CBDC Meaning: Everything to Know

By  Beluga Research September 6, 2023

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  • "Central bank digital currency" (CBDC) is a digital form of fiat money issued by a central bank, using blockchain technology
  • CBDCs are digital representations of official currencies backed by central banks, providing a centralized and controlled alternative to decentralized cryptocurrencies
  • These can be designed as wholesale or retail, with choices in account or token-based systems, as well as centralized or decentralized structures
  • CBDCs offer benefits such as financial inclusion and improved payment efficiency but also face challenges including privacy and scalability


"Central bank digital currency" (CBDC) is a digital form of fiat money issued by a central bank, using blockchain technology. These digital currencies aim to provide a secure and efficient means of digital payments and transactions, offering benefits such as reduced transaction costs, enhanced financial inclusion and greater transparency.

Unlike cryptocurrencies like bitcoin, CBDCs are typically centralized, meaning they are fully controlled and regulated by the central authority, and the associated value is tied to the national currency. CBDCs are increasingly being explored and developed by central banks worldwide as a response to the growing interest in digital currencies and the need for modernizing payment systems.

A Brief History

CBDCs emerged as a response to the rise of cryptocurrencies and the associated potential impact on traditional financial systems. The concept was first proposed by economist J.M. Keynes in the 1940s. The idea gained traction in the 2010s with the advent of Bitcoin and other cryptocurrencies.

Central banks worldwide began exploring the possibility of issuing customized digital currencies. The Central Bank of Ecuador launched the first CBDC, called the "Dinero Electrónico," in 2014, but it was primarily used as an alternative payment system rather than a full-fledged digital currency.

CBDC Meaning: Everything to Know

  • Types of CBDCs . There are two main types of CBDCs: Wholesale and retail. Wholesale CBDCs are designed for financial institutions and used for interbank transactions. Retail CBDCs, on the other hand, are intended for the general public and can be used for everyday transactions like cash or digital payments.
  • Design Choices . Central banks have choices in designing CBDCs. One key decision is whether the CBDC should be account-based or token-based. Account-based CBDCs link digital currency directly to user accounts, while token-based CBDCs use cryptographic tokens for peer-to-peer (P2P) transfers.

Another choice is whether the CBDC should be centralized or decentralized. Centralized CBDCs are controlled by the central bank and operate on a permissioned blockchain or centralized database. Decentralized CBDCs leverage blockchain technology for a more distributed and transparent system.

  • Benefits of CBDCs . CBDCs offer several benefits. They promote financial inclusion by providing banking services to the unbanked, as well as enhancing payment efficiency, reducing transaction costs and settlement times. They also provide a more secure and traceable form of digital currency, reducing counterfeiting and illicit activities.
  • Challenges and Considerations . While CBDCs hold promise, there are challenges and considerations to address. Privacy is a significant concern, as CBDCs involve the collection and storage of personal financial data. Balancing privacy with the need to prevent illegal activities is crucial.

Technical considerations like scalability and security must also be addressed. CBDC systems should handle high transaction volumes securely and protect against cyber threats. Interoperability between different CBDC systems and existing payment infrastructures is a complex issue requiring coordination.

Getting Started

To understand CBDCs, it is important to grasp the basics of cryptocurrencies and central banks. Cryptocurrencies are digital or virtual currencies that use cryptography for security and operate on decentralized networks called "blockchains." They offer fast, borderless and secure transactions, often without intermediaries. Central banks, on the other hand, are responsible for managing a country's money supply, controlling interest rates and maintaining financial stability.

CBDCs aim to bridge the gap between cryptocurrencies and traditional fiat currencies. Unlike cryptocurrencies, which are typically decentralized and operated by a network of participants, CBDCs are centralized and controlled by a central bank. This centralization allows the central bank to maintain control over monetary policy, regulate the currency's circulation and ensure compliance with legal and regulatory frameworks.

