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Central Bank Digital Currency (CBDC)

Frequently Asked Questions

1. What is a central bank digital currency (CBDC)?
A CBDC is a digital form of central bank money that is widely available to the general public.

“Central bank money” refers to money that is a liability of the central bank. In the United States, there are currently two types of central bank money: physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve.

While Americans have long held money predominantly in digital form—for example in bank accounts, payment apps or through online transactions—a CBDC would differ from existing digital money available to the general public because a CBDC would be a liability of the Federal Reserve, not of a commercial bank.

2. Will a U.S. CBDC replace cash or paper currency?
The Federal Reserve is committed to ensuring the continued safety and availability of cash and is considering a CBDC as a means to expand safe payment options, not to reduce or replace them.

3. Has the Federal Reserve decided to create a CBDC?
The Federal Reserve issued Money and Payments: The U.S. Dollar in the Age of Digital Transformation as a first step in fostering a broad and transparent public dialogue about CBDCs in general, and about the potential benefits and risks of a U.S. CBDC. The paper is not intended to advance any specific policy outcome and no decisions have been made at this time. The Federal Reserve has made no decision on issuing a central bank digital currency (CBDC) and would only proceed with the issuance of a CBDC with an authorizing law. Testifying before the House Financial Services Committee in March 2023, Chair Powell said a central bank digital currency is, “something we would certainly need Congressional approval for.”

4. Why is the Federal Reserve considering a CBDC now?
The Federal Reserve is charged with promoting monetary and financial stability and the safety and efficiency of the payment system and is studying how a CBDC could improve on an already safe and efficient U.S. domestic payments system.

With technological advances ushering in a wave of new private-sector financial products and services, including digital wallets, mobile payment apps, and new digital assets such as cryptocurrencies and stablecoins, the Federal Reserve and other central banks around the globe are exploring the potential benefits and risks of issuing a CBDC.

5. What are the potential benefits of a CBDC?
A CBDC could potentially offer a range of benefits. For example, it could provide households and businesses a convenient, electronic form of central bank money, with the safety and liquidity that would entail; give entrepreneurs a platform on which to create new financial products and services; support faster and cheaper payments (including cross-border payments); and expand consumer access to the financial system.

6. What are the risks of a CBDC?
A CBDC could pose certain risks and raise a variety of important policy questions, including how it might affect financial-sector market structure, the cost and availability of credit, the safety and stability of the financial system, and the efficacy of monetary policy.

7. What principles will guide the Federal Reserve’s consideration of a CBDC?
Any U.S. CBDC should, among other things:

• provide benefits to households, businesses, and the overall economy that exceed any costs and risks;
• yield such benefits more effectively than alternative methods;
• complement, rather than replace, current forms of money and methods for providing financial services;
• protect consumer privacy;
• protect against criminal activity; and have broad support from key stakeholders.

8. Would a CBDC protect my privacy?
Any CBDC would need to strike an appropriate balance between safeguarding the privacy rights of consumers and affording the transparency necessary to deter criminal activity.

Protecting consumer privacy is critical. As noted in Money and Payments: The U.S. Dollar in the Age of Digital Transformation, analysis to date suggests that a potential CBDC should be intermediated. Under an intermediated model, the private sector would offer accounts or digital wallets to facilitate the management of CBDC holdings and payments. An intermediated model would facilitate the use of the private sector’s existing privacy and identity-management frameworks.

Financial institutions in the United States are subject to robust rules that are designed to combat money laundering and the financing of terrorism. A CBDC would need to be designed to comply with these rules. In practice, this would mean that a CBDC intermediary would need to verify the identity of a person accessing CBDC, just as banks and other financial institutions currently verify the identities of their customers.

9. How can I learn more about CBDC or comment on the paper?
Reading Money and Payments: The U.S. Dollar in the Age of Digital Transformation is a good place to start. This paper concludes with a request for public comment, the first step in a broad consultation that will also include targeted outreach and public forums. The CBDC comment period has ended. You can submit any additional questions about CBDC through the Board’s Contact Us form.

