Key Takeaways
CBDCs are digital versions of a country’s official currency, like the US dollar or euro, created and managed by the country’s central bank.
They are designed to make payments faster, more secure, and easier to program, helping modernize today’s financial systems.
CBDCs come in two main types: retail CBDCs for everyday users, and wholesale CBDCs for banks and large institutions.
Governments around the world are testing CBDCs to understand how they might impact their economies, banking systems, and financial stability.
While CBDCs can offer some benefits, they also raise concerns about privacy, government control over personal finances, and possible disruptions to the banking system.
Introduction
The way we use money is changing fast. Today, you can pay for a coffee with your phone, send money abroad in seconds, and even buy digital art with cryptocurrency. As everyday life becomes more digital, central banks are joining the shift with Central Bank Digital Currencies (CBDCs).
Unlike cryptocurrencies such as Bitcoin, CBDCs are issued by governments and designed to be stable. As more countries explore and implement CBDCs, they could change the way you use money in the future.
What Are Central Bank Digital Currencies (CBDCs)?
Central Bank Digital Currencies (CBDCs) are digital versions of fiat currencies issued and regulated by a country’s central bank. It is not a new currency but a digital representation of existing fiat money, such as the US dollar, euro, or Chinese yuan.
Unlike cryptocurrencies such as Bitcoin, CBDCs are centralized, government-backed, and fully regulated. They are designed to hold the same value as physical cash and are considered legal tender, meaning you can use them to pay for goods, services, or settle debts.
Why Are Central Banks Exploring CBDCs?
Central banks around the world are actively researching and testing CBDCs to find out the potential benefits they can provide. There are several key reasons driving this interest and exploration:
1. Less cash usage
In many countries, people are choosing digital payments instead of coins or bills. By offering a digital version of national currency, central banks can stay involved in how people pay, without relying entirely on private payment apps or companies.
2. Financial inclusion
In many parts of the world, people don’t have access to bank accounts, but most do own mobile phones. CBDCs could give these people a safe way to store and send money without needing to go to the bank.
3. Efficiency and innovation
Sending money abroad, like remittances to family, can be slow and expensive, especially with bank fees or middlemen involved. CBDCs could eventually allow money to move directly between countries or parties at a lower cost.
4. Enhance policy tools
CBDCs could be programmed with rules, like stimulus payments that will expire if not spent in time or tax rebates that can only be used on essential goods. This could help policymakers ensure that support reaches people quickly and is used as intended.
5. Staying competitive
As private tech companies and stablecoins grow in popularity, some countries worry about losing control over their monetary systems. CBDCs give central banks a way to offer a stable, government-backed alternative.
Types of CBDCs
CBDCs are generally categorized into two main types:
Retail CBDC
Retail CBDCs are designed for individuals, businesses, and merchants, just like the cash in your wallet or money in your bank account. You could use them for buying groceries or sending money to a friend. It works a lot like a mobile payment app, but with a key difference: your money is issued and backed by the government, not a private company.
Wholesale CBDC
Wholesale CBDCs are not meant for public use. They are used behind the scenes by banks and financial institutions to settle large transactions quickly and securely. In this setup, the central bank gives approved institutions access to special accounts where they can deposit and transfer digital funds.
Wholesale CBDCs can give central banks more precise control over the financial system. By adjusting things like reserve requirements or interest on balances, they can influence interest rates and steer lending, just like they do with traditional monetary policy tools, but with potentially greater speed and accuracy.
How CBDCs Work
1. Direct vs. indirect models
Direct model: The central bank handles everything. You would have an account with the central bank directly, and they would issue and manage the digital currency for you.
Indirect or two-tier model: The central bank relies on commercial banks and payment providers to manage customer-facing services, such as wallet apps or account access. The central bank remains in charge of issuing the currency and overseeing the system.
Most countries prefer the two-tier model because it builds on existing financial infrastructure, allowing users to continue banking through familiar apps and services while still benefiting from a centrally issued digital currency.
2. Account-based vs. token-based systems
Token-based: A token-based CBDC functions similarly to digital cash. You hold digital tokens that represent value, and transactions are verified using public key cryptography (PKC) to prove ownership and authorize transfers. This approach can allow for pseudonymous payments, much like handing someone a physical note, although the actual level of privacy will depend on the system’s design and regulatory requirements.
