What is a CBDC?

A CBDC is a digital form of money issued by a central bank. You can think of it as digital central bank money, similar to cash, but suitable for digital payments. The topic is relevant because more and more people pay digitally, while cash is used less in many countries. At the same time, central banks are exploring how to modernize money without putting the stability of the financial system at risk. CBDCs also raise questions. Will it become the digital euro? Will it exist alongside your current bank account, or replace something? And what does it mean for privacy, banks, and control over money flows? In this article, we explain step by step what a CBDC is, which variants exist, why central banks are working on them, and what the main advantages and disadvantages could be.

In short

• A CBDC is digital currency issued by a central bank.
• The goal is to prepare money and payments for a digital future, with the reliability of public money.
• There are different forms, such as a CBDC for consumers (retail) and a CBDC for banks and large institutions (wholesale).
• A CBDC is not the same as crypto, because it is issued by a central bank and is usually not aimed at full decentralization.
• Advantages often include faster and cheaper payments and an alternative to private digital currencies.
• Disadvantages often relate to privacy, supervision, cyber risks, and the potential impact on banks.

What are CBDCs?

CBDC stands for Central Bank Digital Currency. The idea is that you get a digital form of money issued directly by the central bank, instead of only holding money as a balance at a commercial bank.

What does CBDC mean?

A central bank is the institution responsible for a national or regional currency, such as the euro in the eurozone. They ensure price stability, safeguard the financial system, and manage money in circulation. A CBDC is a digital issuance of that same central bank. It is therefore not a coin from a company, not a trading platform token, and not a currency created through mining or staking.

CBDC as digital central bank money

Currently, most people mainly use two forms of money. The first is cash, such as coins and banknotes. The second is bank money, the balance in your bank account. In practice, that balance is a claim on your bank. A CBDC adds a third form: digital money directly linked to the central bank. As a result, it is fundamentally public money, just like cash, but suitable for digital payments.

The role of the central bank

To understand CBDCs, it helps to know what central banks do and how money works today. Central banks issue cash, set the tone for monetary policy, and play a role in payment systems. They also often act as a safety net in times of crisis.

Why central banks are working on CBDCs

Central banks are exploring CBDCs for several reasons. One important reason is that payments are becoming increasingly digital. People pay more often with cards, apps, or online. If cash is used less, there may be demand for a digital alternative with the same public foundation as banknotes. In addition, central banks are looking at the rise of private digital currencies, such as stablecoins. These can be useful, but they are issued by companies and bring different risks. A CBDC could in theory provide a public alternative with clear rules and oversight. There is also a desire to make payments more efficient. Think of faster settlement, lower costs, and better compatibility with modern systems. Finally, a CBDC may help preserve the role of public money in a world where payments increasingly run through commercial parties.

Difference between a central bank and a commercial bank

A commercial bank is the bank where you hold your account and receive your salary. Your balance is a claim on that bank. A central bank is a public institution that safeguards the monetary system and issues money. With a CBDC, part of digital money could be issued directly by the central bank, while commercial banks can still play a major role in services such as credit, payment accounts, and customer relations. How this division works depends on the design.

What types of CBDCs exist?

CBDCs are not one fixed product. There are variants with different goals and target groups. These variants also determine how a CBDC is used and what effects it may have.

Retail CBDC

A retail CBDC is intended for consumers and businesses for everyday use. Think of paying in stores, online payments, or peer-to-peer transfers. The idea is that, just like with cash, you can pay with public money, but digitally.

Wholesale CBDC

A wholesale CBDC is mainly intended for banks and large financial institutions. It can be used for interbank settlement, financial market transactions, or international payments. This version is often less visible to consumers but can make the financial system more efficient.

Account-based vs token-based

There are roughly two ways to design a CBDC. In an account-based model, you have a type of account structure. Your identity or account determines whether you can make payments. This resembles how bank accounts work in some respects, though it may be structured differently. In a token-based model, you work with digital “tokens” that can be transferred, similar to how cash works: whoever holds it can spend it. In practice, hybrid models may also exist, combining elements of both approaches.

Are CBDCs cryptocurrency?

Many people wonder whether CBDCs are the same as crypto. The short answer is no. There may be technical similarities, but the foundation and purpose differ.

Similarities with crypto

CBDCs may use technology also found in the crypto world. Think of digital wallets, cryptography for security, and in some cases a form of shared ledger technology. Payments may also become faster and more direct, similar to some blockchain networks.

