What is Central Bank Digital Currency (CBDC)?

Simar Marwaha
Simar Marwaha

Updated on July 19, 2023 12:32 PM

Published on March 01, 2023 11:00 PM

CBDC is a digital representation of legal tender linked to a nation's reserve currency. The central banks that issue the assets, oversee their supply, and formulate corresponding policies are in charge of these digital currencies. Let's explore CBDCs in detail in this post.

What is Central Bank Digital Currency (CBDC)?
Source: Dreamstime

A central bank provides support and is the issuer of a central bank digital currency or CBDC. But what is CBDC? We shall learn that in today's article. As the usage of cryptocurrencies and stablecoins has grown, central banks throughout the world have concluded that they must provide an alternative to traditional payment methods or risk missing out on the future of money.

Several countries are creating CBDCs, and several have already put them in place. Because so many countries are considering how to transition to digital currencies, the primary focus of this piece will be on understanding what they mean for society. Let us now discuss what is CBDC, how it works, why it is issued, its pros and cons, and the overall CBDC meaning.

What is CBDC?

Digital currencies and cashless societies are becoming increasingly popular due to the development and adoption of cryptocurrencies and blockchain technology. As a result, governments and central banks worldwide are looking into the use of digital currencies that the government backs. These currencies would, like fiat money, enjoy the full trust and support of the government that issued them when and if they are adopted.

  • CBDCs are receiving more attention due to the COVID-19 epidemic, the move to digital payments, the desire to use foreign CBDC network for cross-border transactions, and worries about financial exclusion.

  • As a result, major central banks throughout the globe are vying to provide the first authentic form of digital money. For instance, Europe announced the establishment of a digital euro as part of its five-year strategy. The pandemic accelerated the shift to contactless transactions, highlighting how important it is for everyone to access safe, efficient, and affordable payment methods.

  • In light of technology platforms integrating digital private money into the United States payments system and foreign authorities researching potential uses for CBDCs in cross-border payments, the Federal Reserve is also accelerating its research and public engagement on central bank digital currencies.

  • According to various public pronouncements, CBDCs look to be more than merely a digitally native copy of conventional banknotes and coins. Some governments view CBDCs as programmable currency—means for monetary and social policy that may restrict their usage to bare requirements, certain regions, or predetermined times—in addition to providing a solution to the problem of more widespread financial inclusion.

CBDC can take many forms, each with different effects on financial system structure and stability, the transmission of monetary policy, and payment systems. Let us look at the types of CBDCs now.

Types of CBDCs

There are several ways in which the creation of a general-purpose or wholesale-only CBDC might benefit payment, clearing, and settlement systems.

General-purpose CBDCs

  • A CBDC that will be given to the broader public is called a "general-purpose CBDC." Retail CBDC based on DLT includes aspects such as anonymity, traceability, availability around-the-clock, 365 days a year, and the viability of an interest rate application.

  • Due to a desire to take the lead in the rapidly expanding fintech sector, advance financial inclusion by accelerating the shift to a paperless society, and reduce the expenses associated with printing and managing money, this notion is gaining popularity among central banks in emerging nations.

Wholesale CBDCs

  • Banks that maintain reserve deposits with a central bank are eligible for a wholesale CBDC. It might lower counterparty credit and liquidity concerns and boost the effectiveness of payments and securities settlements.

  • A value-based wholesale CBDC would replace or complement central bank reserves with a restricted-access digital token. A token would be a bearer asset, which means that throughout the transaction, the sender would transmit value directly to the receiver without the need of any middlemen.

  • In contrast to the existing system, which allows the central bank to debit and credit accounts without transferring money, this would represent a big change. The wholesale CBDC is the most desired idea among central banks because it can enhance current wholesale financial systems more quickly, inexpensively, and safely.

How does CBDC work?

Now that you know what is CBDC, let us look at the next important aspect as to how does CBDC work? Each CBDC functions similarly to a nation's current fiat currency since it is a digital replica of that currency. They may be variations in how they operate because other nations are developing their CBDCs, but they all adhere to the same fundamental paradigm.

The federal government supports the CBDC that the nation's central bank issues. In subsequent transactions, such as paying employees or making purchases of goods and services, that CBDC can be used as legal cash.

This could seem like something we already have. After all, you may digitally transfer money from your bank account to a friend's account at a different bank.

This kind of transaction would not have to go through several banks or take several business days if there were a CBDC. All of this could take place on a single digital ledger almost instantly.

Also, consumers might utilise a CBDC without having a business bank account. CBDCs would give unbanked people a method to send money electronically. Now, you very well know what is CBDC and how it functions, right? 

