Central bank digital currencies (CBDCs) are a form of digital currency issued by a country’s central bank. They are similar to cryptocurrencies, except that their value is fixed by the central bank and equivalent to the country’s fiat currency.

Many countries are developing CBDCs, and some have even implemented them. Because so many countries are researching ways to transition to digital currencies, it’s important to understand what they are and what they mean for society.


  • A central bank digital currency (CBDC) is the digital form of a country’s fiat currency.
  • A nation’s monetary authority, or central bank, issues a CBDC, which promotes financial inclusion and simplifies implementing monetary and fiscal policy.
  • Many countries are exploring how CBDCs may affect their economies, financial networks, and stability.

Understanding Central Bank Digital Currencies (CBDCs)

Fiat money is a government-issued currency that has no backing from a physical commodity like gold or silver. It is considered a form of legal tender that can be used to exchange for goods and services. Traditionally, fiat money came as banknotes and coins, but technology has allowed governments and financial institutions to supplement physical fiat money with a credit-based model that records balances and transactions digitally.

Physical currency is still widely exchanged and accepted; however, some developed countries have experienced a drop in its use, and that trend accelerated during the pandemic.

Governments and central banks worldwide are exploring the possibility of using government-backed digital currencies. When and if they are implemented, these currencies would have the full faith and backing of the government that issues them, just as fiat money does.


The introduction and evolution of cryptocurrency and blockchain technology have created further interest in cashless societies and digital currencies.

Goals of CBDCs

In the U.S. and many other countries, many individuals don’t have access to financial services. In the U.S. alone, 5% of adults didn’t have a bank account in 2020. An additional 13% of U.S. adults who had bank accounts, instead used costly alternative services like money orderspayday loans, and check-cashing services.

Board of Governors of the Federal Reserve System. “Report on the Economic Well-Being of U.S. Households in 2020.”

The main goal of CBDCs is to provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security. CBDCs could also decrease the cost of maintenance that a complex financial system requires, reduce cross-border transaction costs, and provide those who currently use alternative money-transfer methods with lower-cost options.

CBDCs would also reduce the risks associated with using digital currencies, or cryptocurrencies, in their current form. Cryptocurrencies are highly volatile, with their value constantly fluctuating. This volatility could cause severe financial stress in many households and affect the overall stability of an economy. CBDCs, backed by a government and controlled by a central bank, would give households, consumers, and businesses a secure means of exchanging digital currency.

A CBDC also provides a country’s central bank with the means to implement monetary policies to ensure stability, control growth, and influence inflation.

Fast Fact

Types of CBDCs

There are two types of CBDCs, wholesale and retail. Financial institutions are the primary users of wholesale CBDCs, whereas consumers and businesses use retail CBDC/

Wholesale CBDCs

Wholesale CBDCs are similar to holding reserves in a central bank. The central bank grants an institution an account to deposit funds or use to settle interbank transfers. Central banks can then use monetary policy tools, such as reserve requirements or interest on reserve balances, to influence lending and set interest rates.

Retail CBDCs

Retail CBDCs are government-backed digital currencies used by consumers and businesses. Retail CBDCs eliminate intermediary riskā€”the risk that private digital currency issuers might become bankrupt and lose customers’ assets.

There are two types of retail CBDCs. They differ in how individual users access and use their currency:

  • Token-based retail CBDCs are accessible with private keys or public keys or both. This method of validation allows users to execute transactions anonymously.
  • Account-based retail CBDCs require digital identification to access an account.

It is possible to develop two types of CBDCs, wholesale and retail, and have them function in the same economy.

Issues CBDCs Address and Create

The Federal Reserve has identified as critical requirements a CBDC meets, as well as matters that need to be addressed before one can be designed and implemented.

