What Is a Central Bank Digital Currency (CBDC)?

Central bank digital currencies are digital tokens, similar to cryptocurrency, issued by a central bank. They are pegged to the value of that 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 is the digital form of a country's fiat currency.
  • A CBDC is issued and regulated by a nation's monetary authority or central bank.
  • CBDCs promote financial inclusion and simplify the implementation of monetary and fiscal policy.
  • As a centralized form of currency, they may not anonymize transactions as some cryptocurrencies do.
  • Many countries are exploring how CBDCs will affect their economies, existing financial networks, and stability.

Understanding Central Bank Digital Currencies (CBDCs)

Fiat money is a government-issued currency that is not backed by a physical commodity like gold or silver. It is considered a form of legal tender that can be used to exchange goods and services. Traditionally, fiat money came in the form of banknotes and coins, but technology has allowed governments and financial institutions to supplement physical fiat money with a credit-based model in which balances and transactions are recorded digitally.

Physical currency is still widely exchanged and accepted; however, some developed countries have experienced a significant decrease in its use, and that trend accelerated during the COVID-19 pandemic.1

The introduction and evolution of cryptocurrency and blockchain technology have created further interest in cashless societies and digital currencies. Thus, 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 issued them, just like fiat money.

Goals of Central Bank Digital Currencies

In the U.S. and many other countries, many people do not have access to financial services. In the U.S. alone, 5% of adults do not have a bank account. An additional 13% of U.S. adults have bank accounts but use expensive alternative services like money orders, payday loans, and check-cashing services.2

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


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

Central bank digital currencies would also reduce the risks of using digital currencies 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 provide households, consumers, and businesses with a stable means of exchanging digital currency.

Types of CBDCs

There are two types of CBDCs, wholesale and retail. Wholesale CBDCs are primarily used by financial institutions. Retail CBDCs are used by consumers and businesses, much like physical forms of currency.3

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 risk—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:3

  • Token-based retail CBDCs are accessible with private/public keys. This method of validation allows users to execute transactions anonymously.
  • Account-based retail CBDCs require digital identification to access an account.3

The two types of CBDCs, wholesale and retail, are not mutually exclusive. It is possible to develop both and have them function in the same economy.

Issues CBDCs Address and Create

The Federal Reserve has published a report on what it believes are critical issues a CBDC meets, and issues that need to be addressed before one can be successfully designed and implemented.4

Issues Addressed By CBDCs
  • Free from credit and liquidity risk

  • Cross-border payment improvements

  • Supports the international role of the dollar

  • Financial inclusion

  • Expands access to the general public

Issues That Need Addressing
  • Financial structure changes

  • Financial system stability

  • Monetary policy influence

  • Privacy and protection

  • Cybersecurity

Issues a CBDC Addresses Explained

  • A CBDC eliminates the third-party risk of events like bank failures or runs. Any residual risk that remains in the system rests with the central bank.
  • High cross-border transaction costs can be lowered by reducing the complex distribution systems and increasing jurisdictional cooperation between governments.
  • The dollar is still the most used currency in the world.5 A U.S. CBDC could support and preserve its dominant position.
  • Removes the cost of implementing a financial structure within a country to bring financial access to the unbanked population.
  • CBDCs can establish a direct connection between consumers and central banks, thus eliminating the need for expensive infrastructure.

Issues a CBDC Creates Explained

  • The financial structure of the U.S. could drastically change. How a change would affect household expenses, investments, banking reserves, interest rates, the financial services sector, or the economy is unknown.
  • The effects a switch to CBDC would have on a financial system's stability are 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 will need to ensure they have the tools they need to positively influence 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.
  • As has been witnessed on several occasions, cryptocurrencies have been the target of hackers and thieves. A central bank-issued digital currency would likely attract the same crowd of thieves, so efforts to prevent system penetration and theft of assets and information would need to be significant.

CBDCs vs. Cryptocurrencies

The cryptocurrency ecosystems provide a glimpse of an alternate currency system in which cumbersome regulations do not 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.6

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

Many central banks have pilot programs and research projects intending to determine the viability and usability of a CBDC in their economy. As of March 2022, there were nine countries and territories that had launched CBDCs.7

  • The Bahamas
  • Antigua and Barbuda
  • St. Kitts and Nevis
  • Monserrat
  • Dominica
  • Saint Lucia
  • St. Vincent and the Grenadines
  • Grenada
  • Nigeria

There are 80 other countries with CBDC initiatives and projects underway.7 Here are a few:

  • In February 2022, India's central bank announced that it would introduce a digital rupee by the end of 2023.8
  • Jamaica minted its first batch of CBDC in August 2021. The Bank of Jamaica is expected to launch its CBDC in 2022.9
  • Sweden's Riksbank began developing an electronic version of the krona (called e-krona) after the country experienced a decline in the use of cash.10
  • The United States is investigating CBDCs to improve the domestic payments system, increase efficiency, and reduce costs.11 And in March 2022, President Biden directed federal agencies to evaluate the infrastructure that would be needed to issue a U.S. CBDC.12
  • The Bank of England (BoE) is still investigating integrating CBDC into its financial system.13
  • The Bank of Canada (BOC) continues to research implementing CDBC.14

Is CBDC a Cryptocurrency?

Though the idea for central bank digital currencies stems from cryptocurrencies and blockchain technology, CBDCs are not cryptocurrencies. CBDCs are controlled by a central bank, whereas cryptocurrencies are almost always decentralized, meaning they cannot be regulated by a single authority.

What Is the U.S. CBDC?

As of March 2022, there is no U.S. CBDC. But the Federal Reserve and its branches are researching CBDCs and ways to implement them in the U.S. financial system, and President Biden has ordered the development of a national strategy on digital currencies.126

Is CBDC Based on Blockchain?

CBDCs can be based on blockchain, but they do not need to be. The Federal Reserve Bank of Boston and Michigan Institute of Technology's Digital Currency Initiative found in their research that distributed ledgers could hinder the efficiency and scalability of a CBDC.6