directly into the technical infrastructure of the CBDC system itself. Instead of relying solely on external audits or reporting after transactions occur, rules for anti-money laundering (AML), know-your-customer (KYC), and other regulatory requirements are automatically enforced within the system. This allows authorities to monitor transactions in real time, ensuring that any programmable features enhance transparency without compromising consumer rights or financial integrity.
Conclusion: Not Fully, But Purposefully
So, can central banks fully adopt smart contract features in their CBDCs?
Not in the way they are implemented in the private sector.
The decentralised, anonymous, and unrestricted nature of traditional smart contracts is fundamentally at odds with the principles of central banking; namely financial stability, consumer protection, and regulatory compliance.
But central banks “can” integrate smart contract functionality partially in tightly controlled forms to enable programmable payments, support innovation, and improve policy delivery. These features will likely be shaped by legal frameworks, technical guardrails, and public interest values.