10. What are the Federal Reserve’s ongoing technological initiatives related to CBDC?
The Federal Reserve is engaged in a number of experiments related to digital currencies, including a hypothetical CBDC. These experiments enrich the Federal Reserve’s policy discussions related to digital currency by giving experimenters hands-on experience with the technology’s opportunities and limitations. Examples include a multiyear exploratory research project (Project Hamilton) conducted by the Federal Reserve Bank of Boston in collaboration with MIT’s Digital Currency Initiative to investigate the technical feasibility of a general purpose CBDC that could be used by an economy the size of the United States, an Innovation Center at the Federal Reserve Bank of New York to facilitate collaboration with the Bank for International Settlements on a number of financial innovations, and a Technology Lab at the Board of Governors that has several CBDC experiments under way.

What Is a Central Bank Digital Currency (CBDC)?

A central bank digital currency (CBDC) is a form of digital currency issued by a country’s central bank. It is similar to cryptocurrencies, except that its value is fixed by the central bank and is equivalent to the country’s fiat currency.

Many countries are developing CBDCs, and some have even implemented them. Because so many countries are researching ways to transition to digital currencies, it’s important to understand what CBDCs are and what they mean for society.

Understanding Central Bank Digital Currencies (CBDCs)

Fiat money is a government-issued currency that has no physical commodity like gold or silver backing it up. It is considered a form of legal tender that can be exchanged for goods and services.

Traditionally, fiat money has been banknotes and coins, but technology has allowed governments and financial institutions to supplement physical fiat money with a credit-based currency model that records balances and transactions digitally.

Physical currency is still widely exchanged and accepted. However, some developed countries have experienced a drop in its use, and that trend accelerated during the pandemic.

The introduction and evolution of cryptocurrency and blockchain technology have spurred additional interest in cashless societies and digital currencies.

Governments and central banks worldwide are exploring the possibility of using government-backed digital currencies. When and if they are implemented, these currencies would have the full faith and backing of the government that issues them, just as fiat money does.

Purposes of CBDCs

In the U.S. and many other countries, many individuals don’t have access to financial services. In the U.S. alone, 6% of adults had no bank account in 2023.  In many other countries, the numbers are much higher. With that in mind, the main purposes of CBDCs are:

• To provide businesses and consumers conducting financial transactions with privacy, transferability, convenience, accessibility, and financial security.
• Decrease the cost of maintenance that a complex financial system requires, reduce cross-border transaction costs, and provide those who currently use alternative money-transfer methods with lower-cost options. The White House. “Technical Possibilities for a U.S. Central Bank Digital Currency.”
• Reduce the risks of using digital currencies, or cryptocurrencies, in their current form. Cryptocurrencies are highly volatile, with their value constantly fluctuating. This volatility could cause severe financial stress in many households and affect the overall stability of an economy. CBDCs, backed by a government and controlled by a central bank, would give households, consumers, and businesses a secure means of exchanging digital currency.

A CBDC also provides a country’s central bank with the means to implement monetary policies to ensure stability, control growth, and influence inflation.

Types of CBDCs

There are two types of CBDCs: wholesale and retail. Financial institutions are the primary users of wholesale CBDCs, whereas consumers and businesses use retail CBDCs.

Wholesale CBDCs

Wholesale CBDCs function similarly to holding reserves in a central bank. The central bank grants an institution an account in which to deposit funds or to use to settle interbank transfers. Central banks can then use monetary policy tools, such as reserve requirements or interest on reserve balances, to set interest rates and influence lending.

Retail CBDCs

Retail CBDCs are government-backed digital currencies used by consumers and businesses. Retail CBDCs eliminate intermediary risk—the risk that private digital currency issuers might become bankrupt and lose customers’ assets.

