What's a CBDC?

A central bank digital currency, or CBDC, is a digital national currency that is a direct liability of a country’s central bank.

Central bankers, policymakers, and government contractors are working around the world to launch CBDCs. From democracies to authoritarian regimes, most governments have welcomed the idea of CBDCs with open arms. 

In the United States and the Euro Area, a CBDC would be a digital form of the U.S. dollar and the euro, respectively. Similarly, in China and Nigeria, there are CBDCs that are digital forms of the yuan and naira. In other words, the creation of CBDCs effectively means experimenting with the money already in people’s pockets.

However, it is a fundamental mistake to think that a CBDC is simply a digital or electronic form of cash. While a CBDC would be a liability of the central bank like cash, it would be unlikely to offer the privacy protections or the finality that cash provides. By opening the door to create a direct connection between the government and a person’s financial activity, CBDCs give governments new powers to conduct sweeping surveillance, restrict financial activity, disrupt the economy, and engage in corruption.  

Brief history of CBDCs

Early CBDC development can be traced back to the 1990s in Finland, 2014 in China, and 2014 in Ecuador. Projects varied on technical grounds, but the central theme of expanding the government’s role in money and payments remained the same. Yet, it was not until the summer of 2019 that central bankers and other policymakers began to push forward rapidly. Following the announcement of Facebook’s cryptocurrency project (known as Libra), policymakers went into a panic due to fears of losing their monopoly on money issuance. Suddenly, CBDCs went from mostly theoretical concepts to critical endeavors for governments almost overnight.

Since 2019, China, the Eastern Caribbean, Nigeria, and others have introduced CBDCs with lackluster results. It remains unclear what benefits a CBDC will offer citizens and thus citizens have largely opted out of using CBDCs. However, how long opting out stays an option remains to be seen. In late 2022, the Nigerian government created a cash shortage partly to spur CBDC use. And in 2024, the Bahamian government announced banks would soon be forced to distribute the CBDC.

Which Countries are currently using CBDCs?

As of January 2024, over 135 different jurisdictions—ranging from territories to currency unions—were either researching, piloting, or launching CBDCs. Several of those jurisdictions currently have CBDCs available to the public. That includes China, The Bahamas, India, Jamaica, Nigeria, Russia, and others.

Why do central banks want to introduce CBDCs?

Central bankers and other policymakers most commonly say they want to introduce CBDCs to promote financial inclusion, spur faster payments, gain a first-mover advantage in global finance, improve cross-border payments, and create new ways to administer monetary policy. The relative importance of each item varies by country, but most countries agree on this general agenda. However, some other central banks and organizations also see CBDCs as a way to replace cash, compete with cryptocurrency, and gain greater control over the economy and its citizens.

Is a CBDC a digital currency?

A CBDC is a digital national currency that is a direct liability of a country’s central bank. This means the central bank is the ultimate authority, possessing absolute power over the network and its users. In contrast, cryptocurrencies are created and managed by private actors in the market. Cryptocurrencies, particularly those like Bitcoin, are designed to operate in a decentralized manner, free from government control or intervention.

To better understand this distinction, let’s focus on Bitcoin because it is decentralized, open, and permissionless. In other words, you don’t need the permission of the central bank, the legislature, any company, or any individual to use Bitcoin. You’re free to choose whether you’d like to use it and how you’d like to use it. And in the same sense, there’s no group or individual who can freeze or seize your funds. However, this freedom goes beyond using Bitcoin for spending or saving. You’re also free to step in to help maintain the inner workings of the system both in terms of proposing updates to the underlying code and in terms of updating the ledger.

A CBDC entails the opposite of every characteristic provided here. In short, where Bitcoin is the best modern example of decentralized money provided by the market, a CBDC is the epitome of centralized money provided by the government (Table 1).

What are the different types of CBDCs?

CBDC designs fall into two different core models: retail and wholesale. However, there are also variations within these models (e.g., direct, intermediated, and synthetic).

At the broadest level, the labels “retail” and “wholesale” refer to who the CBDC would be used by. Retail CBDCs are meant for retail, or consumer, use. Retail CBDCs would be designed to be used just like the digital payments that already exist today so people could purchase goods, pay salaries, or store wealth. Wholesale CBDCs, however, would be restricted to financial institutions for use during interbank settlement. In other words, a wholesale CBDC would only serve as a way for banks and other approved institutions to send money between themselves.

When people speak of CBDCs in popular discourse, they generally refer to retail CBDCs. However, even then, there are three more models to consider: direct, intermediated, and synthetic. A “direct CBDC” would be a CBDC that is available to everyone and managed directly by the central bank. An “intermediated CBDC” would also be for the public to use, but the central bank would enlist the private sector to provide and maintain the accounts or wallets used for CBDC holdings. Finally, a “synthetic CBDC” really isn’t a CBDC at all. Rather, “synthetic CBDC” is a term used to describe a stablecoin with the reserves held in a central bank master account to back its value.

How would a CBDC work?

In practice, how a CBDC works depends on whether it is a retail CBDC or a wholesale CBDC.

With a retail CBDC, the CBDC would most likely be used with a mobile app. For example, citizens in China and Nigeria can open apps to use the digital yuan and eNaira on their phones. Both models limit how much money you can hold and spend based on how much personal information you are willing to provide (e.g., name, address, tax information, etc.). Much like existing payment apps, these apps can be used to scan QR codes and input addresses to make payments where accepted. 

With a wholesale CBDC, the CBDC would be limited to approved financial institutions (e.g., banks and credit unions). When these institutions need to settle transactions between one another, they would use the CBDC to clear differences in the same way they currently use existing clearing houses and central bank services today. The main difference is that the technology behind the settlement is slightly different. 

