What Is a Central Bank Digital Currency (CBDC)?

By Inyoung Hwang · May 18, 2022 · 9 minute read

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What Is a Central Bank Digital Currency (CBDC)?

A central bank digital currency (CBDC) is virtual money issued as legal tender by the central bank of a country. No major bank has issued a CBDC yet. However, it would be similar to blockchain-based cryptocurrencies like Bitcoin that have increased in popularity, only backed in a sovereign nation’s fiat currency: paper and coin currencies like the U.S. dollar and British pound. In other words, a CBDC would be a government-issued virtual store of value.

Fertile Ground For CBDCs

The year 2021 posted strong growth in digital assets in general and stablecoins in particular. According to the Bank of International Settlements’ (BIS) May 2022 publication — Gaining momentum: Results of the 2021 BIS survey on central bank digital currencies — crypto’s market capitalization grew by 3.5 times, swelling to $2.6 trillion in market cap. The BIS survey also found that, in 2021, nine out of ten central banks were exploring the pros and cons of digital currencies. And that approximately two-thirds of the world’s population could see their country issue a CBDC in the next three years. Further, BIS reported that developing economies are more apt than major economies to issue digital money.

Could CBDCs and Stablecoins Hurt Fiat?

The push toward digital currencies comes amid the greater possibility that private virtual currencies like Bitcoin could see even wider adoption in the near term. Some central banks and regulators view this possibility as threatening. They’re concerned that, if and when crypto gains traction as a common form of payment, it might erode the stability of legacy financial services. How could this happen?

If, for example, a director of a crypto project does not understand cryptocurrencies well enough to manage them — along with the high risk profile that most cryptocurrencies carry — then a financial disaster could ensue. Moreover, for an individual to be a leader in the crypto sector, it might behoove them to be a master strategist on the trading floor, too. The ability to execute complex trading strategies quickly and wisely can be critical for navigating the crypto market.

In 2020 and 2021, the Covid-19 pandemic further expedited a shift away from physical cash and coins. But that had been happening well before the pandemic with the advent of payment platforms like PayPal and Venmo. If the pace of adopting digital currencies continues, then that alone could pose a potential threat to fiat currency.

How Could CBDCs Work?

The details of exactly how CBDCs would function remain unclear. However, some outcomes of using CBDCs are already apparent.

As mode of Payment/ Store of Value/ Easier Digital Pay

As with physical cash, CBDCs could be stored or used for payment. They will also likely carry a unique serial number, similar to how paper notes and coins in a fiat-currency system do. Many CBDCs won’t be designed to replace cash anytime soon; instead, they’ll be used to complement physical money.

Could Expedite New Central Bank Monetary Policy

Currently, central banks already issue a form of digital money but only to other banks, which then lend that money to consumers and businesses. When people currently make payments or move money between multiple bank accounts, it usually goes through a patchwork of systems, often incurring fees for the parties involved and taking a couple of days for transfers to be completed.

Possible Democratizing Effect on Central Bank Money

Central bank digital currencies could potentially cut out the middlemen, lowering or eliminating fees and making transfers faster. For instance, a Bitcoin transaction typically takes less than 10 minutes. Instead of purchasing their CBDCs from an exchange, for example, consumers could hold accounts directly with the central bank, which would make these transactions faster. Having the option to purchase CBDCs also could democratize central-bank money by making it more accessible to all.

Potential to Minimize Role of US Commercial Banks

That means CBDCs could become a tool for monetary policy, giving central banks more control over currency supply and allowing them to better track the movement of money within the economy. Central banks also could possibly bypass financial markets and change interest rates directly on consumer accounts.

Exploring the Risks of CBDCs

Of course, CBDCs would be a disappointment to those who buy cryptocurrencies with the hope that a private decentralized form of digital cash, like Bitcoin, Ethereum or Litecoin, will one day displace traditional fiat. Some argue that CBDCs would mean an expansion of governmental oversight; that the anonymity that the most private cryptocurrencies (in particular) offer will continue to fuel their appeal.

Potential to Destabilize Existing Financial System

The emergence of CBDCs could also be a destabilizing force for the existing financial system. If consumers can hold direct accounts with a central bank, commercial banks could become drained of retail deposits. One potential solution to this problem has been to put a cap on how much you can hold in CBDCs, or not have central banks pay interest on retail deposits.

Possible War Against the Dollar

Another potential repercussion could be the start of a new kind of currency war. The U.S. dollar has been the world’s reserve currency since the 1920s. The rise of multiple sovereign digital currencies could challenge the current dollar-dominant system, making it less important for international trade and foreign-exchange transactions to be pegged to the dollar.

Central Bank Digital Currencies Worldwide

A CBDC-based financial system likely would pose unique advantages and challenges for each country that issues a digital currency.

But despite the challenges, most of the world has rushed to adopt central bank digital currencies. In its most recent survey, the BIS reported that the majority of the 81 record countries that responded to its 2021 survey either had developed a CBDC, are in some stage of piloting a central bank digital coin; and more than two-thirds of these countries likely would issue a CBDC in the near term. These countries cited the Covid-19 pandemic and escalating use of cryptocurrencies as among their reasons for embracing a CBDC.

