Central Bank Digital Currency: What It Is & How It Differs

Central bank digital currency (CBDC) is a digital form of a country’s official currency, issued and backed by its central bank. Unlike commercial bank money held in checking accounts, a CBDC is a direct liability of the central bank, meaning the issuing government guarantees its value. You use it through a digital wallet or account, and it is designed to work alongside physical cash and existing payment systems, not replace them overnight.

Formula

The calculator above shows a simplified interest calculation for a CBDC holding. The formula is:

Interest = Principal × (Annual Rate / 100) × (Days Held / 365)

Where:

• Principal (t) – the amount of CBDC you hold, in your local currency (e.g., USD).
• Annual Rate (r) – the interest rate the central bank pays on CBDC balances, expressed as a percentage per year.
• Days Held (d) – how long you keep the CBDC in your wallet, in days.

The result is the interest earned over that period. The total is principal plus interest. This is a simplified model; real CBDC designs may have tiered rates, caps, or no interest at all.

Worked Example

Using the default values from the calculator: you hold 100 USD in a CBDC wallet for 365 days, and the central bank pays 2% annual interest.

1. Convert the rate to a decimal: 2 / 100 = 0.02
2. Multiply by the principal: 100 × 0.02 = 2
3. Multiply by the time fraction: 2 × (365/365) = 2
4. Interest earned = 2 USD
5. Total after interest = 100 + 2 = 102 USD

The calculator returns interest of 2.00 USD and a total of 102.00 USD, matching the manual calculation.

Background: Why CBDCs Exist

Central banks have issued digital money for decades – commercial banks hold reserves at the central bank in electronic form. But that money is only accessible to banks. A CBDC extends that digital liability to the general public, much like physical cash but in electronic form. The motivation varies by country: some want to improve payment efficiency, others aim to increase financial inclusion for people without bank accounts, and some see it as a response to the rise of private cryptocurrencies and stablecoins that could bypass the traditional financial system.

As of 2025, over 130 countries, representing more than 98% of global GDP, are exploring or developing a CBDC, according to the Atlantic Council’s CBDC tracker. Only a few have fully launched, including the Bahamas (Sand Dollar), Nigeria (eNaira), and Jamaica (Jam-Dex). China’s digital yuan (e-CNY) is in large-scale pilot programs. The European Central Bank is in the preparation phase for a digital euro, and the Federal Reserve is researching a digital dollar but has not committed to one.

How CBDCs Work

A CBDC is not a cryptocurrency. It is issued by the central bank and is legal tender, meaning it must be accepted for payments. There are two main design models:

• Account-based – You hold a direct account at the central bank. This is similar to a bank account, but the central bank is the custodian. It allows for easy interest payments and programmability, but may raise privacy concerns because the central bank could see all transactions.
• Token-based – You hold digital tokens in a wallet, similar to cash. Transactions are settled peer-to-peer without the central bank being involved in every transfer. This model offers more privacy but makes it harder to pay interest or enforce limits.

Most proposed CBDCs are “two-tier”: the central bank issues the digital currency to commercial banks, which then distribute it to the public. This keeps the existing banking system involved and avoids a “bank run” scenario where everyone moves deposits to the central bank. Transactions are recorded on a centralized ledger managed by the central bank, not a public blockchain like Bitcoin.

How Does a CBDC Differ from Cryptocurrency?

The most common confusion is between CBDCs and cryptocurrencies like Bitcoin or Ethereum. Here are the key differences:

• Issuer – A CBDC is issued by a central bank and is a claim on the state. Cryptocurrencies are issued by private networks or algorithms, with no government backing.
• Value stability – A CBDC is pegged 1:1 to the national currency, so it has the same value as cash. Cryptocurrencies are highly volatile; Bitcoin’s price can swing 10% in a day.
• Legal tender – In most jurisdictions, a CBDC would be legal tender, meaning creditors must accept it. Cryptocurrencies are not legal tender and acceptance is voluntary.
• Ledger – CBDCs use a centralized ledger controlled by the central bank. Cryptocurrencies use a decentralized, distributed ledger (blockchain) maintained by a network of miners or validators.
• Anonymity – Physical cash is anonymous. CBDCs are generally designed with “controlled anonymity” – small transactions may be private, but larger ones are traceable to prevent money laundering. Cryptocurrencies are pseudonymous, not anonymous, and can be traced on the public ledger.

In short, a CBDC is digital cash, while a cryptocurrency is a separate asset with no government backing.

