Central Bank digital currencies | What CBDCs are and how they work

A central bank digital currency, or CBDC, is a government-issued form of money that lives entirely online. It is tied to the country’s fiat currency—such as the US dollar—and backed by the country’s central bank.

How CBDCs differ from money in a bank account

The main difference between a CBDC and a traditional bank deposit is who guarantees your funds. With a regular bank account, it is your merchant bank that ensures that your funds are safe. With a CBDC, your money is backed by a central bank – typically a country’s top monetary authority. That distinction means your funds will not depend on the financial health of a privately run bank.

What is the purpose of a CBDC?

A central bank digital currency is intended to provide consumers and businesses with a form of digital money that is safe, convenient and accessible. Within that broad goal are several specific goals:

Reduce credit and liquidity risk

Credit risk is the chance that an institution holding your money will not be able to repay it. Liquidity risk is related – this means that even if the institution is solvent, it may not have enough cash on hand to return your funds immediately. These risks exist with commercial banks, which lend deposits and manage liquidity over time.

CBDCs, by contrast, are directly backed by a country’s central bank – the entity that issues the national currency and supports the financial system as a whole. Because the central bank does not face the same repayment or liquidity pressures as commercial banks, CBDCs are designed to avoid these risks altogether.

Provides a secure and efficient digital payment option

CBDCs aim to provide a reliable digital payment system for individuals and businesses. A well-designed CBDC system will protect user privacy, verify identities to prevent fraud, and support high transaction volumes, including international payments.

Support financial inclusion

Barriers such as high fees, limited infrastructure and strict identification requirements prevent many consumers worldwide from using traditional banking services. CBDCs can help reach these “unbanked” populations by offering a free or low-cost way to store and transfer money digitally, without the need for a private bank account.

Maintain a country’s monetary relevance

As more countries develop CBDCs, governments are motivated to keep up. A widely used CBDC can strengthen a country’s currency in global trade and finance. Falling behind in digital currency infrastructure can weaken a country’s influence in the international monetary system.

Improve monetary policy instruments

CBDCs can allow central banks to influence the economy more directly. Rather than relying solely on instruments such as interest rates or asset purchases, a central bank can issue digital money instantly, potentially speeding up the effects of monetary policy and making interventions more targeted.

What are the potential risks of CBDCs?

Central banks worldwide are exploring CBDCs, but each country may take a different approach to how they are designed and implemented. So, the potential benefits and risks can vary greatly depending on the system.

One of the most cited concerns is that a CBDC could destabilize a country’s commercial banking system. If consumers perceive central bank-issued digital money as safer than deposits at a traditional bank, they may shift their funds accordingly. Unlike commercial banks, central banks bear little or no credit or liquidity risk. And if a CBDC were to pay interest — something most central banks currently say they will avoid — it could further reduce the appeal of keeping money in savings accounts or other banking products, especially those with high fees or limited returns.

Even without a full-scale shift, commercial banks may gradually lose customers and deposits to CBDCs. In a fractional reserve system, where banks lend out most of their deposits and keep only a portion in reserve, this outflow can lead to liquidity constraints. In a worst-case scenario, it could even cause a bank run.

Fewer deposits also mean less money available for lending. If CBDCs shrink the role of traditional banks, loans could become more expensive and harder to access. This, in turn, may force central banks to adjust their approach to monetary policy, which often relies on the lending behavior of commercial banks to transmit policy changes throughout the economy.

Finally, like all digital systems, CBDCs will be vulnerable to cyber attacks, technical disruptions and outages. Security, reliability and privacy will be essential to any national deployment.

Can CBDCs replace cash?

Technologically, a central bank digital currency can serve as a substitute for physical cash. But whether that happens depends on political will. In the US, lawmakers have drawn a clear line. In 2025, the House of Representatives passed the Anti-CBDC Surveillance State Act, which would prohibit the Federal Reserve and other federal agencies from issuing a CBDC to the public. A separate Senate bill, the NO CBDC Act, seeks similar restrictions.

If either of them becomes law, it would effectively block the development of a US CBDC without express congressional authorization. Other countries may take different approaches, but in the US, the future of cash looks secure for now.

When can we expect to see CBDCs circulating in the global economy?

As of July 2025, more than 130 countries and currency unions, representing about 98% of global gross domestic product (GDP), are exploring central bank digital currencies, according to the Atlantic Council, a nonpartisan think tank. Only a few countries – such as the Bahamas, Nigeria and Jamaica – have launched retail CBDCs so far, and many others remain in pilot or research phases.

Among them is the United States, where pending legislation would block the Federal Reserve from issuing a CBDC without direct approval from Congress, effectively halting development if enacted. Even among countries making progress, full-scale deployment is likely to take years, and global coordination on technical and policy standards remains a work in progress.

In short, CBDCs may start circulating in some economies soon, but widespread adoption will take time, and it will likely look different in each country.

The bottom line

CBDCs have the potential to reshape how money works – both within individual economies and across borders. Because designs vary by country and many proposals remain untested, the long-term implications are still uncertain.

Still, the rise of CBDCs suggests that governments are rethinking how money is created, moved and controlled. Whether you’re a consumer, policymaker or investor, it’s worth watching these developments unfold.