What is a CBDC?What is a CBDC?

CBDC stands for Central Bank Digital Currency, digital money issued by a central bank. It isn't a cryptocurrency in the bitcoin sense, but a digital form of euros or dollars. Further down we explain exactly how a CBDC works and how it differs from bitcoin. First the background: why are central banks working on this at all?

Central banks such as the ECB and the Fed steer the monetary policy of an entire economy. They set interest rates, manage money creation and keep an eye on the stability of the financial system.

Over the past ten years, three developments have put that role under pressure:

1. Commercial banks are too big to fail, they're so large that their collapse would hit the whole system.
2. FinTech and stablecoins make up an ever larger share of payments, outside the central bank.
3. Bitcoin shows that money can exist without a central authority, and is gaining ground as a store of value.

A CBDC is central banks' answer to these trends: a digital means of payment that they issue themselves and keep in their own hands. Not as a competitor to bitcoin, but as a modernisation of fiat money.

There's no fixed, internationally agreed definition of a CBDC, but most central banks work with these three characteristics:

• A CBDC is legal tender, just like a banknote.
• A CBDC has a unique identifier so that counterfeiting is impossible.
• A CBDC exists only digitally and is issued by the central bank itself.

Important: a CBDC doesn't have to run on a blockchain. In practice many central banks mention blockchain as a technological option, but there are also designs based on central databases. The chosen architecture determines how transparent and privacy-friendly a CBDC ultimately is.

A CBDC differs from bank deposits (the balance in your current account) in that a CBDC is a direct claim on the central bank. With bank deposits your claim is on a commercial bank, which lends that money out itself. That's why commercial banks fear a CBDC undermines their business model.

Central banks are examining three main models for rolling out a CBDC. Which model is chosen determines the future of banking.

Directly to the public

The central bank offers accounts to citizens directly. No commercial bank needed any more for payments and savings. Maximum grip for the central bank, minimal role for commercial banks.

Through financial institutions

The central bank issues reserve accounts to banks and payment service providers. Those carry out KYC and transaction processing. Closer to the current system, but with a digital top layer.

Fully backed by reserves

All bank assets are fully backed by central bank reserves. Fractional reserve banking disappears. The most radical scenario, with major consequences for lending.

Advantages

• Real-time payments without banks or clearing houses in between, comparable to a bitcoin transaction.
• Financial inclusion for people without a bank account, certainly in countries where a commercial bank is hard to access.
• New monetary policy: a central bank can pay money directly to citizens instead of going through bond purchases (quantitative easing). This bypasses the Cantillon effect, where the wealthy benefit from new money sooner than average earners.
• Less risk of bank failures because a CBDC is a direct claim on the central bank. A deposit guarantee scheme becomes less necessary.

Disadvantages

• Loss of privacy: every transaction can be traced. Unlike cash or bitcoin, a CBDC offers little anonymity.
• Centralisation: all payments run past one party, with the associated risks in the event of outages or political pressure.
• Programmable money: a central bank can in theory attach rules to every euro (an expiry date or a spending restriction, for example). To some a feature, to others a bug.

Worldwide, more than 130 central banks are researching or developing a CBDC, according to the Atlantic Council CBDC Tracker. Progress varies widely.

Live in production: China (e-CNY), Bahamas (Sand Dollar), Nigeria (eNaira), Jamaica (JAM-DEX) and the Eastern Caribbean States (DCash). China's e-CNY is by far the largest by volume.

In pilot phase or advanced testing: ECB (digital euro, preparation phase), Brazil (Drex), India (digital rupee), Sweden (e-krona) and Saudi Arabia.

Research phase: United Kingdom (Britcoin), United States (FedNow is a payment system; a US CBDC remains politically contested), Japan and South Korea.

Discontinued: Ecuador (Sucre), Senegal (eCFA, cancelled phase). In the US too, the Trump administration stated explicitly in 2025 that it does not want to roll out an American CBDC.

The ECB is working on the digital euro. The preparation phase runs until October 2026, after which the Governing Council decides on a possible rollout. A European CBDC would be available to consumers in 2028-2029 at the earliest.