--- title: "Central bank digital currencies (CBDC)" path: "/contents/tech/core-concepts/central-bank-digital-currencies" version: "1.0.0" author: "Hydrate" createdAt: "2026-07-03T15:45:37.003Z" updatedAt: "2026-07-03T15:45:37.003Z" --- # Central bank digital currencies (CBDC) | **Topic** | Central banking; digital money; monetary policy | | **Main variants** | Retail and wholesale; account-based and value-based (token-like) | | **Issuer** | Central banks — a CBDC is a direct liability of the issuing central bank | | **Related** | [Stablecoins](/contents/tech/core-concepts/stablecoins), [Decentralized finance (DeFi)](/contents/tech/core-concepts/decentralized-finance-defi), [XRD token](/contents/tech/core-protocols/xrd-token) | A **central bank digital currency** (**CBDC**) is a digital form of money issued by a central bank as its own direct liability. Central bank money today reaches the general public only as physical cash, which is anonymous, transferable peer-to-peer and interest-free, while its existing digital form — reserve deposits — is account-based, traceable and interest-bearing but restricted to eligible financial institutions. A CBDC would [alter this division](https://cepr.org/voxeu/columns/central-bank-digital-currency-concepts-and-trends) by extending digital central bank money beyond the current circle of holders. Proposals differ in who may hold the currency, how holdings are recorded, and whether distributed ledger technology (DLT) is used. Central banks have studied CBDCs for reasons ranging from declining cash use and payment-system efficiency to financial inclusion and the conduct of monetary policy. ## Definitions and design variants Two distinctions organize the design space. A **retail** CBDC would be available to households and firms, whereas a **wholesale** CBDC would be restricted to financial institutions. Separately, an **account-based** CBDC records holdings in accounts, while a **value-based** (token-like) CBDC circulates as prepaid value, more like cash. A widely cited [four-way taxonomy](https://www.adb.org/publications/money-and-central-bank-digital-currency) combines these dimensions with the use of DLT: account-based and value-based retail CBDC without DLT (both examined in Sweden's Riksbank e-krona project), retail CBDC based on DLT, and wholesale CBDC based on DLT, the last tested in experiments in Canada, Singapore, Thailand and South Africa. Wholesale designs aim to speed and rationalize clearing and settlement, including cross-border payments and delivery-versus-payment, and could technically broaden access to the central bank balance sheet to nonbank financial institutions such as insurers and pension funds. The account/value distinction can also carry legal weight: in Sweden an interest rate could lawfully be applied to an account-based e-krona but not to a value-based one, which qualifies as e-money under the EU E-money Directive. ## Motivations and monetary policy The European Central Bank's Benoît Cœuré identified [three developments](https://www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180514_4.en.html) behind the CBDC debate: declining cash demand in some countries, new distributed ledger technologies, and evolving views of central banks' monetary policy role — while noting that in most economies, including the euro area, banknote demand was still growing. The cash-decline motive is strongest in Sweden, where [cash fell to about 1.3 percent of GDP](https://www.adb.org/publications/money-and-central-bank-digital-currency) by 2017 and only 13 percent of Swedes paid for their most recent purchase in cash in 2018, down from 39 percent in 2010. Other documented motivations include cutting cash-handling costs and shrinking informal economies, financial inclusion in emerging economies, fostering fintech sectors, and efficiency gains in wholesale payment and settlement systems. On the policy side, Bordo and Levin argue that a CBDC could serve as a [practically costless medium of exchange, a secure store of value and a stable unit of account](https://www.nber.org/papers/w23711). They advocate an account-based, interest-bearing design in which the CBDC interest rate becomes the link to the monetary policy framework, and contend that achieving its full potential requires a framework oriented toward true price stability. A recurring theme is the effective lower bound on interest rates. Because cash yields zero, its existence prevents central banks from cutting rates far below zero. Assenmacher and Krogstrup propose [decoupling cash from electronic money](https://www.imf.org/en/Publications/WP/Issues/2018/08/27/Monetary-Policy-with-Negative-Interest-Rates-Decoupling-Cash-from-Electronic-Money-46076) in a dual local currency system: with electronic central bank money as the unit of account and a conversion rate engineering a negative yield on cash, substantially negative policy rates become feasible without large-scale substitution into cash. The National Bank of Belgium's Arnoud