Not every country has issued central bank digital currencies, including the United States. However, the U.S. does have numerous stablecoins that are pegged one-to-one to the U.S. dollar.

Why Has the US Not Issued a CBDC?

It will, if it needs one. Some in the United States have embraced the cryptocurrency sector and are trying to integrate it into its existing financial system. One key step in that direction would be for the U.S. to step up regulations for crypto to make it safer for investors and for cryptocurrency platforms to operate.

How About a US e-Dollar? Or, a Fedcoin?

At this time, the U.S. is actively researching the viability of incorporating a CBCD into its financial structure. But its approach is thorough and methodical. Along with being supportive of digital currencies in general, the U.S. is trying to ascertain its own need for a digital dollar. The U.S. Federal Reserve System (the Fed) — which is the central bank of the U.S. — has said it’s looking into different options involving digital currencies.

Key issues that the Fed needs to understand include protection from cyberattacks, counterfeiting and fraud; how a CBDC would affect monetary policy and financial stability; and how it could prevent illicit activity.

Fed Urges Prudence Amid Tenuous Financial Stability

In May 2022, the Fed released its annual Financial Stability Report . The Fed’s last such report was in November 2021, and since that time the United States’ economic uncertainty has risen. A number of factors are responsible for this unease, including the Russian invasion of Ukraine, human and economic hardship, the pandemic’s improving though unclear trajectory, and persistent higher levels of inflation.

The Fed specifically cited concerns about stablecoins in the 2022 report. U.S. traders are using stablecoins a tool in leveraged transactions of other cryptocurrencies, which according to the Fed “may amplify volatility in demand for stablecoins and heighten redemption risks.” Therefore, the Fed is not ready to turn to central bank digital currencies, and had has continued to focus on regulating stablecoins. Also at issue is whether a country really needs both types of digital assets — stablecoins and CBDCs.

Snapshots of Other Countries’ CBDCs

In the rest of the world, adoption of central bank digital currencies seems to be thriving. The Atlantic Council is a nonprofit, which in 2021 launched its database, CBDC Tracker , which first only the Fed, now everyone can use to get the latest news about digital currencies globally.

As of May 2022, nine countries have issued CBDCs, and approximately 100 countries are at some stage of exploring them, be it researching, developing, testing, or launching. (Note: We chose the countries below randomly and cited them in alphabetical order.)

The Bahamas

In October 2020, the Central Bank of the Bahamas issued the world’s first CBDC, called the Sand Dollar. The Bahamas was the first country to issue a central bank digital currency that covered an entire country.


China first began exploring a digital yuan in 2014. In 2022, China launched a pilot of its current CBDC, called e-CNY, during the Beijing Winter Olympic Games. China’s approach is to run tests of e-CNY in smaller sections of the country before initiating it for the entire country. China’s program is designed to replace cash in circulation, not money held in long-term bank accounts.

But e-CNY won’t use blockchain technology for the central database. Instead, both commercial bank distributors and the central bank will keep their own databases that track the flows of digital yuan from user to user.


India’s government, Nirmala Sitharaman announced that India will introduce a digital rupee during its fiscal year 2022–2023, beginning April 1, 2022. The Reserve Bank of India will back this CBDC, which is now in development.

According to the Sitharaman, the CBDC would strengthen India’s economy, increase efficiency and lower expenses for the country’s currency-management system, and provide a stable, regulated digital currency that would compete with private cryptocurrencies.


Sweden is another country at the forefront of moving toward digital currency. Unlike in China however, distributed ledger technology or blockchain was always the inspiration for the country’s electronic krona (e-krona), so it will be the e-krona’s foundation. Sweden’s central bank, Riksbank, is focused on securing new solutions that are scalable, and which would offer the same level of convenience and security that banks offer today.

The BIS estimated in 2018 that Sweden is the world’s most cashless society — and that was before the global pandemic. While many countries have witnessed a downturn in cash use, Sweden’s cash usage in the last decade has been more striking than most.

Even more remarkable is the year-over-year percentage change in Sweden’s cash usage during the Covid-19 pandemic. In 2020, according to Riksbank, cash comprised 40% of the country’s point-of-sale payments; in 2021, that amount dropped to less than 10% — affirming BIS’ estimation.

The Takeaway

As of May 2022, nine countries have issued central bank digital currencies, and approximately 100 more countries are researching and exploring CBDCs.

Proponents of the CBDC argue that blockchain-based fiat currency could solve inefficiencies in the existing central bank infrastructure. Those more cautious warn that CBDCs could be vulnerable to hacks or outages. Meanwhile, enthusiasts of decentralized finance (DeFi) argue for a financial system that moves away from centralized authority, rather than one that expands its influence.

It’s yet to be seen whether CBDCs will usher in a new era of stable digital currency usage. So far, cryptocurrencies have been popular for trading in markets, rather than as a mode of payment.

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