Central bank digital currency

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Central bank digital currency (CBDC) is 1 of 3 main types of digital currencies.

CBDC is a digital form of fiat money. Fiat money is money established that government regulation or law. It is issued by the state or central bank. Other terminologies include digital fiat currency or digital base money.

Base money is money in the economy. That includes money held by commercial bank’s reserves, total money circulating in the public and cash that is held in the bank’s vault. It is money that is liquid, meaning you can change them into other assets without difficulty.

While CBDC is commonly associated with DLT, the underlying technology that CBDC is built upon need not be DLT[1].

Characteristics of CBDC

Legal Tender Status

The key characteristic of CBDC is that it has a legal tender status. Being issued by the central bank and governed with regulations just like physical fiat money, it forms part of the base money in an economy. That means that CBDC is a liability of the central bank as part of the total currency circulating in the economy.


To be defined as money, or currency, the asset has to have all 3 functions: means of payment, unit of account and store of value. This is no different from physical fiat money issued by the central bank.


CBDC is valid independently of digital payment systems. Digital payment systems are systems that enable digital payment for goods and services, or to peers, like PayPal, Venmo, Alipay, WeChat. These are payment gateway or payment systems that facilitate the storing and transferring of digital fiat currency. See the previous section of privately issued digital currency for more details.

Bank Accounts at Central Bank

Traditionally, central bank issues fiat money through commercial banks. Central bank (e.g. Bank of England) allows commercial bank (e.g. HSBC) to borrow money. This money is the monetary base supply mentioned in the start of this section.

The public (e.g. you, me, other people in the country, companies) can spend and use money accordingly. One can withdraw from the bank account (e.g. bank account with HSBC) to purchase goods and services.

With CBDC, money can be borrowed by the commercial bank and the public. This means, the citizens or public may need to have bank accounts at the central bank to keep track of the money available.

Benefits of CBDC

The main driver of CBDC is the reduction of physical cash usage over the years[2]. Hence, central banks are moving towards the digital version of physical cash. Central banks earn an income when they produce and distribute money. This is called seigniorage income. That is the difference between the monetary value and cost to produce and distribute. Less production and distribution of physical cash means less seigniorage income by the central bank.

The general benefits of CBDC is in financial inclusion, improving transaction efficiency and more robust control of monetary policy by central banks, which leads to economic efficiency (and growth).

Other benefits include:

  • Protection of money as a public utility instead of privately issued digital currency – alternative to physical cash
  • Preservation of seigniorage income – avoid predictable reduction of seigniorage income for government
  • Financial inclusion – allow legal citizens free or low-cost bank accounts[3]
  • Technology efficiency – money transfer, payment and settlements are done in real time, instead of intermediaries and clearinghouses
  • Bank competition – as households are able to access money directly from the central bank, it can be a competition between commercial banks to access this group of people
  • Monetary policy – transmission, measurement, adjustment of monetary policy

Types of CBDC

There are 2 primary types of CBDC, according to the money flower and report by BIS[4], general purpose and wholesale.

General purpose is where CBDC is used for general transactions like purchasing meals, groceries or movie tickets. It comes in 2 forms: account-based and token-based.

  • For account based, it is the creation of bank account at the central bank, to account for amount of CBDC used and transacted.
  • For token base, it is the digital cash used for general transactions. They can be distributed by central banks (via the account at the central bank) or commercial banks.

Wholesale purpose is token-based but only accessible by specific entities, i.e. large commercial banks. These are used for wholesale settlements like interbank payments and securities settlement. It is not vastly different from the existing system today, but it is more efficient through the use of new technology (e.g. DLT).

  1. Manaa, M., et al., (2019). Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures.
  2. Bech, M L and R Garatt (2017), “Central bank cryptocurrencies”, BIS Quarterly Review.
  3. The central bank in Bahamas started Project Sand Dollar, a general purpose CBDC to give citizens bank accounts and digital version of the currency to transact.
  4. Löber, K., & Houben, A. (2018). Committee on Payments and Market Infrastructures Markets Committee.