A Central Bank Digital Currency (CBDC) is a digital version of a country’s fiat currency that is issued and regulated by its central bank. CBDCs are built on distributed ledger technology to vastly improve transparency and security, and give the country greater control over its monetary policy.  While only a handful of nations have fully launched a CBDC, over 130 are currently exploring the concept, and dozens have launched pilot programs.

With over 100 new CBDCs on the horizon, including in some of the largest and most important nations on the planet, it’s important to understand the next technology. Below, we will explore what CBDCs are, how they work, their main benefits and limitations, why they’re so important, and more.

What Is a Central Bank Digital Currency (CBDC)?

A Central Bank Digital Currency (CBDC) is a digital representation of a nation’s fiat currency issued and regulated by its central bank. The CBDC is designed to offer a secure, accessible, and efficient form of money for both businesses and individuals.

Unlike decentralized cryptocurrencies, CBDC is regulated and backed by the government. It aims to combine the convenience and security of digital currencies with the stability and regulation of traditional banking systems. Each CBDC unit acts as a secure digital equivalent of fiat currency and can be used for payments, storing value, and accounting.

CBDCs are typically created with several key goals in mind, some of which include the following:

1. Payment efficiency. CBDCs aim to improve the speed and efficiency of cross-border transactions, reducing settlement times and lowering transaction costs.
2. Security and transparency. By leveraging blockchain or distributed ledger technology, CBDCs can enhance security and ensure transparent transactions, reducing the risk of fraud and counterfeiting.
3. Monetary policy implementation. CBDCs can enable central banks to implement more precise and effective monetary policies, as they have better visibility into the flow of money within the economy.

How Do CBDCs Work?

The underlying technology of CBDCs can vary, but they are typically built on distributed ledger technology. Each unit of CBDC represents a specific amount of the nation’s fiat currency and is recorded on the digital ledger. When a user wants to make a transaction, they send CBDC from their digital wallet to the recipient’s wallet, which is recorded and verified on the decentralized network.

Because CBDC is a general term, not all of these currencies will look or act similarly. Countries can be incredibly creative with how they design and implement their CBDCs. For instance, they could theoretically be launched on existing decentralized networks like Ethereum or Solana, which would significantly restrict the government’s control over the asset. However, the vast majority of CBDCs today are built on centrally controlled networks or distributed ledgers for this very reason.

What Are the Types of CBDCs?

Central Bank Digital Currencies come in various forms, each being piloted in different countries. Naturally, governments design their CBDCs differently depending on their needs and wants.

There are two main categories of CBDCs: wholesale CBDCs for transactions between central and private banks and retail CBDCs for everyday transactions among individuals. Retail CBDCs are typically available to the general public and act as digital replacements for physical cash for day-to-day transactions. They can also help track and reduce criminal activities because of the increased transparency of distributed ledgers.

Wholesale CBDCs, on the other hand, are often reserved for financial institutions. They are primarily used for large-scale interbank transactions and settlements. The European Central Bank is currently considering implementing a wholesale CBDC, which would allow banks and financial institutions to set up nodes on the distributed ledger. These nodes would then allow these institutions to distribute the CBDC to everyday users.

Another type of CBDC is the account-based model, where users can hold these assets in digital accounts tied directly to the central bank. One example of an account-based CBDC is DCash, which is issued by the central bank of the Eastern Caribbean. Regular people in the region can set up accounts to use the currency for payments.

Here’s a quick overview of the main kinds of CBDCs you should know about:

• Retail CBDCs: These kinds of CBDCs are designed for everyday citizens to use for regular transactions.
• Wholesale CBDCs: These CBDCs are used primarily by traditional financial institutions like banks
• Account-based CBDCs: In this model, individuals and businesses have accounts directly with the central bank, similar to commercial bank accounts. Transactions are recorded in these accounts, and users can access their CBDC through digital wallets.
• Token-based CBDCs: Token-based CBDCs use digital tokens that are not directly linked to individual accounts. These tokens can be transferred peer-to-peer or through third-party payment providers.

CBDCs vs. Cryptocurrencies

Although CBDCs and cryptocurrencies share some similarities and are often built with overlapping goals, they differ fundamentally in some areas. CBDCs are issued and regulated by central banks, while most cryptocurrencies are decentralized and not tied to any central authority.

CBDCs are usually designed for one fundamental purpose: to maintain a stable currency for payments, similar to traditional fiat currencies. In contrast, cryptocurrencies like Bitcoin, excluding stablecoins, are often extremely volatile. Many cryptos are also created to offer other kinds of utility and not just basic payments.

Benefits and Limitations of CBDCs

Central banks and governments worldwide are exploring the implementation of CBDCs due to several potential benefits they offer to the economy. One of the notable benefits of CBDCs is that they can bring banking services to underserved populations.

