What is CBDC? A complete explanation of Central Bank Digital Currency

The world of money is rapidly changing. Today, you can pay with your mobile phone, send funds to another country in seconds, or even buy digital art with cryptocurrency. As daily life becomes increasingly digital, central banks are beginning to explore new solutions. One of them is CBDC, or Central Bank Digital Currency. Unlike projects like Bitcoin, these currencies are issued by governments and are designed as stable value systems.

CBDC Definition: When Does a Central Bank Create Digital Currency?

CBDC is something you might not recognize at first glance — simply, the digital version of your country’s currency. If you hold dollars, euros, or yuan, you understand what CBDC is. It’s not a new monetary system but just an electronic equivalent of physical cash.

However, there is an important difference. Unlike private-sector digital systems, CBDC is fully regulated and controlled by the central bank. If you want to transfer these funds to others, the transaction would be approved by the central bank. They are considered legal tender, similar to physical cash — you can buy groceries, pay for rationed supplies, or settle transactions with businesses using them.

Why Are Central Banks Exploring CBDC?

Since cash usage has started to decline, central banks find themselves facing not just technological challenges but also management issues. Why should people have direct access to traditional banks if their weekly budget can be managed via a mobile app?

First challenge — decreasing cash usage. International payments, daily transactions — all are moving further away from physical banknotes. By offering a digital version of the national currency, central banks can maintain their role in people’s financial lives, independent of private service providers.

Second — financial inclusion. Billions of people worldwide lack access to bank accounts, but most have mobile phones. CBDC could provide a safe way for them to store and send funds without physically going to a bank.

Third — operational efficiency. International remittances or cash transfers today are costly and slow. CBDC could enable money to move between countries much faster and at lower cost, eliminating intermediaries.

Fourth — policy tools expansion. Governments could leverage CBDC for policy adjustments. For example, benefits could automatically expire if not used, or tax incentives could apply only to essential goods. This would give policymakers more precise control over spending.

Fifth — competitiveness. Private tech firms and stablecoins are growing rapidly. Central banks risk losing control if they are too slow to respond to these changes, as their oversight could quickly diminish.

How Does CBDC Work: Technological Platforms and Models

CBDC is not a one-size-fits-all solution; different countries are adopting different approaches. Some central banks set up direct accounts — you hold funds directly at the central bank, like a digital cash account. Others opt to use intermediaries — commercial banks and payment service providers. This two-tier model relies on existing infrastructure, allowing people to continue using familiar apps and services.

On the technology side, CBDC can use various solutions. Some banks choose centralized databases — the simplest and fastest system where the central bank monitors all transactions. Others decide on distributed ledger technology (DLT) — a system where transaction records are securely shared among network participants. The latter offers more transparency and can support smart contracts.

There are also offline payment options. In areas with limited internet access, CBDC can operate via secure devices similar to smart cards, holding a small amount of funds and synchronizing with the network when available.

Types of CBDC: Retail and Wholesale

CBDC is not a single system. From the start, it was envisioned for two different audiences.

Retail CBDC — this is what you would use. It’s like cash in your wallet but in digital form. Buying a pizza, sending money to a friend — all works like regular mobile banking, just backed by the government.

Wholesale CBDC — a different beast. It’s designed for banks and large financial institutions operating behind the scenes. Here, the central bank provides access to special accounts that large commercial players can manipulate. Through this system, central banks can gain more precise control over the financial system — adjusting reserve requirements or interest rates more quickly and accurately than traditional policy tools.

Innovations and Challenges: What to Know About CBDC Risks

CBDC offers many opportunities but also comes with risks.

Privacy concerns are paramount. If every transaction goes through a central CBDC system, the government could know how, when, and where you spend money. While this could reduce fraud and tax evasion, many fear it could lead to excessive financial surveillance. The question is — could CBDC give authorities the power to freeze or restrict your access?

Banking system disruption. If people start moving large sums from traditional bank accounts into CBDC en masse, it could reduce the capital available for loans. During a financial crisis, this effect could accelerate — people might prefer holding central bank funds as a “safer” option, bypassing the broader banking system and causing instability.

Technology and access are not guaranteed. A successful CBDC must be secure, stable, and easy to use. If it’s too complicated, many people won’t be able to use it effectively daily. Since CBDC would become part of the country’s financial infrastructure, it must be resilient against cyberattacks and system failures. A single outage could impact millions.

CBDC Projects Around the World: Real Examples

Theory is nice, but practice is more grounded. As of July 2025, the Atlantic Council’s CBDC tracker reports over 130 countries developing or researching CBDC.

Already implemented: some projects are live. The Bahamas’ Sand Dollar, Jamaica’s JAM-DEX, and Nigeria’s e-Naira are all retail CBDCs aimed at improving access to digital payment systems. They are driven by real needs for financial inclusion.

Pilot programs underway: China’s e-CNY (one of the largest and most sophisticated pilots), India’s digital rupee, and Russia’s digital ruble are testing how CBDC works in practice before broader rollout.

Still exploring: Canada, New Zealand, and many others are studying how to integrate CBDC into their existing financial systems. This isn’t delay — it’s a careful process, as CBDC implementation involves major infrastructure reforms.

CBDC, Stablecoins, and Cryptocurrencies: Main Differences

People often confuse these categories, but they are fundamentally different.

CBDC — issued by governments and central banks. They are regulated, government-backed, and considered as trustworthy as traditional fiat money. The state guarantees their security.

Stablecoins — private projects usually pegged to traditional currencies like the US dollar. Their goal is to maintain price stability, but their reliability depends on how well the private issuer manages reserves. If reserves are not fully backed, stablecoins can lose their stability.

Cryptocurrencies — like Bitcoin and Ether — operate without central control, decentralized, censorship-resistant. No company or government controls their network. However, their prices can be extremely volatile, like swings in a roller coaster.

The Future of CBDC: What to Expect

CBDC is still in development and testing, but its potential to transform money usage is more real than ever. By offering a digital version of national currency, central banks aim not only to modernize payment systems but also to find new ways to support financial inclusion and efficiency.

At the same time, CBDC raises serious questions about privacy, central control, the role of commercial banks, and the risk that less technologically advanced groups could be left behind. The future of CBDC will depend on how well these issues are addressed and whether the benefits are delivered responsibly and securely.

One thing is certain — once CBDC reaches widespread adoption, the world of money will never be the same.