What is CBDC? Digital currencies of central banks explained

Can you imagine a world where the money in your wallet is no longer in the form of banknotes, but as a secure digital currency available 24/7 from any device? This future is not science fiction — CBDC (Central Bank Digital Currencies) are a reality. What exactly does CBDC mean, and why are entire countries getting involved?

A significant part of the global economy is already embracing this idea. Over 130 countries responsible for nearly 95% of the world’s GDP are researching or testing their own CBDCs. This signifies a revolutionary shift in how we think about money and payments.

What is CBDC: Definition and How It Differs from Regular Cash

To understand CBDC, you first need to know the concept of fiat money. Fiat currency is a type of money that has no intrinsic value but is declared by the government as a legal tender. Dollars, euros, or British pounds — all are fiat money that we use daily.

So, what is CBDC exactly? It’s a digital version of the same fiat money, with an important difference: instead of banknotes and coins, you access it via a smartphone or computer. The central bank issues and controls this currency, giving it the same legal status as traditional money.

Unlike cryptocurrencies like Bitcoin (which operate on decentralized networks), CBDC is centralized and fully backed by government authority. This guarantees stability and widespread acceptance within a country.

Two Main Types of CBDC: Retail and Wholesale

There are two distinct forms of CBDC, each aimed at different users and purposes.

Retail CBDC is designed for ordinary citizens and businesses. It functions like digital cash — used for paying for goods, sending money to friends, or shopping online via a mobile app. This type is divided into two variants:

• Account-based CBDC: You hold an account directly with the central bank or through intermediaries (commercial banks). This system allows precise transaction monitoring but raises privacy concerns.

• Token-based CBDC: You possess digital tokens representing units of currency that can be transferred peer-to-peer, similar to physical cash. This model offers greater anonymity.

Wholesale CBDC is intended for financial institutions — commercial banks and payment processors. It facilitates high-volume transactions and improves the efficiency of interbank payments. The public does not use them directly, but they are a key element supporting the entire financial system.

How CBDC Works: Centralized Mechanism and Security

CBDC is not just a digital copy of cash — it’s an advanced system with several characteristic features.

Centralized control means that the central bank has full authority over issuing and regulating the currency. Unlike decentralized Bitcoin, CBDC can be integrated with existing monetary systems and support national monetary policy.

Digital-only format makes transfers easier than with banknotes or coins. You store them in a digital wallet and send electronically. Transactions are faster, which is invaluable in an increasingly globalized economy.

Legal status of CBDC — it’s an official means of payment that must be accepted for settling debts and financial obligations. This gives it the same weight as traditional money.

Security and privacy are fundamental to CBDC. Advanced encryption techniques protect transactions from hacking and manipulation. However, the level of privacy provided to users depends on the specific project and regulatory framework.

Main Benefits of CBDC: Why Implement Them

CBDC offers several significant advantages for the economy and citizens.

Faster and more efficient payments — CBDC eliminates intermediaries (like traditional banks) and enables direct transactions. The result? Lower costs and shorter settlement times, especially important for cross-border payments.

Greater financial inclusion — about 1.4 billion adults worldwide lack access to a bank account (World Bank data). CBDC provides such individuals with secure access to the financial system via their smartphones.

New tools for central banks — digital currency allows better control over money supply, inflation management, implementation of negative interest rates, or direct stimulus payments.

Reduction of financial crime — every CBDC transaction can be tracked and recorded in a secure ledger. This makes money laundering and tax evasion more difficult.

Main Challenges of CBDC: Problems to Solve

Along with opportunities come serious difficulties.

Privacy concerns are the biggest worry. Unlike anonymous cash transactions, CBDC can be monitored by authorities. This raises questions about surveillance and misuse of personal data.

Cybersecurity risks — as digital assets, CBDCs are vulnerable to hacking and fraud. Any breach could undermine public trust and lead to financial instability.

Impact on traditional banks — if people move funds from commercial banks to CBDC wallets, banks may lose the ability to lend. This could threaten liquidity in the banking sector.

High implementation costs — developing infrastructure and regulatory frameworks require huge investments. Countries must ensure that benefits outweigh expenses.

The Global Race: Which Countries Are Already Implementing CBDC?

By 2026, many countries have already launched or are actively testing their own central bank digital currencies. Here are the most notable examples:

• Bahamas — “Sand Dollar” (2020), the first CBDC in the world
• Jamaica — “Jam-Dex” (2022)
• Nigeria — “e-Naira” (2021)
• China — digital yuan (e-CNY) with tests in multiple cities
• India — digital rupee project since 2022
• Russia — “Digital Ruble” program
• Brazil — “Drex” with pilot phases starting March 2023
• Eastern Caribbean Currency Union — “DCash” (2021)
• Sweden — “e-krona” project
• South Korea — “Digital Won” program
• United Arab Emirates — digital dirham

This global race demonstrates that CBDC is not the future — it is the present.

CBDC vs. Cryptocurrencies: Key Differences

Both forms of digital money sound similar but differ fundamentally.

CBDC is a digital version of traditional money backed by the government and central bank. They are stable, secure, and recognized as legal tender. The state has full control, which also allows for better oversight.

Cryptocurrencies like Bitcoin or Ethereum operate independently in decentralized networks. No one controls them; transactions are verified by a global network of computers using blockchain technology. This provides users with high freedom and privacy, but prices fluctuate dramatically — they can drop or rise by dozens of percent in just a few days.

In short: CBDC is a stable, government-backed digital currency, while cryptocurrencies are a free but volatile alternative.

Summary: CBDC Shapes the Future of Money

What is CBDC ultimately? It’s central banks’ response to the need for modern, secure, and efficient digital money. They bring enormous benefits — faster payments, greater financial inclusion, better monetary policy tools, and reduced crime.

At the same time, they face real challenges: privacy concerns, cybersecurity threats, potential impact on the banking sector, and significant implementation costs.

As countries develop their CBDCs, finding the right balance between these benefits and risks will be crucial. The future of money is digital, and CBDCs are its most important element.

Disclaimer: The opinions expressed in this article are for informational purposes only. The article does not endorse any products or services and is not financial or investment advice. Before making any financial decisions, we recommend consulting qualified professionals.