A central bank digital currency, or CBDC, is a digital form of a country's official money that is issued by its central bank. It is a direct liability of the central bank, like banknotes. That makes it different from the balance in a bank account, which is a claim on a commercial bank, and different from Bitcoin or stablecoins, which are issued outside the central bank.
Most money is already digital. What is new about a CBDC is who stands behind it. A group of central banks working with the Bank for International Settlements set out the basic design goals in a 2020 report on CBDC foundational principles: a CBDC should do no harm to monetary and financial stability, should coexist with cash and bank money, and should promote innovation and efficiency.
Retail and Wholesale CBDCs
There are two main types.
- Retail CBDC: for the general public and businesses, used for everyday payments. It works like digital cash.
- Wholesale CBDC: for banks and other financial institutions, used to settle large payments and securities trades between them.
Banks already hold digital reserves at central banks, so a wholesale CBDC is mostly a technology upgrade. Retail CBDCs are the more debated idea, because they would give ordinary people direct access to central bank money in digital form.
How a CBDC Works
A CBDC does not need a blockchain. Some designs use distributed ledger technology. Others use conventional centralized databases. Either way, the central bank controls issuance and sets the rules.
Most retail designs use a two-tier model. The central bank issues the currency, and banks and payment companies provide the wallets, run the identity checks and deal with customers. The central bank avoids managing millions of accounts itself.
Design choices vary from one project to the next. Common ones include limits on how much a person can hold, no interest paid on balances, and offline payments for places with poor connectivity.
How CBDCs Differ From Cryptocurrencies
- Issuer: a CBDC is issued by a central bank. Bitcoin is issued by a protocol with no central party. Stablecoins are issued by private companies.
- Supply: a central bank decides how much CBDC exists. Bitcoin has a fixed issuance schedule.
- Access: public blockchains are open to anyone. A CBDC is permissioned, and users are identified under the system's rules.
- Privacy: public blockchains are pseudonymous but transparent. In a CBDC, privacy depends on the design and the law behind it.
- Value: a CBDC is worth exactly one unit of the national currency. Cryptocurrency prices float.
Why Central Banks Are Interested
- Cash use is falling in many countries, and a CBDC would keep public money available in digital form.
- Cross-border payments are slow and expensive, and several wholesale CBDC experiments target that problem.
- Private stablecoins and large technology firms are growing in payments, and central banks want to protect the role of their own currency.
- In some countries, a CBDC is seen as a way to reach people who have a phone but no bank account.
Where Things Stand
The Bahamas launched the Sand Dollar in October 2020, the first nationwide retail CBDC. Nigeria followed with the eNaira in October 2021, and Jamaica launched JAM-DEX in 2022. Adoption of these early retail CBDCs has been limited so far.
China has run the largest pilot, the digital yuan or e-CNY, across many cities since 2020.
In the euro area, the European Central Bank began a preparation phase for a digital euro in November 2023. A decision to issue depends on European Union legislation being adopted.
The United States has not launched a CBDC. The Federal Reserve published a discussion paper in January 2022 and keeps a public page on central bank digital currency. It has said it would not proceed without clear support from Congress and the executive branch. In January 2025, a presidential executive order barred federal agencies from establishing, issuing or promoting a CBDC.
Risks and Criticisms
- Privacy: depending on the design, a retail CBDC could give the state a detailed view of individual spending. Projects such as the digital euro say they will include privacy safeguards, but critics doubt how strong these will be.
- Programmability: money could in theory be given rules, such as expiry dates or limits on what it can buy. Several central banks, including the ECB, have said their CBDC would not be programmable money. The concern remains a central part of the debate.
- Bank disintermediation: if people move deposits out of commercial banks and into CBDC, banks have less funding for loans. Holding limits are one proposed answer.
- Operational risk: a central system is a high-value target for cyberattacks and a single point of failure.
Common Misconceptions
- A CBDC is not a cryptocurrency. It may not use a blockchain at all, and it is neither decentralized nor permissionless.
- A CBDC is not a stablecoin. Stablecoins are private liabilities backed by reserves.
- A pilot is not a launch. Many countries are researching CBDCs. Only a few have issued one.
Nothing in this article is financial advice.
Why It Matters for Crypto
CBDC policy shapes the rules for stablecoins, which compete with CBDCs as digital dollars and euros. A country that rejects a retail CBDC may rely more on regulated private stablecoins. A country that adopts one may restrict them. In both cases, the decisions affect how money moves between banks and crypto markets.
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