Central bank digital currencies (CBDC)

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 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 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 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 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. 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 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 – 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”. Fears of this kind led most central banks to resist retail CBDC; 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 – 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, 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 to 2021

This section reflects the cited literature, the newest of which was written in 2021; for the position since, see Where the experiment stands below. As of 2019, no central bank had found strong advantages 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 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. Peters, Panayi and Chapelle approach the question through chartalism, the theory that money takes its value from the state’s power to levy taxes and to decide what it accepts in payment of them. On that view a state currency stays at the top of the hierarchy of debts for as long as taxes are owed in it, so the question is not whether a cryptocurrency competes with it as a medium of exchange but whether public demand pushes the state to accept the cryptocurrency for taxes. Acceptance, they argue, could cost the state part of the monopoly of money creation through which it regulates inflation and unemployment, since it has no control over a cryptocurrency’s issuance beyond whatever reserves of it the central bank holds. 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) ecosystem and fiat-referencing stablecoins – are created and transferred outside any central bank's balance sheet.

Where the experiment stands

The work cited above was published between 2014 and 2021, when no central bank of a large economy had issued a CBDC and the design questions were hypothetical. They are no longer hypothetical. The Atlantic Council’s CBDC Tracker counted 146 countries and currency unions exploring a CBDC in May 2026, representing over 98 percent of global GDP and up from 87 in May 2022, with 77 in the advanced phase of development, pilot or launch and 41 pilot projects running. Three retail CBDCs have fully launched – the Bahamas’ Sand Dollar, Jamaica’s JAM-DEX and Nigeria’s eNaira – and all three are still working on domestic adoption. The Bank for International Settlements’ 2024 survey of 93 central banks, published in August 2025, found 91 percent of them exploring a retail CBDC, a wholesale CBDC or both, wholesale exploration at the more advanced stage of the two, and more than one in three jurisdictions accelerating the work in response to stablecoins and other cryptoassets.

The interest-rate question that Bordo and Levin, Kumhof and Noone and Stevens treated as a design choice has since been answered in the largest live deployment. From 1 January 2026 the People’s Bank of China requires commercial banks to pay interest on e-CNY wallet balances at prevailing deposit rates and covers those balances by deposit insurance on the same terms as ordinary deposits, brings e-CNY into its reserve framework, and requires non-bank payment institutions to hold 100 percent reserves against the e-CNY they manage. The announcement describes the change as moving the digital yuan beyond a cash-like instrument toward a form of digital deposit money, and puts cumulative usage to November 2025 at 3.48 billion transactions worth 16.7 trillion yuan, about 2.37 trillion US dollars. An interest-bearing, deposit-insured retail CBDC distributed through commercial banks is close to the account-based, interest-bearing design Bordo and Levin advocated in 2017.

Two of the jurisdictions whose central banks produced the early analysis have stepped back from it. The Bank of Canada, which published a long series of CBDC working papers, states that it is scaling down its work on a retail central bank digital currency and shifting to broader payments system research and policy development. In the United States the instrument was prohibited outright rather than declined: section 5 of Executive Order 14178 of 23 January 2025 bars agencies, except to the extent required by law, from any action to establish, issue or promote CBDCs within the jurisdiction of the United States or abroad, orders any ongoing agency CBDC plans immediately terminated, and revokes the 2022 order under which that work had been conducted.

The euro area is on a published timetable rather than a decision. In October 2025 the ECB’s Governing Council moved the digital euro project into its next phase, preparing for a potential first issuance during 2029 on the assumption that the necessary EU legislation is adopted during 2026, with a pilot scheduled to begin in 2027. No decision to issue has been taken.

References

1. Shirai, S. (2019). Central bank digital currency: Concepts and trends. VoxEU / CEPR Policy Portal.
2. Shirai, S. (2019). Money and Central Bank Digital Currency. ADBI Working Paper No. 922, Asian Development Bank Institute.
3. Cœuré, B. (2018). The future of central bank money. Speech at the International Center for Monetary and Banking Studies, Geneva, 14 May 2018, European Central Bank.
4. Bordo, M. D. and Levin, A. T. (2017). Central Bank Digital Currency and the Future of Monetary Policy. NBER Working Paper No. 23711.
5. Assenmacher, K. and Krogstrup, S. (2018). Monetary Policy with Negative Interest Rates: Decoupling Cash from Electronic Money. IMF Working Paper No. 18/191.
6. Stevens, A. (2017). Digital currencies: Threats and opportunities for monetary policy. National Bank of Belgium Economic Review, June 2017, pp. 79–91.
7. Kumhof, M. and Noone, C. (2018). Central bank digital currencies – design principles and balance sheet implications. Bank of England Staff Working Paper No. 725.
8. Gross, J. and Schiller, J. (2021). A Model for Central Bank Digital Currencies: Implications for Bank Funding and Monetary Policy. SSRN Working Paper 3721965 (originally circulated 2020 as "Do CBDCs Disrupt the Financial Sector?").
9. Ali, R., Barrdear, J., Clews, R. and Southgate, J. (2014). The economics of digital currencies. Bank of England Quarterly Bulletin, Vol. 54, No. 3, pp. 276–286.
10. Peters, G. W., Panayi, E. and Chapelle, A. (2015). Trends in crypto-currencies and blockchain technologies: A monetary theory and regulation perspective. The Journal of Financial Perspectives, Vol. 3, No. 3; arXiv:1508.04364.
11. Atlantic Council (2026). Central Bank Digital Currency Tracker. GeoEconomics Center. Figures as of May 2026, read 11 September 2026.
12. Illes, A., Kosse, A. and Wierts, P. (2025). Advancing in tandem: results of the 2024 BIS survey on central bank digital currencies and crypto. BIS Papers No. 159, Bank for International Settlements, 22 August 2025.
13. The State Council of the People’s Republic of China (2025). China to enhance digital yuan management with deposit features starting 2026. 29 December 2025.
14. Bank of Canada. Digital Canadian Dollar. Read 11 September 2026.
15. Executive Order 14178 of January 23, 2025. Strengthening American Leadership in Digital Financial Technology. 90 FR 8647, Federal Register Vol. 90, No. 20, 31 January 2025.
16. European Central Bank. Digital euro. Read 11 September 2026.