Concerns and Risks about CBDCs

The risks of CBDCs are many. Because CBDCs involve creating a direct line between governments and each citizen’s financial transactions, there are serious concerns regarding sweeping financial surveillance, restrictions on financial activity, the freezing and seizing of funds, the use of negative interest rates, disruptions to financial stability, disruptions to cryptocurrency, the creation of new targets for cyber attacks, and the creation of a new tool for corruption.

Below is a brief tour of the reasons why so many people are concerned about the rise of CBDCs. None of these issues are new. However, the introduction of a CBDC risks worsening all of them.

1. Sweeping Financial Surveillance: Around the world, governments routinely pressure banks and other financial institutions to supply customer information. From Canada to Russia, this practice has become all too common. The difference between what is experienced today and what would be experienced with a CBDC, however, is that the financial records would be on government databases by default. In other words, a CBDC could spell doom for what little protection remains because it would give governments complete visibility into every financial transaction by establishing a direct link to each citizen’s financial activity—activity that can reveal details about a person’s relationships, profession, religion, political leanings, locations, and more.
2. Restricting Financial Activity: The programming capabilities of a CBDC would provide countless opportunities for governments to restrict citizens’ financial transactions. These capabilities could mean that people would be prohibited from buying certain goods or limited in how much they might purchase. For example, policymakers could try to curb drinking by limiting nightly alcohol purchases or prohibiting purchases for people with alcohol‐​related offenses. The possibilities for the programmability of a CBDC are nearly endless. And in all of them, even the best of intentions are just a few steps away from leading to serious abuses of power.
3. Freezing Funds: Governments have often turned to freezing someone’s financial resources to lock that individual out of society. For example, the Chinese government froze the funds of protestors in response to the Hong Kong freedom protests and the Canadian government froze the bank accounts of protestors in response to the Ottawa trucker protest. This weaponization of the financial system is already such a common problem that many people have turned to cryptocurrencies as a solution to overzealous governments. However, due to the direct access it would provide governments, a CBDC could greatly exacerbate these events.
4. Seizing Funds: With direct access to each citizen’s financial activity, governments could also go beyond freezing funds to seize citizen’s funds. These seizures could come in the form of automatic fines, negative interest rates, civil asset forfeiture, or mass confiscations depending on what controls are in place in each country. This risk is made worse in countries with rampant corruption and authoritarian systems of government.
5. Imposing Negative Interest Rates: Proposals for CBDCs often tout negative interest rates as a benefit because it would offer policymakers “greater control” over the economy. For citizens, however, a negative interest rate amounts to a fine or tax for saving money. Worse yet, implementing negative interest rates depends on there being no alternative payment methods for consumers, which is likely one reason that governments introducing CBDCs have been banning cryptocurrencies. But it’s not just private alternatives that would need to be removed—central bankers cannot effectively implement negative rates with CBDCs if people can still switch to cash.
6. Disrupting Financial Stability: A CBDC would likely worsen bank runs, lead people to leave the banking system, and increase the cost of loans. To lessen this risk, some central banks have proposed limiting how much CBDC a person can own and what they can do with it. But if the tradeoff becomes a question between making something people will want at the expense of the larger financial system or making something no one will want at the expense of taxpayer resources, then the best choice is to not introduce a CBDC at all.
7. Disrupting Cryptocurrency: Globally, governments have demonstrated that they want a CBDC specifically to hold on to their monopoly over national currencies. For instance, China banned cryptocurrencies just as its CBDC was launched; India announced its plans for a CBDC while simultaneously calling for a ban on cryptocurrency; and Nigeria prohibited banks from cryptocurrency transactions just as it launched its CBDC. Such bans may not be inherent in the design of a CBDC, but there is no denying that CBDCs are being used across the world to combat the existence of cryptocurrencies.
8. Putting the Economy at Risk of Cyberattacks: Recent history has shown that governments are not immune to hacks or data breaches. The private sector is not immune either, but it does have the distinct advantage of being more decentralized than the federal government. For example, Bitcoin is often celebrated for the security of its decentralized system. A hacker may attempt to “break in” to one computer, but such actions do little to affect the larger network considering there are countless other computers across the world that work around the clock to verify the system. A successful attack on a centralized CBDC system, however, could bring down the entire economy.
9. Creating a New Tool for Corruption: New government powers often mean new avenues for abuse. Questions as mundane as choosing what company to build the CBDC platform to as complex as choosing who will be allowed to use the CBDC can lead to grave implications. Where corruption runs rampant, a CBDC could be yet another tool to exert political favoritism. Where discrimination is still deeply engrained, a CBDC could be a tool to further cut off religious and social classes from society. One of the best ways to reduce government corruption is to reduce government power. Launching a CBDC would be to do the opposite.

Are there any benefits to CBDCs?

Proponents of CBDCs often claim that CBDCs will help financial inclusion, improve payment speeds, advance monetary policy, and strengthen currency. Yet, these claims do not stand up to scrutiny. Rather, the benefits instead seem to rest entirely with government actors. While it is not a benefit for most citizens, there is no denying that a CBDC could offer governments more insight into each citizen’s life, more ways to steer activity, and more ways to control who can and cannot be involved in society.

Summary

This article has explained what CBDCs are, how CBDCs work in practice, and what CBDCs mean in practice. However, this information only scratches the surface. The approaches taken by each jurisdiction can vary significantly when it comes to technical choices, development progress, and more. Therefore, with this knowledge in hand, the next step is to check out the map and find out what each jurisdiction is doing.