There are two types of retail CBDCs. They differ in how individual users access and use their currency:

• Token-based retail CBDCs are accessible with private keys, public keys, or both. This method of validation allows users to execute transactions anonymously.
• Account-based retail CBDCs require digital identification to access an account.

It is possible to develop and implement the two types of CBDCs and have them function in the same economy.

Issues Concerning CBDCs

The Federal Reserve has identified issues addressed by CBDCs, as well as matters that must be addressed before a CBDC can be designed and implemented.

Issues Addressed By CBDCs

• Free from credit and liquidity risk
• Lower cross-border payment costs
• Support the international role of the dollar
• Aim for financial inclusion
• Expand access to the general public

Issues Created by CBDCs

• Financial structure changes
• Financial system stability
• Monetary policy influence
• Privacy and protection
• Cybersecurity

Issues Addressed by CBDCs

• Eliminate the third-party risk of events like bank failures or bank runs. Any residual risk that remains in the system rests with the central bank.
• Can lower high cross-border transaction costs by reducing the complex distribution systems and increasing jurisdictional cooperation between governments.
• Could support and protect U.S. dollar dominance; the U.S. dollar is still the most-used currency in the world.
• Remove the cost of implementing a financial structure within a country to bring financial access to the unbanked population.
• Can establish a direct connection between consumers and central banks, thus eliminating the need for expensive infrastructure.

Issues Created by CBDCs

• If the U.S. financial structure drastically changes, it’s unknown how it would affect household expenses, investments, banking reserves, interest rates, the financial services sector, or the economy.
• A switch to a CBDC could have an unknown effect on a financial system’s stability. For example, there may not be enough central bank liquidity to facilitate withdrawals during a financial crisis.
• Central banks implement monetary policy to influence inflation, interest rates, lending, and spending, which in turn affects employment rates. Central banks must ensure that they have the tools needed to impact the economy positively.
• Privacy is one of the most significant drivers behind cryptocurrency. CBDCs would require an appropriate amount of intrusion by authorities to monitor for financial crimes; monitoring is also important because it supports efforts to combat money laundering and the financing of terrorism.
• Cryptocurrencies have been the target of hackers and thieves. A central bank-issued digital currency would likely attract the same crowd of thieves. Therefore, efforts to prevent system penetration and theft of assets and information would need to be robust.

CBDCs vs. Cryptocurrencies

The cryptocurrency ecosystem provides a glimpse of an alternative currency system in which cumbersome regulations don’t dictate the terms of each transaction. Such transactions are hard to duplicate or counterfeit and are secured by consensus mechanisms that prevent tampering.

Central bank digital currencies are designed to be similar to cryptocurrencies, but they may not require blockchain technology or consensus mechanisms.

Additionally, cryptocurrencies are unregulated and decentralized. Their value is dictated by investor sentiments, usage, and user interest. They are volatile assets more suited for speculation, which makes them unlikely candidates for use in a financial system that requires stability. CBDCs mirror the value of fiat currency and are designed for stability and safety.

CBDCs in Use and in Development

Central banks in many countries have launched pilot programs and research projects to determine the viability and usability of a CBDC in their economies.

As of March 2024, three countries had a functioning CBDC: the Bahamas, Jamaica, and Nigeria. The Eastern Caribbean Currency Union halted its CBDC for technical reasons and started a new pilot program.

There are 36 CBDC pilots in operation and 8 of the G20 have programs in development. The BRICS countries—Brazil, Russia, India, China, and South Africa—are exploring a CBDC.

One example of a failed CBDC attempt is the United Kingdom’s Britcoin, which existed between 2011 and 2019.

According to the Federal Reserve, the U.S. is one of those countries that is exploring whether a CBDC “could improve on an already safe and efficient U.S. domestic payments system.”

What Is the Purpose of a CBDC?

CBDCs are government-backed digital currencies that use blockchain or distributed ledger technology. Their purpose is to expand accessibility to financial services and lower the maintenance costs of current monetary systems.

Is the U.S. Going to Digital Currency?

