What are Central Bank Digital Currencies (CBDCs) and how do they work?

What is a Central Bank Digital Currency (CBDC)?

A Central Bank Digital Currency (CBDC) is a digital form of a country’s national currency, issued and regulated by its central bank. It represents legal tender in electronic form – not a new currency, but a new format for existing currencies. Just like physical cash is a liability of the central bank, CBDCs are also directly backed by the state.

The main difference between a CBDC and the balance in your online bank account is that CBDC funds come straight from the central bank rather than a commercial institution. This gives them added security, stability and neutrality, especially in times of crisis.

CBDCs are different from cryptocurrencies. Where crypto is typically decentralised, CBDCs are centrally issued and fully regulated. CBDCs’ value is pegged to the national currency, making them suitable for daily payments and long-term savings without the volatility associated with many crypto assets.

These currencies aim to modernise public money by offering a digital version of cash that is accessible, efficient and secure. They’re being developed with various goals in mind, from improving payment infrastructure to preserving monetary sovereignty in the digital age.

Dozens of countries are exploring CBDCs. China’s digital yuan (e-CNY) is in widespread trials. Sweden’s central bank has developed the nation’s CBDC e-Krona and it is in testing and pilot phase. The European Central Bank is studying a digital euro. In the US, the Federal Reserve released papers on a potential digital US dollar in 2022.

However, the exploration of the US CBDC effectively stalled in early 2025 when President Trump signed an executive order in January 2025, titled ‘Strengthening American Leadership in Digital Financial Technology.’

This order prohibited federal agencies from establishing, issuing or promoting CBDCs in the US and required congressional authorisation for any future CBDC endeavours. Following this, the US House of Representatives passed the Anti-CBDC Surveillance State Act in July 2025, which would prohibit the Federal Reserve from developing, testing or issuing a CBDC without explicit congressional approval.

This legislation also bans the Fed from using a CBDC as a tool for monetary policy or surveillance. The bill has passed the House and awaits Senate consideration.

How do Central Bank Digital Currencies (CBDCs) work? 

While CBDCs may feel like regular digital money to the user, behind the scenes they’re powered by highly secure infrastructure. At the centre of this system is a national central bank, which issues and maintains the digital currency. The technology used to support this can vary. Some CBDCs use blockchain or distributed ledger technology, while others rely on conventional databases with additional security layers.

CBDCs are accessed through digital wallets. These wallets may be issued directly by the central bank or by commercial banks and licensed financial service providers. Individuals and businesses can use these wallets to receive, store and send CBDC, just like they would with mobile money or an online banking app.

There are two main CBDC models: account-based and token-based. In an account-based model, users must verify their identity to access funds. Transactions are linked to specific identities, similar to how your bank account works today. Token-based CBDCs are closer to physical cash. The digital tokens represent value and whoever holds them owns them, without needing a linked identity.

A CBDC transaction works like this:

1. You receive funds in your CBDC wallet.
2. You use the wallet app to pay for a product or send funds.
3. The transaction is verified by and settled on a central ledger.
4. The recipient sees the money in their wallet once settled.

Some CBDCs offer offline capabilities, enabling users to make transactions without an internet connection. Others allow programmable functions, such as restricting where or how funds can be spent – a feature some governments are exploring for targeted stimulus or public benefits.

CBDCs provide a new, government-backed way to hold and use money digitally. They aim to make everyday payments faster, cheaper and more secure.

What is the purpose of CBDCs?

The introduction of CBDCs is driven by several key goals, each reflecting a blend of economic, technological and policy motivations.

One of the primary purposes is to enhance payment efficiency. In many countries, existing systems are outdated or fragmented. Domestic and cross-border transactions can be slow and expensive. A CBDC, operating on modern infrastructure, could provide real-time settlement at lower cost, improving accessibility for individuals and businesses.

Another important goal is financial inclusion. Millions of people globally still lack access to basic financial services. By offering a digital currency that can be stored and used through a simple mobile phone – without needing a bank account – CBDCs could bring unbanked populations into the formal financial system.

CBDCs also offer central banks support on monetary and fiscal policies. CBDCs provide central banks with new tools to implement monetary policy more effectively and facilitate direct government payments, such as social benefits or crisis relief, with high targeting and speed.

From a policy perspective, CBDCs serve as a proactive response to the rise of digital payments and privately issued stablecoins. Central banks are seeking to maintain monetary sovereignty and trust in fiat currencies in an increasingly digital economy.

Finally, there are long-term cost savings. Managing and transporting physical cash is expensive. A digital alternative reduces the need for cash printing, transportation and storage, especially in countries where digital payments are already widely used.