Stevens similarly finds that an interest-bearing CBDC, combined with discontinuing large-denomination banknotes, [could relax the lower bound without abolishing cash](https://www.nbb.be/doc/ts/publications/economicreview/2017/ecorevi2017_h5.pdf) — but cautions that a CBDC mimicking zero-interest banknotes could instead raise the lower bound, and that negative rates on households may face political constraints. Cœuré added that ECB simulations suggest full pass-through of policy rates could increase the output and inflation impact of monetary policy by roughly 30 percent. ## Balance-sheet implications and bank disintermediation The most widely discussed risk is disintermediation of commercial banks. If retail deposits migrate to the central bank, banks lose their main loan-funding base, and in a crisis an easily accessible, risk-free CBDC could become the vehicle for rapid [“digital bank runs”](https://www.ecb.europa.eu/press/key/date/2018/html/ecb.sp180514_4.en.html). Fears of this kind led [most central banks to resist retail CBDC](https://www.adb.org/publications/money-and-central-bank-digital-currency); paying a lower rate on CBDC than on commercial deposits was seen as one mitigant. Kumhof and Noone address the problem through design. Their [four core principles](https://www.bankofengland.co.uk/working-paper/2018/central-bank-digital-currencies-design-principles-and-balance-sheet-implications) — an adjustable interest rate on CBDC; strict separation between CBDC and reserves with no convertibility between them; no guaranteed, on-demand conversion of bank deposits into CBDC; and issuance only against eligible securities — imply that households obtain CBDC by trading deposits for it in private markets rather than through guaranteed conversion. Under these principles, they argue, bank funding is not necessarily reduced, credit provision need not contract, and the risk of a system-wide run from deposits into CBDC is addressed. Model-based work reaches a similar conclusion. In a New Keynesian DSGE framework, Gross and Schiller find that CBDC issuance [does crowd out bank deposits](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3721965), but that this is not necessarily a threat to financial stability if the central bank responds adequately — acting as lender of last resort to replace lost deposit funding, or managing CBDC demand through a rule-based variable interest rate. Stevens maps four possible balance-sheet outcomes — “narrow banking”, impaired lending, an inflated central bank balance sheet, and impaired financial stability — and concludes that the net effect on banking and financial stability is uncertain in direction. Cœuré proposed an incremental alternative: selectively widening access to the central bank balance sheet for non-bank market participants, improving rate transmission without wholesale disintermediation. ## Adoption and pilot experience As of 2019, [no central bank had found strong advantages](https://www.adb.org/publications/money-and-central-bank-digital-currency) in its CBDC initiatives, largely because of technical constraints, though rapid technological progress could change that assessment. Early experience was mixed: Ecuador's dinero electrónico (2014–2017) was terminated for lack of adoption, while Uruguay's e-Peso pilot (2017–2019) was completed successfully, with the central bank citing lower costs, financial inclusion, and crime- and tax-evasion-prevention benefits. The People's Bank of China favored a two-tiered system distributing CBDC through commercial banks, and concluded that blockchain was unsuitable for its purposes because of scalability problems. ## CBDC and private digital currencies The CBDC literature grew out of official-sector analysis of private digital currencies. The Bank of England's early assessment found that currencies such as Bitcoin [functioned as money only to a limited extent](https://www.bankofengland.co.uk/quarterly-bulletin/2014/q3/the-economics-of-digital-currencies) and for relatively few people, mostly alongside traditional currencies, and posed no material risk to UK monetary or financial stability at the time. Stevens likewise judged widespread substitution into private digital currencies unlikely, since governments can anchor the official unit of account through taxes and public contracts; he reserved the greatest hypothetical risk for “bitcoinisation”, in which a private currency becomes a unit of account and erodes central bank control, lender-of-last-resort capacity and seigniorage. The categorical difference remains that a CBDC is a centralized liability of the issuing central bank, whereas assets on permissionless networks — including the [decentralized finance (DeFi)](/contents/tech/core-concepts/decentralized-finance-defi) ecosystem and fiat-referencing [stablecoins](/contents/tech/core-concepts/stablecoins) — are created and transferred outside any central bank's balance sheet. ## References 1. $1 2. $1 3. $1 4. $1 5. $1 6. $1 7. $1 8. $1 9. $1