What Is a Central Bank Digital Currency (CBDC)? Purpose and Examples

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A central bank digital currency (CBDC) is a digital form of a country’s national currency that is issued by, and is a direct liability of, the central bank. One unit of a CBDC is worth exactly one unit of the fiat currency it represents. A digital dollar would equal a paper dollar, and a digital pound would equal a pound coin. That direct claim on the central bank separates a CBDC from the digital money most people already use, which is a deposit owed to them by a commercial bank.

What Is a Central Bank Digital Currency (CBDC)?

The name describes the concept. Central bank identifies the issuer: the public institution that already issues banknotes and holds reserves for commercial banks. Digital describes the form. Currency means legal money in the national unit of account, not a separate asset with its own price.

Modern money is fiat money, meaning it is not backed by a commodity such as gold. Its value rests on the issuing government and on its status as legal tender. Today that money comes in three forms:

1. Cash: banknotes and coins, which are a liability of the central bank and are available to everyone.
2. Commercial bank deposits: the balance in a checking or savings account, which is a liability of a private bank.
3. Central bank reserves: balances that commercial banks hold in accounts at the central bank, which only eligible institutions can use.

A CBDC adds a digital version of central bank money. A wholesale CBDC extends or upgrades what reserves already do. A retail CBDC is the more significant change, because it would give the general public a digital claim on the central bank for the first time. Until now, the only central bank money ordinary people could hold was cash.

How a Central Bank Digital Currency Works

A CBDC system needs an issuer, a ledger that records who holds what, a way for users to access their holdings, and rules for how transactions are validated. Central banks can make different choices at each step, so CBDCs are a family of designs, not one product.

Wholesale CBDCs

Wholesale CBDCs work much like reserve balances. An eligible institution holds an account at the central bank and uses it to settle interbank transfers, securities trades or cross-border payments. The central bank keeps its standard tools, such as reserve requirements or interest paid on reserves, to influence interest rates and lending.

Much of the current work on wholesale designs concerns cross-border settlement. One example is Project Agorá, coordinated by the Bank for International Settlements (BIS), which is exploring a shared platform for wholesale cross-border payments. Participating central banks include the Federal Reserve Bank of New York, the Bank of France, the Bank of Japan, the Bank of Korea, the Bank of Mexico and the Swiss National Bank.

Retail CBDCs

Retail CBDCs are meant for everyday use by consumers and businesses: paying a merchant, receiving wages, sending money to family. Because the central bank stands behind the money, holders are not exposed to the failure of a private issuer, as they could be with a private digital currency or an uninsured deposit balance.

Retail designs differ in how users prove they are entitled to spend:

• Account-based CBDCs require digital identification. The system checks who you are before letting you move funds, much as a bank verifies the account holder.
• Token-based CBDCs are accessed with private and public keys, or both. The system checks that the token is valid and that the spender controls the key. This approach can allow anonymous or near-anonymous transactions, closer to how cash works.

Both types can operate in the same economy. A country could, for example, offer key-based tokens for small offline payments and identity-linked accounts for larger balances.

Interpreting a Central Bank Digital Currency

A key design question is who deals with the end user. In a direct model, the central bank runs the accounts or wallets itself. In an intermediated (or two-tier) model, which many central banks discuss, the central bank issues the CBDC and keeps the core ledger, while banks and payment providers onboard customers, run compliance checks and provide the digital wallet apps. In the intermediated model the money in the wallet is still a claim on the central bank, even though the customer interacts with a private firm.

A CBDC also does not need a blockchain. Some designs use distributed ledger technology, but research such as the Federal Reserve Bank of Boston’s Project Hamilton showed a CBDC could be built without one. A central bank does not need a decentralized consensus mechanism, because it is the trusted party that validates the ledger.

Why Is a Central Bank Digital Currency Important?

Central banks that study or launch CBDCs cite several goals:

• Financial inclusion. The Federal Reserve’s household survey found that 6% of U.S. adults had no bank account in 2025. A retail CBDC accessible through a phone or card could give unbanked people a safe way to get paid, store money and pay bills.
• Lower payment costs. Supporters argue a CBDC could reduce the cost of running a payment system and offer cheaper options to people who rely on costly money-transfer services.
• Cheaper cross-border payments. International payments often pass through several intermediaries. Simplifying that chain could reduce fees and delays.
• A safe public option as cash use declines. In the U.S., cash ranks third among payment methods, after credit and debit cards. Its use fell sharply in some developed countries during the pandemic and kept falling afterward. A CBDC would preserve public access to central bank money, and unlike a deposit it does not depend on a commercial bank staying solvent.
• Monetary sovereignty. Central banks want their own currency, not volatile cryptocurrencies or foreign currencies, to remain the basis of domestic payments. The Federal Reserve has also discussed whether a CBDC could support the dollar’s international role.

