Central bank digital currency

Not to be confused with Stablecoin.

A central bank digital currency (CBDC; also called digital fiat currency[1] or digital base money[2]) is a digital currency issued by a central bank,[3] rather than by a commercial bank. It is also a liability of the central bank and denominated in the sovereign currency,[4] as is the case with physical banknotes and coins.

A sign on the Hangzhou Metro advertising acceptance of the Digital Renminbi
A sign on the Hangzhou Metro advertising acceptance of the digital renminbi, the first CBDC adopted by a major economy (China)

The two primary categories of CBDCs are retail and wholesale.[5] Retail CBDCs are designed for households and businesses to make payments for everyday transactions, whereas wholesale CBDCs are designed for financial institutions and operate similarly to central bank reserves.[5]

Retail CBDCs can be distributed through various models. In the intermediated model, the central bank issues the CBDC and manages core infrastructures, while financial intermediaries offer customer services. The ECB and the Federal Reserve have proposed intermediated CBDCs.[6][7] Alternatively, the central bank could either provide the full service or delegate responsibilities further.[4]

While CBDCs may share some properties with virtual currency and cryptocurrency, such as programmability,[8] they differ in that a CBDC is issued by a state.[9][10][11][12] However, most retail CBDC implementations will likely not use any sort of distributed ledger such as a blockchain.[13][14][15]

As of 2023, over 120 different jurisdictions, including major economies like the ECB, UK, and the US, were evaluating national digital currencies.[16] As it currently stands, 9 countries and the 8 islands making up the Eastern Caribbean Currency Union have launched CBDCs; 38 countries and Hong Kong have CBDC pilot programs; and 67 countries and 2 currency unions are researching CBDCs.[16] In the United States, some states have introduced legislation[17][18] to ban state payments using CBDCs with Florida being the first state to pass such a law citing privacy concerns.[19]

CBDCs have faced a plethora of criticisms, including concerns about privacy and the potential for them to be used as a "tool for coercion and control".[20] Their implementation could also have a displacement effect on the private sector, affecting bank balance sheets and private payment methods, necessitating carefully calibrated policies.[21]

  1. ^ "Focus Group on Digital Currency including Digital Fiat Currency". ITU. Retrieved 3 December 2017.
  2. ^ Mersch, Yves (16 January 2017). Digital Base Money: an assessment from the ECB's perspective (Speech). Farewell ceremony for Pentti Hakkarainen, Deputy Governor of Suomen Pankki – Finlands Bank. Helsinki: European Central Bank. Retrieved 19 June 2021.
  3. ^ Davoodalhosseini, M., Rivadeneyra, F., & Zhu, Y. (2020). CBDC and monetary policy (No. 2020-4). Bank of Canada.
  4. ^ a b Lavayssière, Xavier (1 September 2022), Central Bank Digital Currencies: the Quest for Public Digital Payment Infrastructures, École Polytechnique, doi:10.2139/ssrn.4649480, SSRN 4649480
  5. ^ a b "Concept Note on Central Bank Digital Currency". Reserve Bank of India. 7 October 2022.
  6. ^ European Central Bank (18 October 2023). "A stocktake on the digital euro - Summary report on the investigation phase and outlook on the next phase" (PDF).
  7. ^ "Money and Payments: The U.S. Dollar in the Age of Digital Transformation" (PDF). Board of Governors of the Federal Reserve System. January 2022.
  8. ^ Lavayssière, Xavier; Zhang, Nicolas (2024). "Programmability in Payment and Settlement". IMF working paper. 2024 (177). ISBN 9798400208843.
  9. ^ Bech, Morten; Garratt, Rodney. "Central Bank Cryptocurrencies" (PDF). BIS. Retrieved 25 August 2020.
  10. ^ Silva, Matthew De (19 September 2019). "What China could gain from a digital yuan". Quartz. Retrieved 28 September 2019.
  11. ^ "Speech by Jen Weidmann at the Bundesbank Policy Symposium "Frontiers in Central Banking – Past, Present and Future"". www.bundesbank.de. Archived from the original on 14 June 2017. Retrieved 9 November 2017.
  12. ^ "Financial innovation and monetary policy: Challenges and prospects" (PDF). European Parliament. 2017.
  13. ^ Boston, Federal Reserve Bank of (3 February 2022). "Project Hamilton Phase 1 Executive Summary". Federal Reserve Bank of Boston. Retrieved 9 February 2022.
  14. ^ Yang, Yuan; Lockett, Hudson (25 November 2019). "What is China's digital currency plan?". Financial Times.
  15. ^ Cite error: The named reference ukraine was invoked but never defined (see the help page).
  16. ^ a b "HRF CBDC Tracker". Human Rights Foundation. Retrieved 27 November 2023.
  17. ^ "HB 1082 - Relating to Central Bank Digital Currency". North Dakota Can. Retrieved 24 January 2024.
  18. ^ "North Carolina House Passes Bill Prohibiting State Payments With CBDCs". NASDAQ.
  19. ^ "Governor Ron DeSantis Signs First-in-the-Nation Legislation to Protect Against Government Surveillance of Personal Finances". Retrieved 24 January 2024.
  20. ^ "The Risk of CBDCs". www.cato.org. Retrieved 21 December 2023.
  21. ^ European Central Bank. (2022). The optimal quantity of CBDC in a bank-based economy. LU: Publications Office. doi:10.2866/909651.