Skip to main content

What is a Central Bank Digital Currency?


New forms of digital money, such as privately-issued cryptocurrencies, are well on their way to mainstream use. Another category of this new digital money has piqued the interest of governments around the world. Almost one hundred countries have begun research, development, and trials of digital forms of central bank money, known collectively as Central Bank Digital Currencies (CBDCs).

What is a CBDC?

At present, there are two types of money most commonly used by people and businesses: physical cash issued by central banks, and commercial bank money, which takes electronic form as people’s bank deposits.

Central banks do also produce digital money: the reserves held with them by regulated financial institutions. Up until recently, however, this hasn’t been available to the wider public, and in most countries, this is still the case. But CBDCs are changing this. 

CBDCs are an electronic form of central bank money that is available to the general public and non-financial businesses to make payments and store value. Unlike cryptocurrencies, they are issued and fully backed by central banks, so carry the same stability and value as the fiat currency in their country of origin. But instead of cash, they’re digital tokens. 

How is a CBDC different from a stablecoin?  

Stablecoins and CBDCs have some similarities; however, the major difference is that stablecoins are issued by private sector entities, and not backed by any central party, whereas CBDCs are issued and backed by central banks, carrying the same ‘risk free’ characteristics as cash or central bank reserves.

Either way, in a CBDC model, control of underlying technology and the ability to create and ‘destroy’ tokens reside with the central bank, most likely on the basis of a clear legal and regulatory framework. 

Another difference is how they hold their value. CBDCs are the tokenized version of their country of origin’s fiat currency. Like cash, they are fully backed by the issuing central bank, which will typically be mandated to maintain the value of that fiat currency, and publicly accountable for its activities.  

Private stablecoins, meanwhile, seek to overcome the price fluctuations associated with other crypto assets by pegging their value to another asset, most commonly a national fiat currency.  Stablecoin issuers have backing assets in place, so their users can redeem any coins they hold in fiat currency when they want or need to.

Types of CBDC and key use cases

CBDCs should be seen in the context of a central bank’s core payment-related functions:  providing its country’s unit of account (i.e. its fiat currency), ensuring final settlement of payments between its financial institutions, and overseeing the smooth working and integrity of its country’s payment system. 

As part of this central bank framework, it is envisaged that different types of CBDC would be used for specific circumstances. They fall into two main categories: wholesale CBDCs and retail CBDCs.

What is a wholesale CBDC? 

Wholesale CBDCs would be used to settle interbank transfers and other wholesale transactions between regulated financial institutions, domestically and potentially across borders. They would operate similarly to financial institutions’ existing reserve accounts with central banks. But they might also enable new forms of conditionality, such as final settlement of a payment or transaction being dependent on the delivery of a separate payment or asset. As such, they could improve the efficiency, safety and speed of wholesale payments. 

What is a retail CBDC?  

Retail CBDCs are essentially a digital form of fiat currency, intended for use by people and non-financial businesses to make and receive payments. They could be structured in two ways, offering either token-based, anonymous access to users, or account-based access rooted in verifying a user’s identity through some form of digital ID scheme. They offer the potential for transactions that are person-to-person, person-to-business, and even government-to-person. 

CBDC use cases

There are some additional areas where CBDCs can be used. 

  • Global commerce: CBDCs could open foreign markets to businesses and consumers by enabling quicker and easier cross-border payments. This could be achieved, for example, through ‘multi-CBDC’ arrangements, involving the coordination of CDBC standards and regulation, technical interfaces between different CBDC systems, or even a shared system for multiple CBDCs.     
  • Emergency use: During unforeseen circumstances, like a global pandemic or a natural disaster, governments can use CBDCs to distribute emergency funds quickly to those in need of financial support. 
  • Financial inclusion: CBDCs could bring more unbanked people into the financial system, by offering them the ability to make digital payments without a conventional bank account, and also potentially the capability for offline peer-to-peer digital transactions.    

What countries are exploring CBDCs? 

There are close to one hundred countries around the world studying CBDCs. Nine of them have already implemented their use. This includes several countries in the Caribbean and Nigeria.

Sand Dollar, from The Bahamas, has been in use since 2020 and can be accessed via smartphones or physical payment cards which are tied to a digital wallet. Sand Dollar offers some offline features. If a network connection is lost, users can make small-value payments. The user’s wallet will be updated when a connection is made.

Other countries are still in their pilot and development stages. China is one of the leading countries in the pilot stage. Currently, ten major cities have trials of their CBDC, e-CNY. The country also launched another trial during the 2022 Beijing Winter Olympics.


However, the majority of countries with an active interest in CBDCs are still in the research phase. Several countries in Europe, Peru, and Indonesia are a handful of the 40 countries studying CBDCs.


In the UK, the government and Bank of England are working together to explore the case for a UK CBDC. They are capturing the views of industry bodies, business and consumer groups, crypto and payments experts, and academics through a joint Engagement Forum, of which is a member.

The US is also exploring the potential benefits, drawbacks, and obstacles associated with this new form of currency — a process likely to accelerate in light of President Biden's, March 2022 executive order.

The future of CBDCs

It's paramount to remember that CBDCs are mostly still in development – or early infancy, where they do already exist.  There is some way to go before we know what place CBDCs will occupy in the wider spectrum of new digital money emerging around the world, and whether they will become a mainstream payment method and store of value for consumers.

And there are some fundamental questions that still need to be answered, spanning the philosophical (how user privacy should be balanced with the capability to track illicit activity) systemic (whether, and how, traditional banking models and reserve currencies could be impacted) and technical (can CBDCs interoperate with existing payment systems).

However, the broad direction of travel looks set, and it'll likely be a question of when, not if, more countries launch their own CBDCs.