Governments and central banks around the world are studying, testing and in some cases launching digital versions of their national currencies. These are known as central bank digital currencies, or CBDCs. They have attracted a lot of attention, but they are often confused with cryptocurrencies. Here is what they are and why they matter.
What Is a CBDC?
A CBDC is a digital form of a country’s official currency, issued and backed by its central bank. It is a direct claim on the central bank, much like physical cash, rather than a claim on a commercial bank.
How CBDCs Differ From Other Money
- Compared with cash: A CBDC is digital, so it can be sent and received electronically.
- Compared with bank deposits: Deposits are liabilities of commercial banks, while a CBDC would be a liability of the central bank.
- Compared with cryptocurrencies: Cryptocurrencies are typically decentralized and their value can swing sharply. A CBDC is issued by a central authority and denominated in the national currency.
Two Main Types
- Retail CBDCs: Designed for the general public to use for everyday payments.
- Wholesale CBDCs: Designed for banks and financial institutions to settle large transactions between themselves.
Why Countries Are Exploring Them
- Payment efficiency: Faster and cheaper domestic and cross-border payments.
- Financial inclusion: A way to reach people without access to traditional banking.
- Resilience: An additional payment option if cash use declines.
- Monetary sovereignty: A response to the growth of private digital money and foreign payment platforms.
Concerns and Open Questions
CBDCs raise important questions. Privacy is one of the biggest: people want to know who can see their transactions and how data is used. Another is the effect on commercial banks, since large shifts of deposits into central bank money could change how banks fund lending. Cybersecurity, offline access and the digital divide also need to be addressed.
Where Things Stand
Approaches differ widely. Some countries have launched pilots or full versions, while others are still researching or have decided to wait. Design choices on privacy, limits on holdings and the role of banks vary from place to place.
CBDCs are not a single product but a family of possible designs. Whether they succeed will depend on whether they offer real benefits to users while protecting privacy and financial stability.
