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central bank digital currency (CBDC)

What is a central bank digital currency?

A central bank digital currency (CBDC) is a digital version of a country's central bank money or fiat currency. Fiat money is not tied to a physical commodity such as gold or silver.

The role of a central bank is to support financial services, set monetary policy and issue currency. In the U.S., the central bank is called the Federal Reserve. Most countries have a central bank. The U.S. does not currently have a central bank digital currency but does have central bank currencies.

In the United States, there are currently two types of central bank currency -- the physical dollar issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve. A CBDC would be a third type of central bank currency. Like cash, it represents a direct liability from the central bank to the general public.

The digital forms of money people hold in their bank accounts, payment applications and online transactions are the liability of a commercial bank, which have digital balances of the federal reserve. Reserve balances are accessible only by financial institutions not the public.

If the U.S. adopted a central bank digital currency, it would not replace or remove the other two forms of currency -- it would be in addition to the other two forms.

CBDCs are similar to stablecoin -- a type of cryptocurrency that is tied to another commodity, currency or financial instrument. Cryptocurrency and CBDCs are both forms of digital currency that use some form of digital ledger technology that makes the data recorded on it immutable. Cryptocurrencies use a particular type of digital ledger called blockchain. CBDC can be issued on a blockchain but doesn't have to be. Both can be used to carry out anonymous transactions.

The difference between cryptocurrency and CBDCs is that crypto is decentralized, whereas CBDCs are centralized and state-issued. Cryptocurrencies do not generally represent the liability of any government or central authority. They are provided by private market actors.

Learn how cryptocurrency is valued.

Examples of countries that use CBDCs

Many countries -- over 114 -- are interested in CBDCs and several have already implemented them. Countries with functional CBDCs as of this writing include, but are not limited to the following:

  • Bahamas with its Sand Dollar currency, which was launched in October 2020.
  • Jamaica with its JAM-DEX currency, which was launched in July 2022.
  • Nigeria with its eNaira currency, which was launched in October 2021.
  • China with its e-CNY currency, which was launched for a pilot phase in April 2020.
  • India with its e-Rupee, which was launched for a pilot phase in December 2022.
  • Russia with its digital ruble, which was launched for a pilot phase in August 2023.
  • Eastern Caribbean Currency Union with its DCash, which was launched for a pilot phase in March 2019.

China, India, Russia and the ECCU's CBDCs are in a pilot phase as of this writing. This means the country is testing the currency with a limited number of parties. The United States is in the research phase for a CBDC, as are dozens of other economies, according to

Types of CBDCs

There are two main types of CBDCs. They are as follows:

  • Retail CBDCs. Retail CBDCs are primarily tailored to consumers and businesses. Within this category, there are token-based retail CBDCs and account-based retail CBDCs. Token-based CBDCs can be used to carry out anonymous transactions, whereas account-based CBDCs require identification.
  • Wholesale CBDCs. Wholesale CBDCs are used for large infrequent transfers. They are used only by financial institutions to carry out interbank transactions.

There are other characteristics of CBDCs, such as the following:

  • Programmability. Does the currency support smart contracts or other programmable logic?
  • Interoperability. Does the currency integrate with other digital currency?
  • DLT. Is the currency built on top of distributed ledger technology?
  • Renumeration. Is the currency interest-bearing?

Benefits of using CBDCs

There are several potential benefits to CBDCs, including the following:

  • Financial inclusion. CBDCs expand consumer access to the financial system and give access to those traditionally underserved by a country's financial system.
  • Improve payment efficiency. CBDCs give households, businesses and consumers a convenient, digital form of central bank money.
  • Reduce infrastructure costs. CBDCs reduce the need for expensive infrastructure that connects consumers to central banks.
  • Cross-border transaction costs. CBDCs would support faster cross-border transaction costs.
  • New financial products. CBDCs could be a new platform for entrepreneurs to develop new services and products.
  • Global competitiveness. Implementing a CBDC can help expand or maintain the international influence of a nation's fiat currency.
  • Privacy. Advocates for CBDCs argue that they would help increase privacy and security for users with a new public blockchain-based infrastructure.
  • Tracking. CBDCs might simplify certain processes like tax collection because they make transactions recordable and easy to track.
  • Economic growth. CBDCs could stimulate economic growth by making transactions more efficient.

Concerns of using CBDCs

CBDCs also pose certain challenges and risks and might introduce new economic problems, such as the following:

  • Privacy. CBDCs would consider a substantial amount of government oversight to monitor for and protect against financial crimes, which critics argue is more of a privacy infringement than necessary.
  • Security. Cryptocurrency has been the target of hackers in the past. CBDCs would likely also draw attention from hackers and thieves.
  • Impact. Implementing CBDCs would affect monetary policy, which in turn influences interest rates, lending, employment rates and the economy overall.
  • Technical investment. Some countries investing in CBDCs would need to invest in technical infrastructure to make CBDCs possible.
  • Instability. A sudden surge in demand for CBDCs could destabilize the financial system.
  • Central bank overreach. CBDCs might give the central bank more power than it should have by critics' standards.

The future of impact of CBDCs

At the time of this writing, there are 114 countries involved to some level with CBDCs. It's likely that CBDCs will have a significant impact on the world economy in one way or another.

While the U.S. is exploring how CBDCs could improve the U.S. financial system, there is no immediate plan to implement them. According to the Federal Reserve, an American CBDC must do the following:

  • Provide more economic advantages than cost or risk.
  • Safeguard consumer privacy.
  • Prevent criminal activity.
  • Complement existing monetary systems and financial services.
  • Not supplant current forms of money and financial services.
  • Receive broad endorsement from principal stakeholders.

The U.S. House Financial Services Committee announced it would discuss a new bill to prevent the issuance of a CBDC called the Digital Dollar Pilot Prevention Act in September 2023. The bill cites privacy concerns as a reason for prevention.

Still, despite the hesitancy from the U.S., CBDC is expected to see use increase exponentially in the next decade as governments drive adoption around the world.

This was last updated in October 2023

Continue Reading About central bank digital currency (CBDC)

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