CBDCs

Central bank digital currency (CBDC) is a digital form of a country’s sovereign money issued and backed by the central bank. It is designed to be a liability of the state and a widely accepted means of payment, distinct from privately issued cryptocurrencies or payment tokens. CBDCs can be categorized as retail CBDCs, intended for the general public, or wholesale CBDCs, intended for financial institutions and large-value transactions.

Design choices for CBDCs vary by jurisdiction. They can be account-based or token-based, and access can be direct through central bank accounts or indirect through intermediaries. Some plans use centralized databases, while others explore distributed ledger technology. CBDCs may support online use and, in some cases, offline transactions. Interoperability with existing payment systems and cross-border compatibility are common design considerations.

Potential benefits often cited include improved payment efficiency and finality, reduced settlement times, and greater resilience of payment systems. CBDCs can support financial inclusion by providing a safe digital means of payment and may enhance monetary policy transmission and cross-border payments. However, they raise concerns about privacy, cybersecurity, financial stability, and the potential for reduced depositor funding for banks. Governance, access controls, and regulatory safeguards are central to addressing these risks, as is the question of how CBDCs interact with the broader financial system.

Globally, several jurisdictions have conducted pilots or launched CBDCs. The Bahamas introduced the Sand Dollar, China has piloted the e-CNY, and Sweden has tested the e-krona. The European Central Bank and other authorities have ongoing feasibility studies or pilot programs for a digital euro, reflecting growing interest in CBDCs as a complement or alternative to existing payment rails.