Michelle Legge
By Michelle Legge • Head of Crypto Tax Education
Updated Jan 31, 2024
This article has been fact checked and reviewed as per our editorial policy.

What are CBDCs (Central Bank Digital Currencies)?

CBDC is the word on everyone’s lips. But what are CBDCs & why are governments looking at issuing CBDCs? Find out. 🏦💰

What does CBDC stand for?

CBDC stands for Central Bank Digital Currency. A CBDC is a digital currency issued by a central bank, rather than a commercial one.

But knowing what CBDC stands for doesn’t actually help in deciphering what a CBDC is and what CBDCs can be used for, so let’s break down the jargon.

Central vs. Commercial Banks

Understanding the difference between a central bank and a commercial bank is key to understanding CBDCs.

A central bank is a public financial institution. It manages a given country's (or countries’) currency by creating and managing monetary policy. For example, the Federal Reserve is the central bank of the USA.

Meanwhile, commercial banks provide financial services to the public, including individuals and businesses. For example, JPMorgan Chase is a large commercial bank in the USA.

Central BankCommercial Bank
Acts as a banker to the government and other banksAccepts deposits and provides loans to individuals and businesses
Manages a country's monetary policy Generates profits through lending and investments
Issues and regulates the supply of currency and money in circulationOffers a range of financial services such as savings accounts, checking accounts, and credit cards
Holds and manages the country's foreign exchange reservesActs as an intermediary between savers and borrowers
Acts as a lender of last resort to commercial banksOperates within a competitive market and seeks to maximize profits for its shareholders
Regulates and supervises the banking industry to maintain stability and prevent crisesRegulated by central banks and other regulatory authorities to ensure compliance with banking regulations and maintain financial stability.

With that terminology out of the way, let’s take a look at what CBDCs are.

What are CBDCs?

CBDCs are tokenized versions of existing fiat currencies, potentially built using blockchain technologies. Unlike cryptocurrencies like USDT, CBDCs are issued by a central bank

This means CBDCs are (or will be) regulated by a centralized authority and the liability of a given central bank.

What are CBDCs?

Is a CBDC a cryptocurrency?

No. CBDCs are not cryptocurrencies. While CBDCs share some similarities with cryptocurrencies, they are not the same thing.

Are CBDCs cryptocurrenciesCryptocurrencies may be centralized by being issued by a given company like USDC or decentralized like Bitcoin by being distributed via a decentralized ledger. Either way, cryptocurrencies are not issued or controlled by a central authority - like a central bank.

While CBDCs may share some technical features - for example, they may utilize some aspects of blockchain technology - CBDCs are issued by a central bank and effectively backed and managed by the government.

Issued and backed by a central bank or governmentGenerally decentralized and not backed by any central authority or government
Centralized control and managementDistributed control and management through a blockchain network
Designed to be a digital version of fiat currencyDesigned to operate as an alternative to traditional fiat currencies
Legal tender in the country of issuanceNot recognized as legal tender in almost all countries
May be subject to government regulations and restrictionsGenerally operate outside of government regulations and restrictions
Can be used for a variety of purposes, including payments, savings, and investmentsCan be used for a variety of purposes, including payments, investments, and speculation

The centralized nature of CBDCs comes with both its advantages and disadvantages.

What are the benefits of CBDCs?

There are many potential benefits to CBDCs, for both investors and the government. The benefits for investors include:

  • While stablecoins are pegged to the value of a given fiat currency - investors need to have certainty in that stablecoin’s reserves or algorithmic stability. CBDCs would be the liability of the central bank and therefore have guaranteed reserves.

  • There is a reduced risk of a bank run with a CBDC - and if there is, the risk lies with the central bank.

  • CBDCs may allow more efficient and faster payments than traditional payment methods.

  • CBDCs may reduce transaction costs associated with traditional payment methods.

  • CBDCs may streamline cross-border payments and improve access to other fiat currencies for investment purposes.

  • CBDCs may improve the mainstream adoption of new innovations like smart contracts and decentralized finance.

  • CBDCs may help improve access to finance for those who struggle to gain access to traditional financial products, also known as the unbanked population, for example, people in remote areas or people without ID.