Unique Aspects

CBDCs introduce several unique aspects that differentiate them from traditional fiat currencies and cryptocurrencies. One significant aspect is the programmability of CBDCs. Unlike physical cash or traditional digital currencies, CBDCs can be programmed with predefined rules and conditions, enabling the automation of certain financial processes. For example, a central bank could program a CBDC to automatically execute a smart contract when specific conditions are met, such as a certain date or the fulfillment of contractual obligations.

Another unique aspect of CBDCs is the potential for enhanced financial inclusion. Traditional banking services are often inaccessible to individuals without a bank account or those living in remote areas. Because CBDCs are digital and accessible through mobile devices, they have the potential to provide financial services to the unbanked and underbanked populations. This could enable individuals to securely store, send and receive funds, promoting economic empowerment and reducing financial exclusion.

CBDCs also offer improved transparency and traceability compared to traditional cash. Every CBDC transaction can be recorded on the blockchain, allowing for a high level of transparency and auditability. This feature can be beneficial in combating illicit activities such as money laundering and terrorist financing. Additionally, the traceability of CBDC transactions can help central banks gather valuable data on economic activities, enabling them to make more informed decisions regarding monetary policy.

Furthermore, CBDCs can potentially enhance the efficiency of cross-border transactions. Traditional cross-border payments can be slow, costly and involve various intermediaries. On the other hand, the digital nature and potential interoperability of CBDCs could streamline the process, reducing transaction costs and settlement times. This could facilitate international trade, remittances and financial interactions between individuals and businesses across different countries.


  • Enhanced Financial Inclusion . CBDCs can improve financial inclusion by providing access to banking services for the unbanked or underbanked. By offering a digital currency accessible through smartphones or basic internet connections, CBDCs make it easier to participate in the financial system.
  • Increased Efficiency. Usage of CBDCs can enable faster and more efficient financial transactions compared to traditional banking systems. Blockchain technology allows for near-instantaneous settlement, reducing the need for intermediaries and simplifying the process.
  • Lower Costs . CBDCs have the potential to reduce transaction costs associated with traditional banking systems. By eliminating physical cash handling, printing and distribution, CBDCs can save costs for central banks and commercial banks. Additionally, blockchain technology can minimize transaction fees charged by intermediaries.
  • Improved Monetary Policy . CBDCs give central banks greater control over monetary policy. With a digital currency, central banks can easily monitor and control the flow of money, enabling targeted measures such as adjusting interest rates, managing inflation and stabilizing the economy.
  • Enhanced Security . Compared to physical currencies, CBDCs provide stronger security features. Blockchain or distributed ledger technology ensures transparency, immutability, and resistance to fraud or counterfeiting. Digital currencies can also incorporate advanced encryption techniques to protect user data and prevent unauthorized access.


  • Privacy Concerns . CBDCs raise concerns about privacy and surveillance. Digital transactions can be tracked and recorded, potentially compromising user privacy. Balancing transparency and privacy is crucial to adequately protect individuals' financial information.
  • Technological Challenge. Implementing CBDCs on a large scale requires secure and scalable technological infrastructure. Governments and central banks must ensure that the underlying blockchain or distributed ledger technology can handle a high volume of transactions. This may require significant investments in technology and expertise.
  • Cybersecurity Risks . CBDCs are vulnerable to cyber threats and hacking attempts. Malicious actors may target the digital currency infrastructure to disrupt or compromise the system. Central banks and governments must prioritize cybersecurity measures to safeguard the integrity of the CBDC and protect user funds.
  • Disruption to Commercial Banks . CBDCs may disrupt the role of commercial banks as intermediaries in the financial system. If individuals can directly hold and transact with CBDCs, the need for traditional bank accounts and services may decrease. This could lead to a restructuring of the banking sector and potential job losses.
  • Adoption Challenge. Encouraging widespread adoption of CBDCs among the general population may be challenging, as it requires educating individuals about the benefits and security measures associated with digital currencies. Additionally, ensuring access to digital infrastructure in remote or underserved areas can hinder adoption.