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. It is also a liability of the central bank and denominated in the sovereign currency, as is the case with physical banknotes and coins.

The two primary categories of CBDCs are retail and wholesale.^[4] 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.^[4]

Retail CBDCs can be distributed through various models.^[5] 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.^[6][7] Alternatively, the central bank could either provide the full service or delegate responsibilities further.^[5]

The present concept of CBDCs differs from virtual currency and cryptocurrency in that a CBDC would be issued by a state.^{[8][9][10][11]} Most CBDC implementations will likely not use or need any sort of distributed ledger such as a blockchain.^[12][13][14]

In 2023, over 120 different jurisdictions, including major economies like the ECB, UK, and the US, were evaluating national digital currencies.^[15] 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 programs; and 67 countries and 2 currency unions are researching CBDCs.^[15] In the United States, some states have introduced legislation^[16][17] to ban state payments using CBDCs with Florida being the first state to pass such a law citing privacy concerns.^[18]

CBDCs have faced a plethora of criticisms among those being that a "centrally managed, centrally controlled, CBDC is a tool for coercion and control"^[19] and that it would "allow the government to spy on" the citizenry.^[20] Some critics of CBDCs say Bitcoin is a better currency alternative that is "global, immutable, and accessible digital cash open to all," as well as "decentralized, open, and permissionless," since it does not rely on a central bank such as the Federal Reserve.^[21][22]