Overview

A central bank digital currency (CBDC) is a digital version of an official currency, created by a central bank rather than by private companies. Unlike cryptocurrencies such as Bitcoin, CBDCs are issued by a state and may work alongside physical cash. As of 2024, the Bahamas, Jamaica, and Nigeria have launched CBDCs, and 134 countries are researching their own versions while other jurisdictions, such as Florida, have banned CBDCs citing privacy concerns.

CBDCs could enable faster, cheaper payments and improve financial inclusion, but raise concerns about privacy and the potential for them to be used as a "tool for coercion and control". CBDC implementation could affect banks' financial stability, requiring careful policy design.

History

Although the term "CBDC" did not become widely used until after 2019, central banks have researched and launched digital currency projects for decades. For example, Finland's central bank issued the Avant stored value e-money card in the 1990s. In 2014, the People's Bank of China began researching the idea of issuing a CBDC. Elsewhere, the Ecuadorian central bank operated a mobile payment system from 2014 to 2018.

In 2021, Australia's central bank conducted a proof of concept for a wholesale CBDC using Ethereum to tokenize syndicated loans, aiming to automate and secure high-value transactions in the banking sector.

Implementation

A central bank digital currency would likely be implemented using a database run by the central bank, government, or approved private-sector entities. The database would keep a record (with appropriate privacy and cryptographic protections) of the amount of money held by every entity, such as people and corporations.

CBDCs may share some properties with virtual currency and cryptocurrency, such as programmability. In contrast to cryptocurrency, a central bank digital currency would be centrally controlled (even if it was on a distributed database), and so a blockchain or other distributed ledger would likely not be required or useful - even though they were the original inspiration for the concept.

The two primary categories of CBDCs are retail and wholesale. Retail CBDCs are designed for households and businesses to make payments for everyday transactions, whereas wholesale CBDCs are designed for financial institutions and operate similarly to central bank reserves. Retail CBDC is the digitization of sovereign currency, which applies to physical banknotes, coin, and existing wholesale CBDC reserves that are used in the reverse repo and repo market.

Characteristics

A CBDC is a digital counterpart to fiat money, issued by central banks, unless it is dividend-yielding; then, it is an ownership stake in the central bank and a new form of legal tender. Like paper banknotes, it is a means of payment, a unit of account, and a store of value. And like paper currency, each unit is uniquely identifiable to prevent counterfeiting.

Digital fiat currency is part of the base money supply, together with other forms of the currency. As such, DFC is a liability of the central bank just as physical currency is. It is a digital bearer instrument that can be stored, transferred and transmitted by all kinds of digital payment systems and services. The validity of the digital fiat currency is independent of the digital payment systems storing and transferring the digital fiat currency.

Proposals for CBDC implementation often involve the provision of universal bank accounts at the central banks for all citizens.

Criticism

Despite having potential advantages, CBDCs remain a controversial topic, and there are risks associated with their implementation.

According to American policy analyst, Avik Roy, CBDCs inherently expand government control, conflict with American privacy norms, and, in his view, regulated stablecoins can provide similar digital benefits with stronger privacy protections, leading him to oppose adopting a CBDC.