Account-based: An account-based CBDC is tied to a verified identity, much like a traditional bank account. You need to authenticate yourself to access and use their funds. Each transaction is linked to your identity, which means the system needs strong identity management tools to ensure security and prevent fraud.
Many countries are exploring account-based systems because they offer more control, better regulatory compliance, and easier recovery if you lose access to your account.
3. Technology stack
CBDCs can run on different types of technology depending on what each country wants to prioritize. Some central banks choose a centralized database, where the central bank keeps track of all the transactions, similar to how banks already manage account balances today. This setup can be faster and easier for central banks to manage.
Other central banks are exploring the use of distributed ledger technology (DLT), where transaction records are shared securely across multiple participants in the network. This setup offers more transparency and can support advanced features like programmable payments using smart contracts.
Some CBDC designs include support for offline payments, which can be helpful in areas with limited internet access. These systems may use secure devices, such as smart cards or Near Field Communication (NFC) technology, to store a small amount of digital currency and sync with the network once a connection is available.
Concerns and Criticisms
Privacy and oversight
One of the biggest concerns about CBDCs is privacy and how much control they could give to central authorities. If every transaction goes through a central system, the government has the ability to see how, when, and where you spend your money. While this could help reduce fraud and tax evasion, some worry it might open the door to financial surveillance. There is also concern that in extreme situations, CBDCs would give authorities the power to freeze or limit access to your funds.
Impact on banks
If CBDCs become popular, people might start shifting their money from traditional bank accounts into central bank digital wallets. This could reduce the funds that commercial banks rely on to issue loans and support everyday banking services. During periods of financial stress, this shift could accelerate as people may view CBDCs as a “safer” option, potentially putting pressure on the broader banking system.
Technology and access
A successful CBDC needs to be secure, stable, and simple enough for anyone to use. If it is too complicated or confusing, many might find it hard to use in everyday life. CBDCs would be a key part of a country’s financial infrastructure, and they must be resilient against cyberattacks and system failures, since disruptions could affect millions.
CBDCs, Stablecoins, and Cryptocurrencies: What’s the Difference?
CBDCs: Issued by central banks and act as digital versions of national currencies. They are backed by the state and are designed to provide the same level of trust and stability as traditional fiat money.
Stablecoins: Created by private companies, stablecoins are usually tied to the value of a traditional currency, like the US dollar. The goal is to keep their price stable, but it all depends on how well the company manages and secures its reserves. If those reserves are not properly backed or regularly audited, the stablecoin could lose its peg and no longer hold its intended value.
Cryptocurrencies: Cryptocurrencies like bitcoin and ether are permissionless, trustless, and censorship-resistant, meaning no single company or government controls the network. However, their prices can be highly volatile, often shifting dramatically based on market sentiment.
The Global CBDC Landscape
As of July 2025, the Atlantic Council’s CBDC tracker includes over 130 countries that are either developing or exploring the possibilities of CBDC. The progress varies across regions depending on each country’s policy goals, technological infrastructure, and regulatory environment.
Live deployments: Some countries have already launched their CBDCs. These include the Sand Dollar in the Bahamas, JAM-DEX in Jamaica, and the e-Naira in Nigeria. All three are retail CBDCs designed to improve access to digital payment systems.
Pilot programs: Other countries are running pilot programs to test how CBDCs operate in practice. Examples include the e-CNY in China, the Digital Rupee in India, and the Digital Ruble in Russia.
Research stage: Countries such as Canada, Nepal, and New Zealand are continuing to study how a CBDC might fit within their existing monetary and financial systems.
Closing Thoughts
CBDCs are still being developed and tested, but they represent a potential shift in how people access and use money. By offering a digital version of national currency, central banks aim to improve payment systems and explore new ways to support financial inclusion and efficiency.
At the same time, CBDCs raise concerns around privacy and the level of oversight central banks might have, the role of commercial banks, and the potential exclusion of less tech-savvy users. The future of CBDCs will likely depend on how well these challenges are addressed and whether the benefits can be delivered in a way that is secure and trusted by the public.
Further Reading
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