A central bank digital currency (CBDC) is a digital version of an official currency, created by a central bank rather than by private companies. Unlike cryptocurrencies such as Bitcoin, CBDCs are issued by a state and may work alongside physical cash. As of 2024, the Bahamas, Jamaica, and Nigeria have launched CBDCs, and 134 countries are researching their own versions while other jurisdictions, such as Florida, have banned CBDCs citing privacy concerns.
CBDCs could enable faster, cheaper payments and improve financial inclusion, but raise concerns about privacy and the potential for them to be used as a "tool for coercion and control". CBDC implementation could affect banks' financial stability, requiring careful policy design.
Contents
History
Although the term "CBDC" did not become widely used until after 2019, central banks have researched and launched digital currency projects for decades. For example, Finland's central bank issued the Avant stored value e-money card in the 1990s. In 2014, the People's Bank of China began researching the idea of issuing a CBDC. Elsewhere, the Ecuadorian central bank operated a mobile payment system from 2014 to 2018. In 2021, Australia's central bank conducted a proof of concept for a wholesale CBDC using Ethereum to tokenize syndicated loans, aiming to automate and secure high-value transactions in the banking sector.
Implementation
A central bank digital currency would likely be implemented using a database run by the central bank, government, or approved private-sector entities. The database would keep a record (with appropriate privacy and cryptographic protections) of the amount of money held by every entity, such as people and corporations.
CBDCs may share some properties with virtual currency and cryptocurrency, such as programmability. In contrast to cryptocurrency, a central bank digital currency would be centrally controlled (even if it was on a distributed database), and so a blockchain or other distributed ledger would likely not be required or useful - even though they were the original inspiration for the concept.
The two primary categories of CBDCs are retail and wholesale. Retail CBDCs are designed for households and businesses to make payments for everyday transactions, whereas wholesale CBDCs are designed for financial institutions and operate similarly to central bank reserves. Retail CBDC is the digitization of sovereign currency, which applies to physical banknotes, coin, and existing wholesale CBDC reserves that are used in the reverse repo and repo market.
Retail CBDCs can be distributed through various models. In the intermediated model, the central bank issues the CBDC and manages core infrastructures, while financial intermediaries offer customer services. The ECB and the Federal Reserve have proposed intermediated CBDCs. Alternatively, the central bank could either provide the full service or delegate responsibilities further.
As it currently stands, 9 countries and the 8 islands making up the Eastern Caribbean Currency Union have launched CBDCs; 38 countries and Hong Kong have CBDC pilot programmes; and 67 countries and 2 currency unions are researching CBDCs. In the United States, some states have introduced legislation to ban state payments using CBDCs with Florida being the first state to pass such a law citing privacy concerns. In June 2026, the United States Congress passed the 21st Century ROAD to Housing Act, section 1101 prohibits the Fed from issuing "digital asset that ... is a direct liability of the Federal Reserve System; and is widely available to the general public".
By March 2024, the central banks of 134 countries accounting for 98% of the world's GDP were said to be in various stages of evaluating the launch of a national digital currency. These included the ECB, the UK, and the US. China's digital RMB was the first digital currency to be issued by a major economy. Six central banks have launched a CBDC: the Central Bank of The Bahamas (Sand Dollar), the Eastern Caribbean Central Bank (DCash), the Central Bank of Nigeria (e-Naira), the Bank of Jamaica (JamDex), People's Bank of China (Digital renminbi), the Reserve Bank of India (Digital Rupee), and Bank of Russia (Digital Ruble). The Central Bank of Brazil has been rolling out tests of a digital Brazilian currency (Drex) since March 2023. The ECB/Eurozone decided in October 2023 to move forward to the preparation phase for the potential issuance of a digital euro after a two-year study phase.
Characteristics
A CBDC is a digital counterpart to fiat money, issued by central banks, unless it is dividend-yielding; then, it is an ownership stake in the central bank and a new form of legal tender. Like paper banknotes, it is a means of payment, a unit of account, and a store of value. And like paper currency, each unit is uniquely identifiable to prevent counterfeiting.
Digital fiat currency is part of the base money supply, together with other forms of the currency. As such, DFC is a liability of the central bank just as physical currency is. It is a digital bearer instrument that can be stored, transferred and transmitted by all kinds of digital payment systems and services. The validity of the digital fiat currency is independent of the digital payment systems storing and transferring the digital fiat currency.
Proposals for CBDC implementation often involve the provision of universal bank accounts at the central banks for all citizens.
Benefits and impacts
Governments and central banks are studying CBDCs and their implications for financial inclusion, economic growth, technology innovation, and the efficiency of bank transactions. CBDCs have also been discussed as a mechanism to preserve public access to central bank money in an increasingly digital economy and to maintain trust in the monetary system. Potential advantages include:
Technological efficiency: instead of relying on intermediaries such as banks and clearing houses, money transfers and payments could be made in real time, directly from the payer to the payee. Being real time has some advantages:
Reduces risk: payment for goods and services often needs to be done in a timely manner and when payment verification is slow, merchants usually accept the risk of some payments not succeeding in exchange for faster service to customers. When these risks are eliminated with instant payment verifications, merchants no longer need to use intermediaries to handle the risk or to absorb the risk cost themselves.
Reduces complexity: merchants will not need to separately keep track of transactions that are slow (where the customer claims to have paid but the money has not arrived yet), therefore eliminate the waiting queue, which could simplify the transaction process from payment to rendition of goods/services.
Reduces (or eliminates) transaction fees: current payment systems like Visa, Mastercard, American Express etc. have a fee attached to each transaction and lowering or eliminating these fees could lead to widespread price drops and increased adoption of digital payments.
Financial inclusion: safe money accounts at the central banks could constitute a strong instrument of financial inclusion, allowing any legal resident or citizen to be provided with a free or low-cost basic bank account.
Preventing illicit activity: A CBDC makes it feasible for a central bank to keep track of the exact location of every unit of the currency (assuming the more probable centralized, database form)
Criticism
Despite having potential advantages, CBDCs remain a controversial topic, and there are risks associated with their implementation.
Banking system disintermediation: With the ability to provide digital currency directly to its citizens, one concern is that depositors would shift out of the banking system. Customers may deem the safety, liquidity, solvency, and publicity of CBDCs to be more attractive. In the extreme, this could precipitate potential bank runs and thus make banks' funding positions weaker. However, the Bank of England found that if the introduction of CBDC follows a set of core principles, the risk of a system-wide run from bank deposits to CBDC is addressed. A central bank could also limit the demand of CBDCs by setting a ceiling on the amount of holdings. Federal Reserve economists have similarly noted that stablecoins' impact on bank credit provision depends on inflow sources and reserve composition, while their financial-stability implications turn on run risk and links to the traditional financial system.
Centralization: Since most central bank digital currencies are centralized, rather than decentralized like most cryptocurrencies, the controllers of the issuance of CBDCs can add or remove money from anyone's account with a flip of a switch.
Digital dollarization: A well-run foreign digital currency could become a replacement for a local currency for the same reasons as those described in dollarization. The announcement of Facebook's Libra contributed to the increased attention to CBDCs by central bankers, as well as China's progress with DCEP to that of several Asian economies.
Privacy:
"Governments have direct visibility of financial transactions", an "eagle-eyed view on the spending of everyone".
Digital currency would give a country "broad new powers when it comes to surveillance and controlling its population."
Data from tracing money routes could lead to losing financial privacy if the CBDC implementation does not have adequate privacy protections. This could lead to encouraging of self-censorship, deterioration of freedom of expression and association, and ultimately to stalling social developments.