CBDC vs. Commercial Bank Money

Most money today is already digital – it exists as bank deposits. When you pay with a card or app, you are transferring commercial bank money, which is a liability of your bank, not the central bank. A CBDC differs in two ways:

• Risk – If a commercial bank fails, your deposit may be insured only up to a limit (e.g., $250,000 in the US). A CBDC is a direct claim on the central bank, which cannot go bankrupt in its own currency. This makes it safer, but it also means you might not need bank deposit insurance for CBDC balances.
• Access – Commercial bank money requires a bank account. A CBDC could be held by anyone, including unbanked individuals, through a simple digital wallet.

However, a CBDC could also compete with bank deposits. If people move money from banks to CBDC wallets, banks lose funding for loans. To mitigate this, central banks may impose limits on CBDC holdings (e.g., a cap of €3,000 in the digital euro proposal) or pay no interest on CBDC balances.

Potential Benefits and Risks

Benefits

• Financial inclusion – CBDCs can reach people without bank accounts, as seen in the Bahamas and Nigeria.
• Faster and cheaper payments – Cross-border transactions could settle instantly, reducing fees compared to correspondent banking.
• Monetary policy tool – A CBDC could allow central banks to implement negative interest rates more easily, or distribute stimulus directly to citizens.
• Reduced illicit activity – Traceable digital currency could help combat money laundering and tax evasion.

Risks

• Privacy erosion – A central bank with full transaction visibility could be a surveillance tool. Design choices must balance privacy with anti-money-laundering requirements.
• Bank disintermediation – If too many people shift deposits to CBDC, banks could face liquidity problems, affecting lending.
• Cybersecurity – A centralized system is a single point of failure; a hack could disrupt the entire payment system.
• Digital divide – Older or tech-averse populations may struggle to use CBDC, potentially excluding them from payments if cash is phased out.

How to Choose a Design: Account vs. Token

When a central bank decides to issue a CBDC, it must choose between account-based and token-based models, or a hybrid. The choice affects privacy, scalability, and user experience.

• Account-based – Better for paying interest, enforcing limits, and preventing illicit use. Requires identity verification (KYC). Example: China’s e-CNY uses a tiered account system.
• Token-based – More like cash, with lower transaction costs for small payments and better privacy. Harder to pay interest or apply caps. Example: The Bahamas’ Sand Dollar uses a token model.

Most pilots are hybrid: token-based wallets with account-based identity checks for large amounts. The key trade-off is privacy versus control. No country has yet launched a fully anonymous CBDC.

Common Misconceptions

“A CBDC is the same as a cryptocurrency.” No – it is issued by the state, has a stable value, and is legal tender. It does not use a decentralized blockchain.

“A CBDC will replace cash.” Not in the near term. Most central banks, including the Fed and ECB, have stated they will maintain cash alongside a CBDC. Cash remains important for privacy and financial inclusion.

“A CBDC is just a bank account at the central bank.” It is similar, but the central bank is not a retail bank – it does not lend or offer services. The two-tier model keeps commercial banks involved.

“CBDCs are already in use everywhere.” As of 2025, only a handful of small economies have fully launched. Most countries are in research or pilot phases.

Frequently Asked Questions

Will a CBDC replace my bank account? No. CBDCs are designed to complement, not replace, commercial bank money. Most proposals limit CBDC holdings to prevent bank runs. You would still likely need a bank for loans, mortgages, and investment products.

Is a CBDC safe from inflation? A CBDC has the same value as physical cash, so it is subject to the same inflation. It is not a hedge against inflation like gold or some cryptocurrencies. However, if the central bank pays interest on CBDC, it could partially offset inflation, but that is not guaranteed.

Can I use a CBDC without a smartphone? Some designs, like Sweden’s e-krona pilot, are testing offline cards and physical tokens. But most current pilots are app-based, which could exclude some people. Central banks are aware of this and are exploring offline solutions.

How does a CBDC affect my privacy? It depends on the design. Token-based CBDCs offer more privacy for small transactions, while account-based ones require identity verification. Central banks say they will not sell data, but they will comply with anti-money-laundering laws, meaning large transactions will be traceable.

When will my country have a CBDC? There is no universal timeline. The Bahamas, Nigeria, and Jamaica have launched. China is in advanced pilots. The ECB expects a digital euro by 2028. The US has not committed to a timeline. Check your central bank’s website for the latest status.

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in t | Transaction amount | USD | 100 | 0
in r | CBDC interest rate | % per year | 2 | 0
in d | Holding period | days | 365 | 0
out interest | Interest earned | USD | t * (r/100) * (d/365) | 2
out total | Total after interest | USD | t + t * (r/100) * (d/365) | 2