Examples of central bank digital currencies (CBDCs)

Several CBDCs have been released, but most are still in research or development. These are a few CBDCs that are either on the market or being tested in various nations:

  • The Sand Dollar, a digital rendition of the Bahamian dollar, has been introduced by the Bahamas. Accredited financial institutions distribute it on behalf of the Central Bank of the Bahamas.
  • The Digital Yuan, the Digital Renminbi or Digital RMB, is being tested in China. China has advanced the most in creating the CBDC among the top economies.
  • The eNaira, which keeps track of transactions on a centralised blockchain ledger, is being introduced by Nigeria. It is the first country in Africa to establish a CBDC.

CBDCs are still in their infancy, but it's evident that the concept is gaining traction. More than 90% of the global gross domestic product is accounted for by the nations investigating them. Although while CBDCs might not completely replace cash, most nations will probably at least use their own digital currencies in some capacity.

Why is a CBDC issued?

If a nation issues a CBDC, its government will regard it as legal tender in the same way that fiat currencies are; both the CBDC and actual currency would be legally recognized as a means of payment and would serve as claims against the central bank or government.

A digital currency issued by a central bank improves the security and effectiveness of both wholesale and retail payment systems. On the wholesale side, a central bank's digital currency makes speedy settlement of retail payments possible. It could increase the effectiveness of transactions between parties or at the point of sale.

In a digital society, no actual coins or bills are available to people; all transactions involve digital currency. A digital currency backed by the government or central bank is a respectable option if a nation plans to transition to a paperless society. 

As the market for private e-money is expanding, there is significant pressure on governments to implement a CBDC. Beneficiaries would be at a disadvantage if it gained widespread acceptance since e-money suppliers prioritise their own profits over those of the broader population. Governments would have an advantage over private e-money competitors by issuing a CBDC.

The existing cross-jurisdiction payments paradigm primarily depends on central banks running the real-time gross settlement (RTGS) infrastructure, within which all commitments of local banks must settle, in addition to domestic transactions. Cross-border payments have time gaps, which exposes parties to settlement and credit risk. A CBDC is always on call, and privacy concerns are considered to reduce the danger of counterparty credit.

Why have central banks become interested in CBDCs?

Four trends are believed to have prompted central banks' interest in CBDCs, lets see:

Cash usage is falling: Between 2014 and 2021, cash usage in Europe fell by one-third. Only 3% of payment transactions in Norway are conducted with cash. This shift has compelled central banks to reconsider their position in the financial system.

Growing interest in privately issued digital assets: In the United Kingdom, 10% of adults own or have owned a digital asset such as Bitcoin. According to the European Central Bank, up to 10% of households in six major EU nations possess digital assets. Consumer usage of digital assets may pose a threat to fiat currency as a unit of measurement for value.

Decreasing sense of central banks as payment innovators: CBDCs provide central banks with a unique chance to conduct strategic debates on cash use cases in a public arena.

Rising global payment systems: Many central banks are attempting to develop stronger local jurisdiction over increasingly global payment networks. CBDC is seen by central banks as a possible stabilising anchor for local digital payment systems.

CBDCs have potential advantages, but they are not without danger. Continue reading to learn more.

Pros and Cons of CBDC

Pros Cons
Payments are more efficient and safe. All control rests with central banks.
Provide customers immediate access to the central bank. User privacy is compromised.
Reduce the possibility of a commercial bank failing. It is challenging to get widespread adoption.
Simple to follow. The potential rivalry between central banks and private banks.

How to Invest in CBDC?

CBDCs are identical to a country's existing monetary supply. This implies that holding the money in your account is the only method to invest in a CBDC. In other words, investing in CBDCs is like to possessing a country's tangible currency in your palm right now.

However, foreign nationals cannot currently store CBDCs issued by any other government in their digital wallets. To hold a CBDC from any country today, you must have a confirmed login and a bank account. This means that people of various nations cannot be given CBDC from another country. Most experts believe that as more CBDCs are introduced across the world, this will alter.

CBDC Vs. Cryptocurrency

Difference between CBDC and Cryptocurrency

Source: LinkedIn

CBDCs are not cryptocurrencies. Despite the fact that cryptocurrencies were the inspiration for CBDCs, they are two completely distinct kinds of digital currency.

Central bank digital currencies are frequently confused with other forms of cryptocurrency. As previously said, every transaction using central bank digital currencies has the central bank at its core. Yet, cryptocurrencies—like Bitcoin—are distributed networks or blockchains that use cryptographic techniques to produce digital tokens.

Cryptocurrencies utilise permissionless (public) blockchains, whereas CBDCs use permissioned (private) ones. On a public blockchain, anybody may join and participate in the blockchain network's basic activities. Anybody may read, write, and audit the current operations on the public blockchain network, which aids in maintaining the self-governed character of a public blockchain. Conversely, a private blockchain is a distributed ledger that is not decentralized and works as a closed, secure database based on cryptography principles.

  • A central bank establishes the limitations of CBDC networks. On crypto networks, the user base is given authority and decides by coming to a consensus.