Benefits of CBDCs

CBDCs bring a wide range of potential benefits to users, financial institutions and governments.

For everyday users, one major benefit is faster, lower-cost payments. Whether you're paying a bill, sending money to a friend or receiving wages, CBDCs can enable instant transfers with minimal fees. This is especially helpful in countries where digital payments are expensive or slow.

Security and transparency are also major strengths. Each transaction can be verified, making it harder for illegal activity to go undetected. While full anonymity is unlikely, many CBDC designs still protect user privacy within reasonable bounds.

CBDCs also offer greater resilience. Unlike private systems that can fail or be shut down, a central bank-issued currency provides public access to reliable infrastructure. Even if a bank or app goes offline, the central system remains intact.

For governments, CBDCs improve the precision and effectiveness of monetary policy. They can be used to deliver targeted fiscal support, manage interest rates more directly or track economic activity more accurately.

And for commercial players, especially banks and fintech companies, CBDCs create opportunities to build new services. Wallets, analytics, integrations and lending tools can all be developed on top of CBDC platforms, opening up opportunities for innovation and growth.

Together, these benefits position CBDCs as a potential game-changer – one that could create a more efficient, transparent and accessible financial ecosystem for all participants.

CBDC types

CBDCs generally come in two forms: retail CBDCs and wholesale CBDCs. Each type serves a different purpose and target audience within the economy.

1. Retail CBDCs

Retail CBDCs are designed for everyday use by individuals, businesses and households. They function much like physical cash or debit card payments but in a digital format. With a retail CBDC, users can store and spend money through a digital wallet, which might be issued by a commercial bank, central bank or licensed third-party provider.

Retail CBDCs aim to replace or complement existing forms of payment. They can improve access to money in areas with limited banking infrastructure and provide a reliable, government-backed alternative to private digital wallets or mobile payment apps. For example, The Bahamas’ Sand Dollar and China’s Digital Yuan are active pilot programmes designed to enhance public access to central bank money.

2. Wholesale CBDCs

Wholesale CBDCs, on the other hand, aren’t for the general public. They’re used by banks and financial institutions to settle large-scale transactions more efficiently. These systems can streamline clearing and settlement processes, reduce counterparty risk and make cross-border payments faster and more transparent.

Countries like France, Switzerland and Singapore are testing wholesale CBDCs in projects like Project Jura and Project Ubin. These pilots focus on strengthening the financial infrastructure that underpins capital markets and interbank transfers.

Both retail and wholesale CBDCs are being developed in parallel and many central banks are exploring hybrid models that combine elements of each. The type of CBDC a country pursues depends on its policy goals, infrastructure and financial environment.

CBDCs vs cryptocurrencies: what is the difference? 

CBDCs and cryptocurrencies may look similar on the surface, but they serve fundamentally different roles in the financial system.

The key distinction is who controls the currency. CBDCs are issued and managed by central banks. They represent legal tender, backed by the full faith of the state. Cryptocurrencies like Bitcoin and Ethereum are decentralised. They run on open networks without central control and their price often swings based on what people are willing to pay, not what a government sets.

CBDCs are also designed to be stable. Their value is pegged to the national currency, so one unit of a digital Australian dollar is worth the same as a physical Australian dollar. Cryptocurrencies are often volatile, with prices that can swing dramatically over short periods. This makes crypto attractive for speculation but less practical for day-to-day transactions. You can compare current crypto prices, volatility and performance using tools like Crypto.com Price, which tracks hundreds of tokens in real time.

Privacy is another difference. CBDCs may allow limited anonymity, but they’re likely to include identity verification and transaction monitoring for legal and regulatory compliance. Most cryptocurrencies offer a higher degree of privacy and anonymity.

Finally, CBDCs integrate with national financial systems. They’re regulated, traceable and compliant with central bank policy. Cryptocurrencies operate outside traditional financial frameworks, often raising questions about oversight, regulation and legal protection.

For those using crypto day to day, the Crypto.com Visa Card offers ways to spend digital assets at many retailers, even as CBDC infrastructure evolves.

Risks and concerns about CBDCs

While CBDCs offer many benefits, they also raise a number of important issues.

Privacy is one of the biggest concerns for users. Unlike cash, which leaves no digital trail, CBDC payments are usually logged, even if user details are protected. Even if users' identities are protected, the central bank or other authorities may still be able to track spending patterns. This has raised civil liberties concerns, especially in countries with less transparency or fewer data protection laws.