A CBDC also gives the central bank a direct channel for monetary policy, its tools for influencing inflation (often measured by the Consumer Price Index), interest rates and growth. For this reason, whether a retail CBDC should pay interest is among the most contested design choices.

Example of a Central Bank Digital Currency

Countries that have launched a CBDC

Three countries operate a live retail CBDC:

• The Bahamas: the Sand Dollar, launched in 2020 and generally recognized as the first nationwide retail CBDC. It was created partly to reach residents across the country’s many islands, where bank branches are scarce.
• Nigeria: the eNaira, launched in 2021.
• Jamaica: JAM-DEX, launched in 2022.

Every G20 country except the U.S. is exploring a CBDC, as are all the BRICS countries (Brazil, Russia, India, China and South Africa). China’s e-CNY is among the most widely piloted. The Bank of England is in the design phase of a possible digital pound, sometimes nicknamed “Britcoin.” A build phase would follow only if that work succeeds, and Parliament and the public would be consulted before any launch.

The U.S. has not issued a CBDC. The Federal Reserve has published research on whether one could improve the safety and efficiency of domestic payments, and it participates in international wholesale projects such as Project Agorá.

A hypothetical retail payment

Maria lives in a country with an intermediated, account-based retail CBDC. She opens a CBDC wallet through her phone carrier’s payments app, which verifies her identity. Her employer pays 500 units of the national currency into the wallet. When she buys groceries for 40 units, the merchant’s wallet is credited and hers is debited on the central bank’s ledger. Settlement is final at that moment: the merchant holds central bank money, not a promise from a card network or bank that funds will arrive later.

Compare the same purchase paid from a checking account. The 40 units move as a liability of Maria’s bank, then settle between her bank and the merchant’s bank through reserves at the central bank. The amount is identical. The difference is the chain of claims and who bears the risk along it.

A hypothetical wholesale settlement

Two banks in different countries need to settle a foreign exchange trade. Today each leg might pass through correspondent banks and settle at different times, so one bank can pay before it receives. On a shared wholesale CBDC platform (again hypothetical), both legs could settle simultaneously in each country’s central bank money. That removes the risk that one side delivers while the other does not.

Limitations of a Central Bank Digital Currency

The Federal Reserve has identified several issues that would need to be resolved before a CBDC could be designed and launched:

• Changes to the financial structure. Banks fund loans with deposits. If households moved large sums into a retail CBDC, banks might cut lending or pay more for funding. The effects on interest rates and the wider economy are uncertain. Some proposals respond with holding limits or by paying no interest on CBDC balances.
• Financial stability. In a crisis, people could move money from banks into the CBDC far faster than they could withdraw cash, turning a bank run into a digital one. Central bank liquidity might also fall short of withdrawals in a severe crisis.
• Monetary policy effects. A CBDC could change how interest rate decisions pass through to lending, spending and employment.
• Privacy. Account-based designs give authorities potential visibility into transactions. Some monitoring is needed to combat money laundering and terrorist financing, but how much access the state should have is a main public objection to retail CBDCs.
• Cybersecurity. Cryptocurrency platforms are frequent hacking targets, and a national digital currency would attract the same attention. Protections against intrusion and theft of funds and data would need to be very robust.

Most central banks describe a CBDC as a complement to cash and bank deposits, not a replacement. No country has used one to replace its fiat currency, so the effects of doing so remain theoretical.

CBDC vs. Cryptocurrency, Stablecoins and Bank Deposits

CBDCs are often confused with other forms of digital money. The differences come down to who issues the money, what backs it, and whether its value can change.

CBDC vs. cryptocurrency. Cryptocurrencies such as Bitcoin are decentralized, issued by protocol rules and not by a government, and secured by consensus mechanisms. Their value floats with sentiment and demand, which makes them volatile and better suited to speculation than to payments. A CBDC is issued by the state and fixed one-to-one with the national currency. It may borrow ideas such as tokens and keys, but it needs neither a blockchain nor decentralized consensus.

CBDC vs. stablecoin. A stablecoin is a privately issued token that aims to hold a steady value, often one U.S. dollar, by keeping reserve assets. Its stability depends on the issuer’s reserves and management. A CBDC is the currency itself, issued by the central bank, so no private issuer’s reserves stand between the holder and the money’s value.

CBDC vs. bank deposits and payment apps. Balances in a bank account or a service such as PayPal are already digital, but they are liabilities of private companies. A deposit may be protected by deposit insurance up to a limit, while a payment-app balance depends on how the provider holds customer funds. A CBDC balance is a direct claim on the central bank.

FAQs

The Bottom Line

CBDCs matter most to people who depend on cash or lack a bank account, and to policymakers weighing safer, cheaper payments. A retail CBDC would give the public a digital claim on the central bank, but design choices on privacy, interest and holding limits shape its risks to bank lending and stability. For now, most central banks frame a CBDC as a complement to cash and deposits.