What Is a Central Bank Digital Currency (CBDC)?

When fiat and digital currencies collide.

Written by Brooke Becher
What Is a Central Bank Digital Currency (CBDC)?
Image: Shutterstock / Built in
Brennan Whitfield | Apr 19, 2023

A central bank digital currency (CBDC) is a digital fiat currency, or digitized, government-issued money. CBDCs act like traditional banknotes, but come in a programmable, digital form.

Fiat currency is legal tender that’s completely backed by a government system and the promise of its citizens, instead of by physical commodities like gold or silver. The U.S. dollar, euro and pound are all examples of fiat currency. 

Unlike existing digitized capital, such as the numbers tallying our bank balances or tendered online at checkout, CBDCs differentiate themselves by being liable to the Federal Reserve versus a commercial bank.

What Is CBDC?

A central bank digital currency (CBDC) acts as traditional banknotes, but comes in a programmable, digital form. CBDCs are issued and governed by a country’s central bank, which records transactions on a digital ledger.


How Does CBDC Work?

Currently, there are two types of government-backed money in circulation: physical currency and digital balances tied to commercial banks. If adopted, CBDCs would establish a third payment option without replacement or a reduction in value of those in existence.

In theory, policymakers would be able to delete or airdrop money into citizens’ digital wallets at will.

“You can imagine that in a recession, airdropping money that has an expiration day of, say, one week into citizens’ digital wallets would be an effective way to force people to consume and thus stimulate the economy,” said Scott Byron, head of venture and research at crypto exchange platform AscendEX. The 472 million payments in financial relief paid to U.S. households impacted by the Covid-19 pandemic, for example, could have been auto-distributed if CBDCs were in effect.

Oddly enough, CBDCs are inspired by blockchain technology without actually using it. The main point of blockchains is to eliminate the need for a central authority or middleman by way of decentralization. This is done by creating immutable, public ledgers, secured by cryptography, that distribute users’ transaction histories across peer-to-peer networks.

Fully centralized, CBDCs borrow the principle of recording transactions within an encrypted database, then throw out the rest. So, while the concept of CBDCs is a total inversion of decentralized finance, their creation is largely credited to fintech pioneer platform Bitcoin.

The same drivers that bore Bitcoin — a digital-first economy, demand for real-time payments and fee-less global monetary transactions — are at the core of CBDC development, according to Deloitte.

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CBDC Examples

As of December 2022, 114 countries are actively “exploring” CBDCs, with China being the first to deploy a centralized digital currency pilot program that year, according to independent think tank the Atlantic Council. Of the countries surveyed, only 11 of them have fully launched a digital currency. Given varied status in the global economy and stances on digital asset adoption, each country will have their own reasons backing their decision to go digital.

Let’s look at some examples:


The Sand Dollar

A digitized iteration of the Bahamian dollar, the Sand Dollar launched as the world’s first CBDC in October 2020. Although it has become available to 393,000 citizens, a March 2022 report shows that there’s only 0.1 percent in circulation.



The People’s Bank of China rolled out a digital yuan known as e-CNY. It competes with two major mobile payment systems, Tencent’s WeChat Pay and Alipay, which are both run by Alibaba affiliate Ant Group. As of September 2022, transactions totaling more than 100 billion yuan ($14 billion) have been tendered in the two years since the CBDC’s launch, making it the most widely adopted CBDC per capita.



The official digital currency of Sweden launched as a response to a decline in cash usage among its citizens. The Swedish central bank had set ambitious goals, hoping to execute 65 percent of all Swedish transactions via eKrona while hitting a market value of $5,000 per eKrona before the end of 2022.



Widespread usage of cryptocurrency led to a nationwide ban against DeFi banking in Nigeria starting February 2021. The announcement for a government-issued, centralized digital token came four months later, with 500 million in circulation valued at $1.21 million. Crypto-savvy Nigerians seem to be underwhelmed. Less than 0.5 percent of the nation’s 211 million population have opened an eNaira digital wallet, as reported by Bloomberg.



Jamaica’s senate became the first to amend legislation to include virtual tokens alongside banknotes and coins under its definition of legal tender. JamDex was created to provide a bank to the bankless as well as an alternative to fiat currency in the island nation’s cash-heavy economy.

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Benefits of CBDC

Many of the advantages that CBDCs have over other payment options can seem quite obvious. Faster, cheaper and more efficient transactions beget a favorable user experience. Direct access to bank funds. Secure funds, safe from commercial bank collapse and vaulted behind multiple cryptography methods. 

And that’s all just the beginning.


Better Traceability 

CBDCs are also easily traceable. This means that a digital ledger system could also be used to combat illicit activity, such as fraud, money laundering, tax evasion and cybercrimes. Mishandled or counterfeited currency would become virtually impossible.

“Proceeds of crime could theoretically be tracked and removed from the financial supply, rendering crimes of profit less attractive to commit,” Joe Robinson, co-founder and CEO of Hummingbird, a service combining communications and tech to flush criminals from the financial system, said. “Political corruption, cronyism and exploitation of the financial system could be reduced by CBDCs, with established and public governance oversight.”


Better Transparency 

And with traceability comes greater transparency.

“Currently, other than what is shared with the media, we do not have much visibility into the growth or reduction of the money supply,” said Brad Yasar, co-founder and CEO of Eqifi, a DeFi platform backed by a digital bank. “Whereas with a CDBC, everyone has full transparency, although this may not be perceived as a desirable outcome for certain governments.”


Greater Accessibility 

Costs behind money manufacturing is a number one priority for governments with high interest in developing CBDCs, Yasar said. The cost efficiency between digital minting versus printing, securing and distributing paper fiat currency is incomparable, he said.

