CBDC
Also known as: Central bank digital currency, Digital euro, Digital pound
Central bank money in digital form, held directly by the public. Not a cryptoasset in any meaningful sense — and potentially the largest change to bank funding in a century.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat is it, really?
There are two kinds of money in an ordinary economy: central bank money (physical cash, and reserves that only banks can hold) and commercial bank money (your deposit, which is a claim on your bank). Almost all the money you use is the second kind.
A CBDC would be central bank money in digital form, held directly by the public — a digital equivalent of cash rather than a digital version of a bank account.
What it is not:
- Not a cryptoasset. There is no scarcity mechanism, no mining, and no decentralisation. Most designs do not need a blockchain at all.
- Not a stablecoin. A stablecoin is a private company's promise backed by reserves. A CBDC is the central bank's own liability — the same thing a banknote is.
- Not automatically programmable or surveilled. Both are design choices, and they are the ones the public argument is actually about.
something deliveredonly if a condition is metnot a payment
Every serious design keeps commercial banks in the middle — because a central bank that took deposits directly would compete with the banks that lend.
Issuance
- The central bank → A commercial bank The central bank issues; the commercial bank distributes. This is the two-tier design almost every project has settled on.
When you hold some
- A commercial bank → You Your bank onboards you and runs the wallet, so the anti-money-laundering checks stay where they already are.
- The central bank → You Unlike a deposit, it is not the commercial bank's debt. It cannot fail with the bank, and no guarantee scheme is needed.
What the design has to prevent
- You → The central bank If holdings were unlimited, a scare would move deposits to the central bank instantly. Holding caps and unremunerated balances exist to stop that, at the cost of making it less useful.
- Asset class
- Digital assets (central bank money)
- Instrument type
- Direct claim on a central bank
- Traded
- Not traded — a payment instrument at par
- Typical users
- Households and businesses, if issued
Which risks decide the outcome
Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.
- Marketbarely applies
- Creditbarely applies
- Liquiditymatters
- Fundingbarely applies
- Operationaldecides it
What decides it here. A claim on a central bank rather than on a commercial one, which is why holding caps exist: without them a scare would move deposits out of the banking system in one tap.
3 · IntermediateHow it works in practice
Where it sits among the money you already use
| Instrument | Claim on | Fails if |
|---|---|---|
| Banknote | Central bank | The state fails |
| Bank deposit | Your bank | The bank fails, above the insured limit |
| Stablecoin | The issuer | The issuer or its reserves fail |
| CBDC | Central bank | The state fails |
Retail versus wholesale — two different projects
- Wholesale CBDC — a digital settlement asset for banks and financial institutions. Uncontroversial, incremental, and the area where live pilots have progressed furthest, particularly for cross-border settlement.
- Retail CBDC — issued to the public. This is the contested one, because it changes the structure of the banking system rather than the plumbing of it.
The stated motivations
- Cash is disappearing in several economies, removing the public's only direct access to central bank money.
- Payment concentration in a small number of private networks is a resilience and competition concern.
- Cross-border payments remain slow and expensive relative to domestic ones.
- Monetary sovereignty — a concern that widely adopted foreign stablecoins could displace domestic money.
4 · AdvancedPricing & valuation
Bank disintermediation is the real design constraint
Banks fund lending with deposits. A CBDC gives depositors a risk-free alternative that no bank can match on safety. The consequences run in two directions:
- In normal times, a shift of deposits into CBDC raises banks' funding costs and shrinks lending capacity. The deposit franchise — the discounted spread between what banks earn and what they pay — is the single most valuable liability in banking, and a CBDC competes directly with it.
- In a crisis, the problem inverts and becomes acute: a CBDC makes a bank run frictionless. No queue, no transfer limit, no counterparty to move to — one tap moves deposits to the safest possible asset. As the 2023 banking episode showed, runs already move at app speed; a CBDC would remove the last remaining friction.
Every serious retail design therefore includes brakes: holding limits, zero or penalising remuneration, and waterfall arrangements that automatically sweep balances above the cap back into a bank account. These make the instrument deliberately unattractive as a store of value — which is the point, and also the reason critics question what problem it solves.
Privacy: the argument that will decide adoption
- Cash is anonymous. A digital claim on the state is not, unless privacy is engineered in deliberately.
- Proposed designs use tiered privacy — small offline payments closer to cash-like anonymity, larger ones subject to normal anti-money-laundering rules — with the central bank seeing pseudonymised data at most and intermediaries handling identity.
- Central banks have generally committed to not programming restrictions on what money can be spent on. The technical capability nonetheless exists in most designs, and the gap between "we will not" and "we cannot" is precisely the public's concern. It is a governance question, and treating it as a technical one is the mistake in most of the debate.
Current state, plainly
A small number of countries have launched retail CBDCs with modest adoption; several large jurisdictions are in pilot or preparation; some have explicitly declined. Wholesale experiments have advanced more quickly and with less controversy. The honest summary is that the technology is largely solved and the open questions are institutional: how much deposit displacement is acceptable, what privacy is guaranteed in law, and what problem the retail version solves that improved instant-payment rails do not.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow practitioners think about it
Now say it back
Close the page and give CBDC in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — two parties wanted opposite things badly enough to write it down.
- What the contract obliges, and when — not the payoff; the obligation.
- Where the money comes from — name the source, or you have described a hope.
- What makes it lose — the ordinary way, not the dramatic one.