Central bank digital currencies
A digital form of central bank money, issued by the state. It borrows some technology from this field and almost none of its purpose.
A central bank digital currency is a liability of the central bank, held directly by the public or by institutions, in digital form. Most people assume their bank balance already is this. It is not — a bank deposit is a claim on a commercial bank, and physical cash is currently the only central bank money households can hold.
Two very different designs
- Wholesale. Restricted to financial institutions, used for interbank settlement. Closer to an upgrade of existing plumbing than a new product, and the less contentious of the two.
- Retail. Available to the public, functioning as digital cash. This is the one that generates argument.
Why central banks are interested
- Declining cash use. As physical cash fades, the public loses direct access to central bank money, and payments depend entirely on private intermediaries.
- Payment efficiency. Particularly cross-border, where costs and delays remain high.
- Financial inclusion, for people without banking relationships.
- A response to private alternatives, including stablecoins denominated in foreign currencies, which raise sovereignty questions for smaller economies.
The disintermediation problem
If households can hold central bank money directly, the incentive to do so is strongest precisely when banks look fragile — which is when deposits leaving is most damaging. A digital bank run could occur at the speed of an app. This is why most proposals include holding limits or tiered remuneration designed to make a CBDC a payment instrument rather than a savings vehicle, and why banks have lobbied hard on the design.
Privacy
Physical cash is anonymous. A poorly designed CBDC would give the state a complete record of every retail transaction, and in principle the ability to restrict what money can be spent on or when.
Most central banks proposing retail designs have stated privacy commitments and propose intermediated models where commercial institutions handle accounts and the central bank does not see individual transactions. Whether those commitments survive contact with future policy is a governance question rather than a technical one, and it is the crux of the public objection. It deserves engagement rather than dismissal.
What it is not
It is issued by a central authority, supply is set by policy, balances can be frozen, and transactions can be reversed or restricted. Most implementations do not even use a blockchain, because the problem a blockchain solves — agreement without a trusted party — does not arise when there is a trusted party by design. The overlap with the rest of this stage is mostly vocabulary.
Where things stand
A large majority of central banks have researched the idea, a number have run pilots, and a small number have launched retail versions with generally modest adoption. Several major economies have advanced wholesale work while deferring retail decisions, and in some jurisdictions retail CBDCs have met explicit political resistance. The direction is not settled.