Central Bank Digital Currency (CBDC)

Today, most money used by the public is either physical cash, issued by the central bank, or bank deposits, created by commercial banks. A CBDC would be digital money that is a direct liability of the central bank, just like cash, but in electronic form.

Central banks are exploring CBDCs for several reasons: to provide a safe digital alternative as cash use declines, to improve payment efficiency, to support financial inclusion, to maintain control over money in a world of private cryptocurrencies and stablecoins, and to improve cross-border payments.

Several countries have launched CBDCs, including the Bahamas, Jamaica and Nigeria, while China has carried out large-scale trials of its digital yuan. The European Central Bank has been preparing a possible digital euro, and many other central banks are researching the idea.

CBDCs raise important questions. Critics worry about privacy, since a central bank could potentially see detailed payment data, and about the effect on commercial banks if people move large amounts of deposits into CBDCs, especially during a crisis. Designs being considered include limits on individual holdings and privacy protections.