Not yet. The Federal Reserve and its branches are researching CBDCs and ways to implement them in the U.S. financial system. President Joe Biden ordered the development of a national strategy on digital currencies.

Has Any Country Launched a CBDC?

Yes, Jamaica, Nigeria, and The Bahamas have launched CBDCs.

Is CBDC a Threat?

CBDCs should be implemented to enhance existing financial networks and fiat currencies, not replace them. If one was launched to replace a fiat currency, it might cause problems in a system—but no country has tried it yet, so the effects it might have are unknown or theoretical at best.

The Bottom Line

Many countries are researching or developing central bank digital currencies, and three have implemented them. A CBDC’s main purpose is to provide businesses and consumers with privacy, transferability, convenience, accessibility, and financial security.

Many individuals throughout the world have no access to bank accounts, so a CBDC would give them a way to be paid, hold their money, and pay bills. CBDCs could also decrease the maintenance a complex financial system requires, reduce cross-border transaction costs, and give people who use alternative money-transfer methods lower-cost options.

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What are central bank digital currencies and what could they mean for the average person?

Money has taken many forms over the centuries. In fact, it’s not even always been money at all. It gradually evolved from bartered commodities to pieces of metal, before becoming paper money and eventually debit and credit cards. The next step in this evolution could be central bank digital currencies (CBDCs).

CBDCs are already in use today. A total of 11 countries have launched one, and another 21 have pilot programs, according to the Atlantic Council’s CBDC Tracker. A further 79 are developing or researching a digital currency.

Well over 90% of the money in circulation today is already digital, according to Harvard Business Review (HBR), with rapid declines in the use of cash having accelerated because of the pandemic.

But just because more payments are happening digitally, does that mean we need central banks to adopt digital currencies?

What are CBDCs?

A CBDC is digital money issued by a central bank. It would not replace cash but complement it. “In a CBDC world, the digital code for each virtual currency unit will be held in a digital wallet and transferred seamlessly by the wallet-holder to other people’s digital wallets,” HBR says.

A CBDC would differ from cryptocurrency as it would be issued by a central bank, rather than a private coin like Bitcoin. This means the currency would be backed by the issuing government, ensuring its value would be stable, unlike with cryptoassets where large swings in value can happen for a number of reasons.

Why do countries want to issue CBDCs?

There are several expected benefits that countries could unlock by modernizing existing financial systems and introducing CBDCs:

CBDCs can cut transaction costs and times

When migrants send money back to people in their home country, they face an average charge on the transaction of 6.25%, the World Bank says. This is hacking away at the remittances that provide critical support for developing economies.

CBDCs could reduce the costs of these cross-border transactions by removing the need for money transfer operators, the Bank for International Settlements (BIS) says.

CBDCs could also speed up cross-border transactions. International payments often take one or two days, but some can take five. With CBDCs, digital payments could happen within seconds at any time of day.

There is a counter-argument that systems are already being developed that could enable near-instantaneous international payments, as BIS research points out. That said, current real-time payment methods face interoperability issues because of the patchwork of non-standardized payment systems that have gradually been developed around the world, according to payment provider Swift.

CBDCs can help people access money in emergencies

The Bahamas was the first country to adopt a CBDC. It launched the Sand Dollar in 2020 because it wanted to increase financial inclusion for its citizens, who live across a series of 700 islands, some of which offer limited access to cash machines and banking services.

“We didn’t start with the idea of a central bank digital currency,” says John Rolle, Governor of the Central Bank of the Bahamas. “We focused on eliminating as many obstacles as possible for persons having access to the equivalent of a deposit account or a mobile wallet account to conduct transactions.”

The Sand Dollar came about shortly after the Bahamas suffered its worst ever natural disaster, Hurricane Dorian. Digital currencies were seen as a way for the government to send immediate financial aid to citizens after such events, when bank branches or cash machines may have been damaged or become inaccessible.

