Central bank digital currency

A central bank digital currency (CBDC; also called digital fiat currency^[1] or digital base money^[2]) is a digital currency issued by a central bank,^[3] rather than by a commercial bank.^[4] It is also a liability of the central bank, unless it is dividend-yielding, then it is an ownership stake in the central bank, and is a new form of legal tender, unlike cash like retail CBDC which is the digitization of sovereign currency,^[5] which applies to physical banknotes, coin, and existing wholesale CBDC reserves that are used in the reverse repo and repo market.

The two primary categories of CBDCs are retail and wholesale.^[6] Retail CBDCs are designed for households and businesses to make payments for everyday transactions, whereas wholesale CBDCs are designed for financial institutions and operate similarly to central bank reserves.^[6]

Retail CBDCs can be distributed through various models. In the intermediated model, the central bank issues the CBDC and manages core infrastructures, while financial intermediaries offer customer services. The ECB and the Federal Reserve have proposed intermediated CBDCs.^[7][8] Alternatively, the central bank could either provide the full service or delegate responsibilities further.^[5]

While CBDCs may share some properties with virtual currency and cryptocurrency, such as programmability,^[9] they differ in that a CBDC is issued by a state.^{[10][11][12][13]} However, most retail CBDC implementations will likely not use any sort of distributed ledger such as a blockchain.^[14][15][16]

As of 2023, over 120 different jurisdictions, including major economies like the ECB, UK, and the US, were evaluating national digital currencies.^[17] As it currently stands, 9 countries and the 8 islands making up the Eastern Caribbean Currency Union have launched CBDCs; 38 countries and Hong Kong have CBDC pilot programmes; and 67 countries and 2 currency unions are researching CBDCs.^[17] In the United States, some states have introduced legislation^[18][19] to ban state payments using CBDCs with Florida being the first state to pass such a law citing privacy concerns.^[20]

CBDCs have faced a plethora of criticisms, including concerns about privacy and the potential for them to be used as a "tool for coercion and control".^[21] Their implementation could also have a displacement effect on the private sector, affecting bank balance sheets and private payment methods, necessitating carefully calibrated policies.^[22]