The benefits for governments and institutions include:

  • CBDCs will be cheaper to issue than physical cash and likely more popular in a post-COVID era.

  • CBDCs provide increased transparency for governments and may help authorities more easily monitor and tackle illicit activities like money laundering.

  • CBDCs may help central banks capture a market share and compete with the rise in popularity of private digital tokens, most of which operate outside financial regulations.

  • CBDCs may help central banks preserve and improve the position of their fiat currency in the global economy. For example, the US Dollar is the most widely used currency worldwide and a USD CBDC may help preserve and support this.

  • CBDCs may establish a direct connection between consumers and central banks - eliminating the need for financial intermediaries like commercial banks.

  • In theory, governments could create CBDC subsidiaries to support low-income households and provide better financial support and services. Whether governments would actually do this is another matter entirely.

As you might have noticed, many of the benefits of CBDCs for institutions are inherent risks for investors.

What are the risks of CBDCs?

CBDCs have many potential risks too, for both investors and institutions:

  • CBDCs are a privacy concern for investors. Governments and central banks will be able to monitor and track your financial transactions far more easily.

  • Some think tanks have raised not only the issue of surveillance of CBDCs and the lack of privacy but also warned that CBDCs could lead to intrusive changes to the taxation system.

  • CBDCs may be vulnerable to cyber attacks if not implemented properly and maintained with best-in-class security practices. A successful cyberattack may bring financial instability to entire populations.

  • CBDCs may eliminate the need for financial intermediaries. This is both a pro and a con, as it may have significant impacts on the economy.

  • CBDCs may have significant impacts on monetary policy - both good and bad.

  • CBDCs may face many adoption and implementation challenges, particularly for older generations.

  • While CBDCs may give improved access to the unbanked population, there is an equal risk that they may exclude those who do not have access to the technology or infrastructure to access CBDCs, as well as those unable to provide adequate KYC identification.

  • CBDCs have both technical and operational risks if the underlying infrastructure isn’t developed properly.

What’s the purpose of CBDCs?

Much of the hype around CBDCs you see in the news today comes as a direct result of the impact cryptocurrencies have had on the global financial market - both good and bad.

Cryptocurrencies have improved financial inclusivity worldwide, as well as innovating new borderless financial opportunities thanks to the DeFi market and stablecoins in particular.

But they're not without their risks - even for stablecoins. Most investors remember all too well the fallout when the TerraUSD algorithmic stablecoin de-pegged permanently, leaving billions in losses, despite promising investors that their assets were pegged to a particular value.

The rise (and sometimes fall) of crypto, as well as COVID speeding up our growth towards effectively cashless societies, has shifted government focus towards CBDCs - both to potentially offer regulated digital currencies for investors and to continue moving towards a cashless world.

Use cases for CBDCs are plentiful. Take the example of exchanging currencies to travel. Although some apps exist to aid cashless currency exchange and travel, with CBDCs this process could potentially be much cheaper and with better exchange rates, allowing for easy, cashless currency exchange.

This though is an example of a retail CBDC - and there are actually two kinds, with two distinct purposes.

Retail vs. wholesale CBDCs

We mentioned a retail CBDC above. This is a CBDC primarily used by individuals for retail payments - like cash or like many investors currently use stablecoins. Unlike stablecoins, retail CBDCs are backed by a central bank.

Wholesale CBDCs would be utilized by financial institutions, commercial banks, and central banks. Wholesale CBDCs could potentially solve a wealth of problems within traditional financial systems, for example, by improving payment speed and streamlining cross-border transactions.

While there are two distinct kinds of CBDCs that central banks are looking at implementing now, there’s no reason with the right infrastructure and development that a CBDC couldn’t serve as both a retail and wholesale CBDC.

Retail vs. wholesale CBDCs

Which countries have CBDCs?