CBDCs could have also helped governments around the world with recent energy bill support payments prompted by soaring gas prices, according to HSBC Global Economist James Pomeroy. Some of these support payments took the form of discounts applied to energy bills, but this risked excluding people who have prepayment meters (which are often used in lower-income areas).

“In a world where every single person … has a CBDC account, what you could do is essentially drop payments into people’s accounts,” Pomeroy told the Poundcast podcast.

CBDCs can boost financial inclusion

Increasing financial inclusion was one reason Nigeria introduced its CBDC, the eNaira, in 2021. Around a third of people in Nigeria do not have bank accounts.

The benefits of financial inclusion include helping eliminate poverty, create jobs, improve gender equality and raise health standards, according to the World Bank.

There have been large drops in poverty in rural India thanks to moves to bring people into the banking system. And better financial access for farmers in Malawi is helping them invest in equipment, which is in turn boosting their yields and their potential crop earnings by over a fifth.

Giving people access to financial services is seen as key to achieving the UN’s Sustainable Development Goals. CBDCs could transform financial inclusion as they can be used directly via a mobile phone, potentially benefitting the more than 600 million people around the world who have access to a mobile but not to a bank account.

CBDCs can counter criminal activity

CBDCs would allow for the creation of digital records and traces, and this could make it easier to stop money laundering and flows of money used to finance terrorism, BIS says.

That said, there is the possibility that the added traceability of CBDCs could push these sorts of transactions further away from the formal banking systems and lead to criminals seeking out other ways to circumvent regulations.

The potential traceability of CBDCs also gives rise to one of the biggest objections to digital currencies.

Objections to CBDCs

Privacy is one of the most commonly cited concerns when it comes to CBDCs, as the World Economic Forum’s Digital Currency Governance Consortium White Paper Series points out.

It’s a legitimate concern given the rise of data protection and online privacy issues in our increasingly digital world. However, just as governments around the world have brought in new legislation to tackle these concerns, they will have to introduce rules around CBDCs, such as enforcing the use of privacy-enhancing technology and ensuring consumer protection, the Forum points out.

These kinds of rules will also be required to protect personal data against the inevitable cybersecurity risks of digitizing sensitive financial information.

Banks including the European Central Bank (ECB) are already looking hard at how to embed anonymity in CBDCs. “While the question of whether or not to issue CBDC is still primarily a policy matter, that question cannot be answered without a deep understanding of the various specific design features that a CBDC could have,” the ECB points out.

The US Federal Reserve also says security would be a key consideration before any decision to go ahead with CBDCs. But it points out that many of the underlying technologies that may be used already exist in today’s digital payments systems. CBDCs would also benefit from the additional security benefits of blockchain and cryptography, the Fed says.

Building trust in CBDCs

Every time money has changed its form, it has taken time for people to learn to trust it.

It took a huge leap for people to move from a system where goods were bartered directly against one another to one where a tiny piece of metal was understood to represent the value of those goods.

Even a decade ago, large numbers of people did not trust new contactless card payments. Now, the chips in these cards are understood to make them more secure than their predecessors, which had to be swiped.

Time will also be needed to build trust in CBDCs, and that trust will only be built if governments and central banks are transparent and honest about the potential advantages and risks of digital currencies, about the reasons to pursue CBDCs, and about the rationale behind their technology choices.

International regulations and cooperation will also be critical bricks in the wall that will secure sturdy and long-lasting public faith and confidence in CBDCs.

Another key step in building trust will be ensuring that accurate and accessible information is available about CBDCs. Education and awareness will be crucial to counter any misinformation on the topic, and to drive trust and adoption of possible future CBDCs.

People only gained trust in money because they saw that it not only worked, but also made their lives easier and better. CBDCs will need to prove that they can do the same.

Resources

federalreserve.gov, “Central Bank Digital Currency (CBDC).”; investopedia.com, “What Is a Central Bank Digital Currency (CBDC)?” By Shobhit Seth; weforum.org, “What are central bank digital currencies and what could they mean for the average person? Sandra Waliczek;

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