Cybersecurity is another critical risk. Any digital system – especially one that holds large amounts of value – is a potential target for hackers. A breach of a CBDC system could undermine confidence and lead to financial disruption. Central banks will need to invest heavily in technology and risk management to ensure resilience.

There’s also the potential for disruption to commercial banks. If people move their funds from private bank accounts into CBDC wallets, it could reduce the role of commercial banks in the economy. This might potentially cause disintermediation, reduced credit availability and financial stability unless a well-designed framework is in place.

Centralisation and concentration risks: Storing large amounts of sensitive payment data centrally may attract risks of data breaches and misuse. Wrong design choices could exacerbate data protection issues and reduce user trust.

Regulatory and legal challenges: CBDCs require adapting existing regulations and creating new frameworks for anti-money laundering (AML), know-your-customer (KYC), consumer protection and data security. Balancing compliance with user rights is complex.

Impact on monetary policy and user control: Programmable features of CBDCs could enable negative interest rates or direct taxation but also raise concerns about government control over spending and financial freedoms.

Technical complexity and cost are also real challenges. Building, testing and maintaining a national digital currency system requires significant time and investment.

Real-world examples of CBDC implementations

Several countries have already moved beyond research and into real-world trials or rollouts of CBDCs. Two of the most notable examples are China’s Digital Yuan and the Bahamas’ Sand Dollar.

China’s Digital Yuan (e-CNY) is one of the most advanced CBDC projects globally. The People’s Bank of China launched large-scale trials in multiple cities. Citizens can use the digital currency to pay for transit, shopping and public services via mobile apps or cards. While not yet available nationwide, the project showcases how a central bank can integrate digital money into daily life using existing infrastructure.

The Bahamas’ Sand Dollar became the world’s first fully deployed retail CBDC. It launched in 2020, aiming to provide secure and inclusive financial services across the country’s many islands. Accessible via smartphone or prepaid card, the Sand Dollar is accepted at local merchants and enables peer-to-peer transfers. It was designed to serve both the banked and unbanked, especially in remote areas with limited physical banking access.

What’s the outlook of CBDCs?

CBDCs are gaining traction fast, with more countries testing, planning or launching them. According to the Bank for International Settlements (BIS), more than 130 countries are exploring or developing CBDCs, with over 30 in the pilot or launch phase.

Financial institutions like the International Monetary Fund (IMF) and World Bank support CBDCs for their potential to modernise economies and improve cross-border payments. The IMF has published technical guidance to help countries evaluate risks and design options. Meanwhile, the World Bank is focused on how CBDCs can expand access to finance in underserved regions.

In the near term, more countries are expected to launch limited retail pilots, often alongside existing payment networks. Nations like India, Brazil and Nigeria have already started their own CBDC initiatives. The digital euro and digital pound are both in advanced planning stages.

In the long run, CBDCs could support public and private sector partnerships, digital ID tools and multi-currency systems that make international payments easier and more efficient.

For individuals, the best way to prepare is to stay informed. As central banks release updates, users can track developments through trusted sources like the BIS, IMF and Crypto.com Learn. The Crypto.com App also provides real-time access to news, price alerts and tools to explore how CBDCs might fit alongside existing crypto and payment services.

FAQs: Central Bank Digital Currencies

What exactly are CBDCs?
CBDCs are digital versions of a country’s national currency, issued and regulated by the central bank. They combine the trust of government money with the convenience of digital payments.

What is the point of CBDCs?
CBDCs aim to improve payment efficiency, expand financial inclusion, reduce cash handling costs and support monetary policy – all while modernising the role of public money.

Will digital currency replace cash?
CBDCs aren’t designed to replace cash completely, at least not in the short term. Most plans involve offering CBDCs as a complementary option, with cash remaining available.

Can CBDCs be used without the internet?
Some designs include offline payment features using mobile wallets or smart cards. These enable users to transact even in areas with poor connectivity.

What are the benefits of CBDCs?
Key benefits include faster payments, lower fees, increased financial access and better transparency. They also allow governments to deliver support or aid more efficiently.

How secure are CBDCs compared to traditional banking?
CBDCs are built on secure, centralised infrastructure. They must meet the highest cybersecurity standards to prevent fraud, hacking and operational failure.

Are CBDCs cryptocurrencies?
No, CBDCs are issued by governments, centrally controlled and are a claim on the government. They do not share the decentralised or permissionless nature of cryptocurrencies like Bitcoin.

How soon could CBDCs become mainstream?
Some countries may see broad adoption within a few years, while others will take longer. Global rollout timelines depend on local readiness, regulations and public demand.

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