What Is a CBDC?

A CBDC is a digital currency that is issued by a government and are usually a tokenized form of the country’s fiat currency.

Updated Mar 27, 2023 at 8:44 p.m. UTC

CBDC stands for “central bank digital currency,” a type of virtual currency that governments around the world are experimenting with and investigating. What sets a CBDC apart from established currencies is that proponents hope it can use new payment technology, typically a blockchain, to potentially increase payment efficiency and lower costs.

This new type of currency is still early in its development. Most countries are still exploring and testing the idea, such as the U.S. form of a digital dollar. A few ambitious countries, notably China with its digital yuan, have already finished a demo and are piloting the technology. But a CBDC has yet to be deployed on a large scale.

Each country exploring a CBDC has its own approach. Several CBDCs are based on the same general principles and blockchain technology underlying Bitcoin.

Blockchain technology allows many different entities to hold a copy of a history of transactions so that history is distributed and not controlled by a single entity.

Several countries are known to be experimenting with blockchain-inspired CBDCs. Venezuela was a pioneer in this respect, launching its own cryptocurrency, the petro, in 2018. However, the petro is plagued by scandals and very few Venezuelans actually use it.

Common CBDC features

CBDCs are very early-stage, but in many cases, a CBDC is like a hybrid of Bitcoin and a government-issued currency. The resulting CBDC creation pulls in attributes of each, and specific features can include the following:

Distributed Ledger Technology (DLT)

We live in a digital world and our money is mostly digital to begin with. We use apps on our smartphones to glimpse our balances. We use credit cards to make payments. So how is a CBDC different?

CBDCs are digital, but with a different technological makeup. They are generally proposed to reengineer money from the ground up, with many borrowing from Bitcoin's underlying technology with distributed ledger technology (DLT).

In order to keep track of money, banks need to store financial records, such as how much money a person has and what transactions they've made, in a ledger.

Instead of one central database storing all the financial records of people, DLT is composed of several copies of this transaction history, each stored and managed by a separate financial entity, and usually managed from the top by the country's central bank. These financial entities share DLT together in a distributed manner.

This is what's known as a permissioned blockchain, because only a select few entities can access and/or alter the blockchain. In addition, central entities control who gets access to the blockchain and what they can do with it. For instance, the central entity might decide that Alice can only read the blockchain, while Bob can both modify and read the blockchain.

This sits in contrast to a permissionless blockchain, such as Bitcoin, which allows anyone to run the software and participate in sending transactions on the network. No central entity can turn users away.

Centralized Control

There's a reason CBDCs choose this permissioned blockchain. Though DLT has some similarities with bitcoin and other cryptocurrencies, the goals are very different.

Bitcoin and other public blockchains like Ethereum are unique in that no central entity or group of entities (as is the case with DLT) is in charge. That's typically not a property that sits well with governments.

Governments are choosing DLT technology because they can still retain control over certain aspects such as:

  • The supply: Bitcoin has a limit of 21 million bitcoins built into the protocol, and it is impossible to change this limit. In contrast, governments each have a central bank, which is in charge of the country's money supply. These powerful banks choose when to remove or add money to the supply, such as to stimulate the economy in troubled times, and set national interest rates, among other tasks. These roles aren't going to change with CBDCs.
  • Who runs it: A central entity will choose which financial entities participate in managing the distributed ledger. This differs from Bitcoin, which allows anyone to run the software, without permission.

Lower costs and higher efficiency

Advocates claim that because of the way CBDCs are structured under the hood, they could lead to lower costs for transferring money. The idea is that with a CBDC, financial entities are more connected, making a smoother way to move money around than the disjointed financial system that's in place today.

Tracking payments

DLTs give a full record of all the transactions. Some governments, such as China, which is known for its extensive surveillance apparatus, will potentially want to use this financial information to keep tighter tabs on its citizens.

Different governments are leaning toward different policies in this respect. For example, the U.S. Federal Reserve seems more eager to preserve the privacy of U.S. citizens in case it adopts a CBDC.

CBDC FAQ

Will CBDCs replace the money we use today?

Most countries see a CBDC as a supplementary form of money, not necessarily a currency that will completely replace the existing infrastructure.

What countries currently have CBDCs?

Several countries have launched CBDCs, including the Bahamas, Jamaica and Nigeria, though some view Nigeria’s CBDC as a cautionary tale. While Nigeria pioneered the use of CBDCs with its launch of the eNaira in 2021, the infrastructure to support it has been lacking and the citizens are reluctant to give up cash.

How many countries are experimenting with CBDCs?

In January 2020, a survey found only 10% of central banks reported they were exploring the idea, but a more recent survey by the Atlantic Council found 114 countries are currently exploring CBDCs. Some countries investigating CBDCs include:

Why are some U.S. lawmakers opposed to CBDCs?

In 2023, both Senator Ted Cruz and Florida governor Ron DeSantis proposed bans on CBDCs. Cruz believes cryptocurrency should not be in control of a centralized government and DeSantis has stated concerns of “government-sanctioned surveillance” if CBDCs are used. Both Republicans noted fears that a centralized digital dollar would stifle innovation in the industry.

Will all CBDCs use blockchains?

No. While many central banks see blockchains as bringing benefits such as efficiency gains, several central banks have expressed skepticism, arguing a blockchain-inspired CBDC does not bring enough benefits to justify creating and maintaining one.

Edited by Toby Leah Bochan.


This article was originally published on Dec 4, 2020 at 10:20 p.m. UTC

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Alyssa Hertig

Alyssa Hertig is a programmer and journalist specializing in Bitcoin and the Lightning Network. She's currently writing a book exploring the ins and outs of Bitcoin governance. Alyssa owns some BTC.


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