The ease of access required of a countrywide currency invites underserved demographics to banking, as simple as downloading an app. Connecting unbanked populations to modern finance and reducing the reliance some countries have on major currencies, like the U.S. dollar, are some ways in which CBDCs make way for a more accessible economy, according to Richard Gardner, CEO of advanced tech manufacturer Modulus.

“These are especially critical for many developing countries,” Gardner added. “Others may see lowered costs of international remittances, as well as transaction costs — the benefits and risks really depend greatly on the country, their mission and their rollout.”

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Challenges of CBDC

On the other hand, programmable money controlled by governments may not be the ideal scenario. In fact, CBDCs are essentially the antithesis of cryptocurrency.

“Cryptocurrencies were designed in part to be functional currencies that do not require a centralized authority,” Robinson said, noting that governments have historically taken on the role of issuing currencies, enforcing laws related to them and controlling the economic supply. “With most cryptocurrencies like Bitcoin, those roles are automated by the technology itself.”

“A CBDC takes the emancipatory promise of crypto and turns it upside down.”

So, while items such as government remittances — like welfare or pandemic stimulus checks — may be easier to facilitate, it could unfairly sway political power in a government’s favor. Till Wendler, co-founder of Peaq, a blockchain platform backing the Economy of Things, points to the dystopian potential of CBDCs. 

“The main drawback of a CBDC, at least as long as it’s not running on a public blockchain, is that it allows the issuer to dictate the users’ consumer behavior,” Wendler said, based on an undisclosed system of data collection recording account activity. From smothering peaceful political protest by exiling activists from the economy to force-injecting savings as a stimulus, Wendler said that a CBDC is as powerful as a tool for social control can get.

“Many people today tend to take financial inclusion for granted,” Wendler said. “At its core, a CBDC takes the emancipatory promise of crypto and turns it upside down.”


CBDC vs. Cryptocurrency

Aside from their shared digital format, CBDCs and cryptocurrencies share little else. Fundamentally, the centralized and decentralized aspects of the pair place them on opposite ends of the digital-asset spectrum.

CBDC vs. Cryptocurrency

  • CBDC: centralized currency that is government-issued and regulated; operates on permissioned, private blockchain networks.
  • Cryptocurrency: decentralized currency with no regulatory authority; operates on permissionless, public blockchain networks.

Still, it is possible to find a common association between the two.

“From a certain perspective, it’s possible to argue that CBDCs actually follow the crypto spirit,” Wendler said. “Most of our money is already digital. Quite a few of us have completely ditched physical cash due to the sheer convenience of digital payments.”

Similar to the private companies, like commercial banks or PayPal, CBDCs eliminate the middleman between a person and their stored funds, which would be issued directly into a virtual wallet.

“A CBDC would behave the same way [as a stablecoin] in terms of its price action, but, under the hood, the difference is gargantuan.”

Nevertheless, one is governed by distributed autonomous communities while the other is fully regulated by the government and backed by reserves.

Even the closest cousin that may best relate the two — stablecoins, a cryptocurrency that pegs its market value to a fiat currency such as the U.S. dollar in order to foster stability in an otherwise notoriously volatile market — will always be a private, non-state issued asset.

“A CBDC would behave the same way [as a stablecoin] in terms of its price action, but, under the hood, the difference is gargantuan,” Wendler said. While blockchains serve a vital role for stablecoins, they are completely optional for CBDCs.

This distinction is crucial, as it reveals the underlying ownership mechanisms, Wendler said. On a public chain, a user always owns their tokens with full autonomy on how to spend them, as long as they are in possession of the key to the correlating wallet. On the other hand, private chains and centralized issuers rule a users’ ability to transact. The ownership of one’s tokens is at the discretion of the central bank.

“This implies different legal and operational playbooks,” he said.

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The Future of CBDC

Experts say it’s a matter of when, and not if, CBDCs will be a societal implementation. Though it’s too early to tell how far away widespread adoption is currently, experimentation will continue in the now. More government-funded initiatives and pilot programs will be rolling out in the immediate years ahead as countries explore how CBDCs cater to their unique needs.


How Will CBDC Be Used? 

“The purpose of CBDCs really vary greatly by country,” said Gardner. In a side-by-side comparison, he juxtaposed Ghana and Nigeria venture into CBDCs. 

For Ghana, “their vision is very closely tied” to expanding access to banks. “Even in their trials, they are testing the viability of offline transactions in order to bring rural merchants into the banking system. This gives the additional benefit of being able to track income in a way that may allow them to apply for bank loans, something long out of reach for many,” he said. “On the other hand, if you look at Nigeria’s rush towards a CBDC, it appears clear that the intention was to preempt competition.”

The eNaira was suffering from the Nigerian populace taking their assets and using stablecoins or other cryptocurrencies as inflation hedges, Gardner said. “The eNaira was clearly an attempt to keep assets in the country’s own currency. If and when they work out the kinks to eNaira, it wouldn’t surprise me to see the country take steps to eliminate access to other assets in competition.”


Citizens Will Shape CBDC’s Future

Many of the potential issues paramount to CBDCs are being worked out in today’s DeFi landscape among cryptocurrency as regulations develop, domestic and abroad.

Yasar is confident that the citizen experience will be a major factor into a CBDCs success. 

“CBDC is the future of all monetary transactions if implemented in a way that does not interfere with individual rights and freedoms,” he said. “Any other implementation will make it less like fiat currencies and less prone to gain widespread adoption.”

This content is for informational and educational purposes only. Built In strives to maintain accuracy in all its editorial coverage, but it is not intended to be a substitute for financial or legal advice.

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