CBDC

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.

Where it sits among the money you already use

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.

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.