Differences from Bitcoin and stablecoins

Bitcoin was designed without a central issuer and works through an open network where participants reach consensus. A CBDC, by contrast, has a central issuer — the central bank — and operates under laws and regulations. This usually means there are control mechanisms, such as identity, compliance, and supervision rules. Stablecoins are often linked to a currency like the dollar or euro but are issued by companies. This raises questions about reserves, transparency, and risks. A CBDC is issued by a central bank and is therefore directly part of the monetary system.

Why is there a need for CBDCs?

Less cash, more digital payments

In many countries, digital payments have become the norm. Cash remains important but is used less. If cash becomes less available or accepted in practice, demand may arise for a digital form of public money that can fulfill the same basic function.

Faster and cheaper payments

A CBDC could be a way to settle payments faster, including across borders. Some existing systems involve delays, extra costs, or intermediaries. A well-designed CBDC could potentially reduce this, depending on the infrastructure and agreements between countries and banks.

Competition with private stablecoins

Stablecoins can play an important role in digital payments, but they also create dependence on private parties. Central banks want to avoid payment systems or trust in money shifting too far toward systems outside the public monetary framework. A CBDC could offer a public alternative that evolves alongside digital innovation.

CBDC vs bank deposits

Bank deposits are money you hold at a bank. When you pay, that balance moves within the banking system. A CBDC is money issued directly by the central bank. Depending on the design, this could mean holding part of your money in a form that does not depend on the balance sheet of a commercial bank.

CBDC vs cash

Cash is anonymous in use, directly transferable, and works without internet. A CBDC is digital, meaning it works through a system and often via a wallet or account. As a result, rules may apply that are harder to enforce with cash. Some designs try to approach cash-like features, such as offline payments or stronger privacy, but this depends on central bank choices and legislation.

Programmability and control

A frequently discussed topic is programmability. In theory, digital money could include conditions, such as spending limits, time-bound use, or automated settlement. Not every CBDC will work this way, but the possibility exists technically. This makes the debate about control and privacy especially important. The more rules and supervision there are, the bigger the question: who decides, and how is misuse prevented?

What are the advantages of CBDCs?

More efficient payment systems

A CBDC could make payments faster and cheaper, especially for international transactions or settlement between parties. Fewer intermediaries can mean lower costs. It may also make payment systems more resilient if there are multiple ways to use digital public money.

Financial inclusion

In some countries, people do not have a bank account or have limited access to financial services. If properly designed, a CBDC could provide a low-threshold payment method, such as simple digital wallets or access via public channels. In practice, this depends on infrastructure, regulation, and digital skills.

Better security and stability

Because a CBDC is issued by a central bank, it is fundamentally linked to the reliability of the currency itself. This can inspire trust, especially compared to private alternatives where uncertainty may exist about reserves or management. Oversight may also help reduce fraud and money laundering, though this also touches on privacy concerns.

What are the disadvantages of CBDCs?

Privacy and supervision

One of the biggest concerns is privacy. If payments run through a CBDC, transaction data may be generated. The question is who can see that data, how long it is stored, and under what conditions. Central banks can choose designs that better protect privacy, but legislation and oversight play a major role. For many people, it is essential that digital payments do not lead to a system where every expense is automatically traceable.

Impact on banks and lending

If consumers were to move large amounts of money from bank accounts to a CBDC, this could affect banks. Banks use savings and deposits, among other things, for lending. Fewer deposits could mean banks need different funding models. That is why many central banks are exploring models where commercial banks remain involved, or where limits and rules prevent extreme shifts.

Technical risks and cyber threats

Digital systems can be targets for cyberattacks, outages, or technical failures. A CBDC must therefore be extremely reliable and secure. It is also necessary to plan for emergency scenarios, such as system downtime, offline payments, and recovery after incidents. The larger the role of a CBDC, the higher the requirements for security and continuity.

Frequently asked questions

When can we expect a CBDC?

This differs by country and project. Many central banks are still in research and testing phases, running pilots to assess technology, legislation, and impact. The digital euro, for example, is being explored, but a final rollout depends on political decisions, regulation, and technical choices. In practice, it is not one fixed date but a process with stages, testing, and approval.

Is a CBDC mandatory?

A CBDC is usually discussed as an additional form of money alongside cash and bank deposits. Whether it becomes mandatory depends on legislation and political choices. In many scenarios, the intention is precisely to keep choice available. At the same time, the market may evolve if shops or services increasingly support certain payment methods. That is why how countries handle cash, freedom of choice, and accessibility remains important.

Which countries already have a CBDC?

Some countries have already launched a CBDC, while others are running pilots. Some projects focus on consumers, others on interbank settlement. The picture changes quickly as more countries experiment. Smaller economies can often test faster, while larger regions take more time due to scale, legislation, and the impact on banks and payment systems.