According to research from the Atlantic Council, there are 11 CBDCs launched as of 2023:

  • Nigeria

  • Jamaica

  • The Bahamas

  • Anguilla

  • Saint Kitts and Nevis

  • Antigua and Barbuda

  • Montserrat

  • Dominica

  • Saint Lucia

  • Saint Vincent and the Grenadines

  • Grenada

As well as this, 18 countries now have CBDCs in pilot stages, including:

  • Russia

  • Sweden

  • Ukraine

  • Kazakhstan

  • Iran

  • Saudi Arabia

  • United Arab Emirates

  • Ghana

  • South Africa

  • China

  • India

  • South Korea

  • Japan

  • Hong Kong

  • Thailand

  • Singapore

  • Malaysia

  • Australia

These are by no means the only countries launching developing CBDCs though. Overall, there are 119 countries with a CBDC either launched, being trialed, in some form of development, or researching a CBDC.

Which countries are developing CBDCs?

Let’s take a quick look at some of the biggest financial players and where they sit in the race to launch a CBDC.

United States CDBC

The Biden administration has shown a lot of interest in a digital dollar. As part of the so-called crypto executive order, Biden directed the Federal Reserve and other authorities to research and pursue prototypes for a US CBDC for wholesale and retail applications.

United Kingdom CDBC

The Bank of England and HMRC released a consultation paper in February 2023 outlining the case for a Britcoin. As well as this the government has been advertising CBDC-related roles and the Bank of England has announced its soliciting vendors for a CBDC wallet, suggesting a launch of a digital pound may be imminent.

Australia CBDC

Australia's CBDC is in the pilot stages now. The Reserve Bank of Australia, alongside the Digital Finance Research Cooperative Research Centre, has outlined the technical requirements for Australia's CBDC - eAUD - and invited public comments. eAUD is currently planned to be utilized as both a wholesale and retail CBDC.

Canada CBDC

The Bank of Canada has been conducting research and development work into CBDCs since 2017 and more recently launched a consultation process in 2022. Though its early days, the Bank of Canada has focused on offering a digital currency with an eco-friendly footprint that could serve as both a retail and wholesale CBDC.


More questions on CBDCs? We got you.

Why have so many countries been exploring CBDCs?

Two main reasons - crypto and COVID-19. Crypto - and stablecoins in particular - have grown rapidly, offering new investment opportunities, all without regulation from a central authority. At the same time, covid pushed us closer to being a cashless society than ever before. As such, the two events have created a perfect storm to compel governments and central banks into researching and developing CBDCs faster than they were previously.

Will all CBDCs use blockchains?

No, not all CBDCs will use blockchain technology. While they may use a digital ledger, it’s unlikely that many of them will implement the key feature of a distributed public ledger like existing cryptocurrency blockchains have.

Will CBDCs replace cash?

Most central banks currently developing CBDCs have stated that the CBDCs they're developing are not cash replacements. But who knows what the future may one day hold!

How many countries are looking at developing CBDCs?

119 countries according to research from the Atlantic Council, although a few of these projects are stagnant or have been canceled.

What's the difference between a CBDC and a stablecoin?

Although stablecoins are pegged to the value of a particular fiat currency, they’re not regulated by the issuer of that currency. Instead, they’re generally backed by reserves (either cash or cash equivalents). This means you need to trust whatever entity issues that stablecoin. USDT in particular has come under fire for not being transparent about whether it maintains full reserves. Meanwhile, a CBDC would be issued and backed with the assurance of the central bank, theoretically meaning it can’t fail as a stablecoin could.

Does the US have a CBDC?

Not yet, but the Federal Reserve is looking at developing a USD CDBC - so watch this space!

Can Bitcoin survive CBDCs?

Bitcoin and other cryptocurrencies don't share many similarities with the CBDCs being developed or launched by central banks today. The main appeal of cryptocurrencies remains as an investment asset, as well as remaining out of reach of government regulation and control.

Will there be a single-world CBDC?

It looks unlikely currently, but maybe one day. The European Central Bank has announced its intention to develop and test a CBDC, which could mean a CBDC for 20 countries using the euro.

Why are people against CBDCs?

Mainly due to privacy concerns. With cash, the government can’t trace our every transaction as easily. Similarly, with crypto, in many instances, while transactions are recorded on a public ledger, wallet addresses are not linked to our personal data. With a CBDC, the central authority would be able to trace every transaction and theoretically link every transaction to a given identity, giving governments unprecedented insight into our financial lives.

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