Central Bank Digital Currency (CBDC): Shaping the Future of Money

A Central Bank Digital Currency (CBDC) is a purely digital form of money issued directly by a central bank. Unlike traditional cash, CBDCs exist only electronically, making transactions and transfers faster, simpler, and more secure.

Global interest in CBDCs has surged in recent years for several reasons. The COVID-19 pandemic accelerated the shift toward digital and contactless payments, contributing to the ongoing decline of cash. At the same time, private cryptocurrencies like Bitcoin have grown in popularity and value, prompting central banks to explore sovereign digital alternatives. Today, 87 countries—representing over 90% of global GDP—are investigating CBDCs, with nine already having fully launched a state-backed digital currency.

CBDCs can be implemented in multiple ways. A centralized model records transactions on ledgers managed entirely by the central bank, which also provides user-facing services. A decentralized model allows users or financial intermediaries to record transactions according to rules set by the central bank. The chosen design significantly impacts efficiency, security, and usability. Traditional money relies on multiple intermediaries, creating slower, less secure payment experiences, whereas CBDCs promise faster, safer, and more streamlined payments.

The European Central Bank (ECB) is actively exploring a Digital Euro.

The digital euro, a digital form of central bank money, would provide consumers and businesses with greater payment options, particularly in situations where physical cash is less practical. It is designed to complement cash, which would remain widely available and usable.

As part of the EU’s digital transition, the digital euro could advance the bloc’s digital finance and retail payments strategies by offering an additional, innovative, and secure means of payment.

The digital euro would help ensure that central bank money—both physical and digital—is widely accessible and accepted across the euro area. It could promote financial inclusion, cater to user needs, and maintain financial stability. Additionally, it could support the development of pan-European, interoperable retail payment solutions while fostering efficiency, innovation, and resilience in the EU’s increasingly digital economy.

Finally, the digital euro could strengthen the international role of the euro and reinforce the EU’s open strategic autonomy.

• Privacy by design: Citizens and professionals consistently rank privacy as the most important feature of a CBDC. Effective design can enhance data protection while ensuring lawful auditing for purposes like anti-money laundering or tax compliance.
• Greater control: A well-designed CBDC could give users more control over their personal data, increasing security and confidence in digital payments.
• Anonymity options: Privacy-enhancing technologies could allow for anonymous transactions while maintaining compliance with regulatory requirements.

• Centralized data concentration: Storing all citizens’ payment data in a single central bank database could create privacy risks and incentives for cyberattacks.
• Poor design choices: Mistakes in technological infrastructure could exacerbate existing digital payment privacy issues, such as unauthorized use of transactional data for credit scoring or marketing.
• Trust and security concerns: Weak security measures could undermine public confidence in a CBDC, limiting adoption.

In today’s always-on world, central banks are exploring ways to enable faster, round-the-clock payments. While some countries are upgrading banking infrastructure for real-time transactions, central bank digital currencies (CBDCs) provide an additional path to speed and efficiency.

CBDCs can also reduce the high costs of managing physical cash, which can reach up to 1.5% of a country’s GDP. With increasing connectivity and smartphone adoption, CBDCs offer a way to bring more people into the digital economy, expanding access to basic financial services.

Central Bank Digital Currencies (CBDCs) and cryptocurrencies are two prominent innovations shaping the future of finance, but they serve very different purposes.

• Issuance & Backing: CBDCs are digital currencies issued and backed by central banks, making them equivalent to cash. In contrast, cryptocurrencies like Bitcoin and Ether are decentralized and not government-backed, leading to higher volatility.
• Stability: CBDCs maintain a stable value, as they're pegged to a country's fiat currency. Cryptocurrencies can experience significant price fluctuations, affecting their suitability for everyday transactions.
• Purpose & Adoption: CBDCs aim to enhance financial inclusion, reduce cash management costs, and modernize payment systems. While cryptocurrencies are increasingly accepted by merchants, their primary use has been as investment assets.
• Regulatory Oversight: CBDCs operate under the jurisdiction of central banks, ensuring regulatory compliance. Cryptocurrencies, however, often operate in a less regulated environment, which can pose risks to users.

CBDC designs can differ, but one approach compatible with existing payment systems would function similarly to a mobile wallet. The central bank could issue digital currency to financial institutions for distribution, or even directly to individuals’ digital wallets — much like receiving a government benefit or stimulus payment. From there, making a payment at checkout would be as simple as using your smartphone today.