Central bank digital currency: what it is and how it works
A central bank digital currency is digital cash from a central bank, not a crypto coin. The Federal Reserve has studied one but the US has not issued it.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20263 min readFact-checked
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- Central banks issue CBDCs; private companies issue most cryptocurrencies.
- Retail CBDCs would serve households; wholesale CBDCs would serve banks.
- A CBDC would likely run through banks and apps, not Fed accounts.
Central banks study the idea to make payments faster and cheaper and to reach people who lack bank accounts. A retail CBDC would let households and businesses pay for everyday transactions. A wholesale CBDC would serve financial institutions.
How is it different from crypto?
A CBDC is a digital form of a country's official currency. The central bank issues it, not a private company. It is centralized and backed by a central bank, and it is not an investment. Bitcoin is issued by a network, and its value comes from the market.
Does the US have a digital dollar?
No. The United States has not issued a central bank digital currency. The Federal Reserve has only studied the idea, including a January 2022 paper. The Fed has said it would not proceed without support from Congress and the executive branch.
Which countries are testing CBDCs?
Several central banks have moved from research to pilots. The list below shows a few examples.
- The Bahamas launched the Sand Dollar in 2020.
- China began e-CNY pilots in 2020.
- The Eastern Caribbean Central Bank launched DCash in March 2021.
- Nigeria launched the eNaira in 2021.
How would a CBDC work and affect privacy?
A CBDC would likely run through banks and payment apps, not as a direct account at the Federal Reserve. Banks or payment providers would handle customer accounts, while the central bank would keep the core ledger. Privacy concerns center on government surveillance. Design choices decide how anonymous transactions are.
Frequently asked questions
Most proposals would keep cash as an option, and the Federal Reserve has not proposed replacing it. Cash is issued by the central bank too, so a CBDC could work alongside it.
Some designs could pay interest, but the Federal Reserve has not proposed that. Economists warn it could pull deposits from banks.
Most proposed designs would make a CBDC optional. No US CBDC exists, so no mandate is in place.
A CBDC could draw deposits from banks and affect lending. Policymakers would design rules to limit the risk.