  • As a result, CBDCs are centralized as opposed to decentralized cryptocurrencies. Moreover, cryptocurrencies offer anonymity, while CBDCs let central banks track who owns what. CBDCs are more likely to function on unique technology platforms than cryptocurrencies, which are frequently created using blockchain.

  • Moreover, stablecoins, currencies anchored to a fiat currency like the US dollar, are not the same as CBDCs. A CBDC would be the fiat currency rather than being tied to a fiat currency. For instance, a CBDC dollar bill and a $1 bill are the same.

  • CBDCs can only be used to make payments; hoarding or speculating in them is strictly forbidden. Cryptocurrencies may, however, be used for both business transactions and speculation.

  • A CBDC would be less concerned about data and privacy than a cryptocurrency. The cryptocurrency industry is undeniably independent with a peer-to-peer architecture, whereas some constraints limit central banks.

  • Because cryptocurrencies are peer-to-peer, users may decide how much and what information they want to share. Contrarily, transactions involving CBDC will automatically transmit a tremendous quantity of data to regulatory and tax authorities.

What distinguishes CBDCs from Bitcoin?

Although it may have been the first cryptocurrency to become widely accepted and it undoubtedly dominates conversations about blockchain and cryptocurrencies, bitcoin is only one of the many crypto assets that are currently accessible.

Bitcoin's popularity, usefulness, and fundamental ideas have not been diminished or diminished by the emergence of many crypto variations. Instead, the development of stablecoins, CBDCs, and other blockchain and cryptocurrency-related applications has enhanced the general health of the ecosystem.

The ecosystem surrounding Bitcoin provides a glimpse of a different type of financial system where onerous regulations do not constrain transaction conditions. One of the most well-known cryptocurrencies in the world is Bitcoin, which was established in 2009.

Bitcoin doesn't represent an actual, transferable currency. Instead, trades are made, and their records are kept in a publicly accessible, encrypted ledger. The mining process enables the validation of all transactions. Any banks or governments do not back Bitcoin.

CBDCs are intended to be used in place of fiat money. The goal is to provide customers access to both the controlled, reserve-backed circulation of traditional banking systems and the simplicity and security of digital banking systems. They are designed to work as a medium of exchange in everyday transactions and as a unit of account and store of value.

Like fiat money, CBDCs will have the full support of the government issuing them. Central banks or monetary authorities will be solely accountable for their actions.

What is CBDC in India?

In India, CBDC is referred to as Digital Rupee. The digital rupee would include qualities like trust, safety, and settlement finality that are present in real money. It may be converted into other forms of payment, such as bank deposits, and, like cash, it won't earn interest.

According to RBI, the Digital Rupee pilot program will commence on December 1st, 2022. The wholesale section of CBDC (The Central Bank Digital Currency- Wholesale) is intended for restricted access to specified financial institutions.

How to buy CBDC in India?

Eight banks have been chosen to participate in the phase-by-phase e-rupee pilot program by RBI, the Central Bank of India. The first phase will be distributed among the four banks in the aforementioned cities: State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank. Next, the second phase's pilot program will include four additional banks.

To facilitate transactions, these partnering banks have released the digital rupee app. You should know that the e-rupee is not a cryptocurrency but a digital representation of your cash or paper money. Hence, to conduct transactions and pay with an e-rupee, use the QR codes displayed at stores or malls.

While distinct from cryptocurrencies in many respects, the CBDC is comparable to them in terms of advantages. Government agencies and other businesses now accept digital rupees as legal cash, a form of payment, a safe deposit box, etc., which is one of the CBDC's noteworthy advantages.

Let's explore its advantages:

  • Digital currency is easily convertible into cash or business bank currency.
  • You can use the digital rupee even if you don't have a bank account because it is flexible legal money.
  • It cannot be destroyed via physical harm, such as breaking apart or burning.
  • No other digital currency can take the place of e-rupees.
  • Paper money is equivalent to digital money. Consequently, it will continue as long as your paper money last.
  • The digital rupee is managed by the government, unlike cryptocurrencies. As a result, it poses less volatility risk and offers user security.

CBDC's Road to Adoption

Today's decentralised blockchains have a "user beware" mentality: all transactions are final once finalised, and assets cannot be retrieved if the transacting party refuses to cooperate with law enforcement. For a CBDC seeking widespread adoption, this is not a workable choice.

Furthermore, no non-banking payment method now in use is given this sort of status under the legislation. Furthermore, since the recipient can be an unidentified foreigner not subject to abide by the rules and regulations of the CBDC's jurisdiction, legal authorities are unable to force compliance.