Issues Addressed By CBDCs

  • Free from credit and liquidity risk
  • Lowers cross-border payment costs
  • Supports the international role of the dollar
  • Aims for financial inclusion
  • Expands access to the general public

Issues Created by CBDCs

  • Financial structure changes
  • Financial system stability
  • Monetary policy influence
  • Privacy and protection
  • Cybersecurity

Issues Addressed By CBDCs Explained

  • Eliminates the third-party risk of events like bank failures or bank runs. Any residual risk that remains in the system rests with the central bank.
  • Can lower high cross-border transaction costs by reducing the complex distribution systems and increasing jurisdictional cooperation between governments.
  • Could support and protect U.S. dollar dominance; the U.S. dollar is still the most-used currency in the world.
  • Removes the cost of implementing a financial structure within a country to bring financial access to the unbanked population.
  • Can establish a direct connection between consumers and central banks, thus eliminating the need for expensive infrastructure.

Issues Created by CBDCs Explained

  • If the U.S. financial structure drastically changes, it’s unknown how it would affect household expenses, investments, banking reserves, interest rates, the financial services sector, or the economy.
  • Effects a switch to CBDC would have on a financial system’s stability are also unknown. For example, there may not be enough central bank liquidity to facilitate withdrawals during a financial crisis.
  • Central banks implement monetary policy to influence inflation, interest rates, lending, and spending, which in turn affects employment rates. Central banks must ensure they have the tools needed to positively impact the economy.
  • Privacy is one of the most significant drivers behind cryptocurrency. CBDCs would require an appropriate amount of intrusion by authorities to monitor for financial crimes; monitoring is also important because it supports efforts to combat money laundering and the financing of terrorism.
  • Cryptocurrencies have been the target of hackers and thieves. A central bank-issued digital currency would likely attract the same crowd of thieves. Therefore, efforts to prevent system penetration and theft of assets and information would need to be robust.

CBDCs vs. Cryptocurrencies

The cryptocurrency ecosystems provide a glimpse of an alternative currency system in which cumbersome regulations don’t dictate the terms of each transaction. They are hard to duplicate or counterfeit and are secured by consensus mechanisms that prevent tampering.

Central bank digital currencies are designed to be similar to cryptocurrencies, but they may not require blockchain technology or consensus mechanisms.

Additionally, cryptocurrencies are unregulated and decentralized. Their value is dictated by investor sentiments, usage, and user interest. They are volatile assets more suited for speculation, which makes them unlikely candidates for use in a financial system that requires stability. CBDCs mirror the value of fiat currency and are designed for stability and safety.

Central Bank Digital Currencies at a Glance

Central banks in many countries have pilot programs and research projects to determine the viability and usability of a CBDC in their economy. As of March 2023, there were 11 countries and territories with CBDCs. They are the Bahamas, Antigua and Barbuda, St. Kitts and Nevis, Monserrat, Dominica, Saint Lucia, St. Vincent and the Grenadines, Grenada, and Nigeria. Eighteen countries now have a pilot program, including seven of the G20 economies, and 32 countries have a program in development. According to the Federal Reserve, the U.S. is one of those countries that is exploring whether a CBDC “could improve on an already safe and efficient U.S. domestic payments system.”

Is CBDC a Cryptocurrency?

Though the idea for central bank digital currencies stems from cryptocurrencies and blockchain technology, CBDCs aren’t cryptocurrencies. A central bank controls a CBDC, whereas cryptocurrencies are almost always decentralized, meaning they can’t be regulated by a single authority, such as a bank.

Is a CBDC Based on a Blockchain?

A CBDC can be based on a blockchain, but it doesn’t need to be. The Federal Reserve Bank of Boston and the Massachusetts Institute of Technology (MIT)’s Digital Currency Initiative found in their research that distributed ledgers could hinder the efficiency and scalability of a CBDC.

The Bottom Line

Many countries are developing central bank digital currencies (CBDCs), and 11 already have implemented them. A CBDC’s main goal is to provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security. Many individuals throughout the world have no access to bank accounts, so a CBDC would give them a way to be paid, hold their money, and pay bills. CBDCs could also decrease the maintenance a complex financial system requires, reduce cross-border transaction costs, and give people who use alternative money-transfer methods lower-cost options.

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