Glossary term
Central Bank Digital Currency (CBDC)
A central bank digital currency is a digital form of central bank money that could be used by financial institutions, the public, or both, depending on the design.
Updated
Read time
What Is a Central Bank Digital Currency?
A central bank digital currency (CBDC) is a digital form of central bank money. It is issued or backed by a central bank rather than a private company, and its design can be limited to financial institutions, opened to the general public, or structured through intermediaries such as banks and payment firms.
A CBDC is not the same thing as a cryptocurrency, a bank deposit, a payment app balance, or a private stablecoin. It is a public-money design question: should central bank money exist in a new digital form, who should be allowed to hold it, and how should it move?
Key Takeaways
- A CBDC is digital central bank money, not a privately issued cryptoasset.
- Wholesale CBDCs are aimed at institutions; retail CBDCs are aimed at the public.
- Design choices can affect privacy, bank deposits, payment speed, financial inclusion, monetary policy, and financial stability.
- The United States has studied CBDCs but has not issued a retail digital dollar.
- A CBDC can be account-based, token-based, intermediated, direct, interest-bearing, non-interest-bearing, online, offline, or some combination of those choices.
How CBDCs Could Work
A wholesale CBDC would mainly serve banks, financial institutions, or settlement systems. It could be used to settle large-value payments, securities transactions, or interbank obligations. A retail CBDC would be accessible to households and businesses, either directly with the central bank or through regulated intermediaries.
The legal and operational design is the hard part. A direct retail CBDC could create a close relationship between the public and the central bank. An intermediated model could keep banks and payment providers in the customer-facing role while the CBDC remains central bank money underneath. Each approach changes privacy, compliance, operational resilience, and bank-funding implications.
CBDC Versus Money People Already Use
Instrument | Issuer or liability | Main distinction |
|---|---|---|
Physical cash | Central bank or government currency authority | Public central bank money in physical form. |
Bank deposit | Commercial bank | Private bank liability, typically supported by deposit insurance rules. |
Stablecoin | Private issuer | Claims to track fiat money but depends on issuer reserves and redemption rights. |
CBDC | Central bank | Digital public money, depending on the legal design. |
Policy Choices That Shape the Financial Impact
CBDC debates are less about whether money can be digital and more about who controls the ledger, who can access it, and what protections surround it. A CBDC could improve payment speed or resilience if designed well. It could also create new risks if deposits move out of banks quickly during stress, if privacy protections are weak, or if the system concentrates too much operational importance in one payment architecture.
Interest is another design choice. A non-interest-bearing CBDC may behave more like cash. An interest-bearing CBDC could affect monetary transmission and competition with bank deposits. Holding limits, tiered balances, offline functionality, and identity rules can all change how the instrument works in practice.
Current U.S. Context
In the United States, Federal Reserve materials emphasize that the country already has central bank money in physical currency and digital balances held by commercial banks at the Federal Reserve. A retail CBDC would be a different design because households and businesses could potentially hold or use a digital form of central bank money. The Federal Reserve has explored the topic, but a U.S. CBDC has not been issued.
That distinction also matters for FedNow and other payment upgrades. Faster payment rails can move commercial bank money more quickly. They are not automatically CBDCs.
The Bottom Line
A CBDC is digital central bank money. Its financial significance depends on design: retail or wholesale, direct or intermediated, private or traceable, interest-bearing or not, and integrated with banks or separate from them. The debate is ultimately about monetary architecture, not just payment convenience.