In many rich regions like the U.S., the E.U., or the U.K., most people have access to the traditional banking system. This is not true across much of the rest of the world, where over 1.3 billion people are unbanked due to various structural, economic, and political factors. Even some heavily industrialized countries, such as China and India, have large unbanked populations due to rural isolation or lacking infrastructure.

Proponents of CBDCs believe that this tech could help provide banking access to millions of people who need it. Widening access to the economy also helps boost economic growth in general by boosting spending.

Depending on how they are designed, CBDCs could also reduce transaction costs associated with cash handling and processing. Nowadays, digital payments almost always come with some kind of fee or fees, often charged by card networks, payment processors, or correspondent banks. A CBDC could theoretically power the exact same transfers with little or no fees at all.

CBDCs could help central banks gain real-time insights into money flows as well, enabling more effective monetary policy implementation. Policy experts suggest that CBDCs could have a variety of benefits in terms of monetary policy, including more competitive banking interest rates, reducing reliance on other centralized power structures, and new tools for economic stimulus.

The technology could also be used to fight fraud and money laundering as it would ideally be much easier to track than other assets. Many people think of cryptocurrencies as anonymous and secretive, and some are, but most are built with transparency as a main goal. This sounds great, but there are two sides to this coin.

Privacy and small government advocates would argue that this transparency is actually a major downside of CBDCs. These currencies would likely concentrate significantly more power in the governments, giving them greater control over their citizens’ money and spending. Authoritative or plutocratic governments could abuse this power in any number of ways, such as freezing spending at will or even creating new monetary rules for political benefit.

Another limitation of these digital currencies is that they may not be as secure as many people suspect they are. Distributed ledger technology absolutely has its benefits, but it isn’t immune to hacks, exploits, or bugs. New currencies that aren’t designed or stress-tested well enough could have disastrous bugs or security flaws just waiting to be exploited.

A massive influx of CBDCs could also be a destabilizing force in the banking industry. They could disrupt existing power centers and put pressure on banks that rely heavily on deposit funding. Businesses and individuals might shift their funds out of banks and into CBDCs quickly, potentially causing a major downturn in lending or even major bank runs.

What Is the Current State of CBDCs?

CBDCs are quickly becoming a reality in many different countries and regions across the world, with a handful of standout examples. The most impactful CBDC right now is easily China’s digital yuan (e-CNY). According to the Atlantic Council, which closely tracks global progress on CBDCs, the total transaction value of currency surpassed 7 trillion e-CNY (roughly $1 trillion) in June 2024.

e-CNY is regularly used by countless citizens of China across 23 major cities for everyday transactions, numbering hundreds of millions of active wallets. Users can simply download the e-CNY app, created by the People’s Bank of China’s Digital Research Institute,  on their phones and use it like regular payment apps. The government is also currently working to expand the infrastructure underlying the e-CNY, expanding access across the country and even exploring international payments.

Europe is another leading region in CBDC technology, with its own plans for a digital euro. It concluded its preparation phase in October 2025 and hopes to start issuing the currency sometime in 2029. However, E.U. lawmakers still need to actually pass the required legislation for the plans to go forward.

A handful of smaller nations have already fully launched CBDCs as well. Nigeria was the first country in Africa to launch its own CBDC, dubbed the eNaira. Its goals included modernizing its payment infrastructure and absorbing the large informal economy that has caused issues with tax collection and capital controls.

The future of CBDCs looks promising with dozens of pilot programs and the e-CNY’s resounding success in China. However, most CBDC rollouts will not look like China’s. The adoption of CBDCs is expected to evolve gradually, with a focus on building secure, useful, and popular programs that citizens will actually want to use.

What Is The Future of CBDCs?

Central Bank Digital Currencies represent a significant advancement in the global financial system, offering potential benefits in terms of financial inclusion, payment efficiency, and monetary policy implementation.

However, the successful implementation of CBDCs requires careful consideration of the associated risks, cybersecurity measures, and the impact on the existing banking system. As countries continue to explore and develop their CBDC projects, they understand that it is crucial to strike a balance between innovation and risk management to ensure a stable and inclusive financial system. With the possible exception of the e-CNY, it’s likely that widespread implementation of CBDCs is still years away.

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Ibrahim Ajibade

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I’m a research analyst with experience supporting Web3 startups and financial organizations through data-driven insights and strategic analysis. My goal is to help organizations make smarter decisions by bridging the gap between traditional finance and blockchain innovation.

With a background in Economics, I bring a solid understanding of market dynamics, financial systems, and the broader economic forces shaping the crypto industry. I’m currently pursuing a Master’s degree in Blockchain and Distributed Ledger Technologies at the University of Malta, where I’m expanding my expertise in decentralized systems, smart contracts, and real-world blockchain applications.

I’m especially interested in project evaluation, tokenomics, and ecosystem growth strategies, as these are areas where innovation can drive lasting impact. By combining my academic foundation with hands-on experience, I aim to provide meaningful insights that add value to both the financial and blockchain sectors.