Central Bank Digital Currency (CBDC) Definition

A central bank digital currency, or CBDC, is the digital form of a nation’s money that is issued and managed by its central bank. It aims to keep the value and legal status of regular cash while moving payments into a native digital format.

Why governments explore CBDCs

Common goals include wider access to payments, faster and cheaper transfers at home and across borders, and a cleaner toolkit for monetary policy. Many countries also see CBDCs as a way to maintain public access to state-backed money as cash use declines.

How CBDCs work in practice

A CBDC represents the national currency as a digital token or balance recorded on controlled infrastructure. The design can support quick, low-cost payments and settlement while keeping the unit of account the same as the country’s fiat currency.

Types: wholesale and retail

Wholesale CBDCs are for banks and other financial institutions to settle between themselves, much like central-bank reserves. Retail CBDCs are built for people and businesses to use directly for day-to-day payments.

Retail access models

Two access styles appear most often. A token-based model lets users transact by proving ownership of a key pair. An account-based model uses digital identity to sign in and move funds. Some countries consider running both in parallel.

Technology choices

CBDCs can borrow ideas from blockchains, yet a blockchain is not required. Many proposals use permissioned systems that limit who can validate and operate the network, which supports auditability and policy controls.

Benefits often cited

Potential upsides include smoother domestic payments, easier cross-border transfers, lower transaction costs, better safeguards for users if private issuers fail, and clearer channels for central-bank policy. 

Risks and trade-offs

Designers weigh privacy, data protection, and cybersecurity. Moving some deposits to CBDC could change bank funding and market dynamics, so rollouts need guardrails to protect financial stability and operations.

CBDC vs. cryptocurrencies and stablecoins

Both CBDCs and crypto live in digital form, but CBDCs are centralized, state-backed, and designed for price stability. Cryptocurrencies are decentralized and can be highly volatile. Stablecoins aim for steady value yet remain privately issued.

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