CBDC issuers should alter their status in accordance with banking, property, payment, and contract law instead. Only hybrid two-layer solutions that tackle two different issues may achieve this:

  • CBDC requires an effective management system that enables transactions to be validated and updated in accordance with local laws. A dispute resolution system has protocols in place for security, compliance, and auditing. Banks that overlay customer services on top of the payment layer may trust and confirm that transaction information is correct by using publicly verifiable logs of transactions for CBDCs that reside in permissioned blockchain frameworks.
  • Together with the status of the transactions, CBDC must also provide other information to the appropriate regulatory organizations, such as IP addresses or account numbers. For payment system dispute settlement, this information is essential. Authorities might check the status of a CBDC, including the specifics of how users have interacted with it, immediately using a public record.


Given central banks' work and focus on CBDCs, widespread acceptance of these assets is all but certain. As more individuals start using CBDCs and hunt for credible alternatives, the global acceptance of CBDCs will significantly accelerate the expansion of the cryptocurrency sector.

For a nation's underserved citizens, CBDCs will also assist central banks in reaching out to the unbanked or underbanked people.

Nations may ultimately benefit from CBDCs' improved financial stability. Central banks can readily implement monetary policies with greater openness if a digital currency is in use that is centrally controlled and guaranteed by the government. CBDCs could ultimately take over as the norm for domestic and international payments.

The future of finance, particularly the purchasing and selling of digital assets and securities, will be significantly impacted by CBDCs. But when, is the question. This response will rely on the principles of a specific legal framework to make it easier for international governments to issue, distribute, and be transparent about a digital form of currency. The world will start to accept digital currencies as a standard as soon as authorities and central banks take decisive action to create CBDCs.


What is the first CBDC in the world?

The first CBDC in the world to be made public and widely available is the "Sand Dollar" from the Bahamas. All 393 Bahamas citizens received the Sand Dollar on October 20, 2020. The Bahamas dollar, backed by the US dollar, is the benchmark for each Sand Dollar.

What does CBDC mean in India?

The RBI's Central Bank Digital Currency (CBDC) pilot programme for the retail market includes elements built on blockchain technology.  On October 7, 2022, the Reserve Bank of India (RBI) released a concept note on Central Bank Digital Currency (CBDC).

Which Indian cities have CBDCs?

In Mumbai, New Delhi, Bengaluru, and Bhubaneswar, the Reserve Bank of India (RBI) have started a trial of its retail central bank digital currency (CBDC), the e-rupee.

Has CBDC been introduced in India?

In the Union Budget presented to Parliament on February 1, 2022, the Government of India announced the introduction of the Digital Rupee, a digitally issued tender by a central bank, effective from FY 2022–23.

Which nation introduced CBDC first?

When a digital currency was first formally introduced, it was in The Bahamas. In October 2020, Sand Dollar, a digital currency, was introduced nationwide. After the Bahamas, Nigeria was the second nation in the world to introduce CBDC.

Will CBDC replace cash?

The Federal Reserve is contemplating a CBDC to increase secure payment choices, not to decrease or replace them since it is dedicated to maintaining the safety and accessibility of cash.

Is CBDC superior to cryptocurrencies?

The main distinction is that whereas Crypto is decentralised or not connected to or regulated by any government, CBDC is centralised, meaning RBI manages it. While cryptocurrencies must be maintained in digital wallets, CBDC is legal cash and may be retained in bank accounts.

What distinguishes the digital rupee from UPI?

You may transact with your actual money via the UPI interface. Digital money, on the other hand, is an additional type of paper money that may be taken out of a bank account.

Can I use a digital rupee for purchases?

Yes, you may use the retail digital rupee, or CBDC-R, to purchase from a store or mall that takes digital currency and has a QR code. The digital currency may be kept in your digital wallet and used for online purchases.

Can I transfer digital money to relatives and friends?

Digital money is your tangible money in a digitalised form. Hence, you may perform a transaction or transfer them to friends or family exactly like your actual cash. Both the individual giving and taking the digital money should have a digital wallet for the transaction.

What are the possible advantages of CBDC?

A CBDC might possibly provide a number of advantages. It could, for example, provide households and businesses with a convenient, electronic form of central bank money, with the associated safety and liquidity; provide entrepreneurs with a platform on which to create new financial products and services; support faster and cheaper payments (including cross-border payments); and broaden consumer access to the financial system.

What are the dangers of CBDC?

A CBDC might offer certain dangers and raise a number of critical policy problems, such as how it would influence financial-sector market structure, loan cost and availability, financial system safety and stability, and the efficacy of monetary policy.

Which country uses CBDC?

Over a hundred countries are testing CBDCs currently. A few countries that use CBDC: Australia, Bulgaria, Malaysia, China, India, UK, and more.

What are the Federal Reserve's continuing CBDC-related technical initiatives?

The Federal Reserve is conducting a number of digital currency experiments, including the creation of a fictitious CBDC. These experiments add to the Federal Reserve's policy talks on digital currency by providing experimenters with hands-on experience with the technology's advantages and disadvantages.



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