What Is a CBDC? How Central Bank Digital Currency Works

Central bank digital currencies, commonly known as CBDCs, have moved from an experimental monetary-policy idea into active pilots, infrastructure projects and live payment systems across much of the world.

But a CBDC should not be confused with Bitcoin, a stablecoin or simply money stored in a mobile-banking app.

A central bank digital currency is a digital form of sovereign money issued by, and representing a direct liability of, a central bank.

That last point is the defining feature.

Whether a CBDC uses blockchain, a conventional database, digital tokens or accounts depends on how the central bank designs the system.

The latest Bank for International Settlements survey found that 85 of 93 surveyed central banks—91%—were exploring a retail CBDC, wholesale CBDC or both. Wholesale CBDC projects were generally further advanced than retail projects.

What is CBDC?

CBDC stands for Central Bank Digital Currency. It is a digital form of official money issued by a country’s central bank.

For example:

• A digital rupee would represent Indian rupees.
• A digital euro would represent euros.
• An eNaira represents Nigerian naira.

A CBDC generally maintains the same unit of account as the country’s existing currency.

India’s Reserve Bank, for example, describes the digital rupee, or e₹, as the digital form of India’s physical rupee, issued by the RBI and maintained at par with physical currency.

CBDCs are different from ordinary bank deposits because the underlying claim is on the central bank rather than a commercial bank.

BIS describes a CBDC as a direct central-bank liability, while money held in an ordinary commercial-bank account represents a liability of that commercial bank.

That does not mean a CBDC has no risks. Its value can still be affected by inflation, exchange-rate movements or broader sovereign monetary conditions, while the system itself can face cyber, operational and privacy risks.

Are CBDCs cryptocurrencies?

No. A CBDC is not the same as a cryptocurrency such as Bitcoin.

Bitcoin is based on a decentralized network and does not have a central monetary issuer.

CBDCs are issued within a sovereign monetary system and are controlled according to rules established by central banks and applicable law.

Feature	CBDC	Bitcoin/Decentralized Crypto
Issuer	Central bank	No central issuer
Unit of account	National currency	Native crypto asset
Monetary policy	Controlled under sovereign monetary framework	Determined by protocol rules
Central-bank liability	Yes	No
Price relative to national currency	Designed as the currency itself	Market determined
Blockchain required?	No	Usually blockchain/DLT
Mining required?	No	Depends on cryptocurrency
Legal status	Depends on national law	Depends on jurisdiction

Calling a CBDC a “government cryptocurrency” therefore creates more confusion than clarity.

Does a CBDC use blockchain?

Not necessarily.

Blockchain is one possible technology for implementing a CBDC, but it is not what makes a currency a CBDC.

Central banks can design CBDC systems using:

• Conventional centralized databases
• Distributed-ledger technology
• Hybrid infrastructures
• Token-based systems
• Account-based systems

BIS research evaluates both conventional and distributed infrastructure models for CBDCs.

The defining question is therefore not:

“Does it run on blockchain?”

It is:

“Is this digital money a liability of the central bank?”

What are the two main types of CBDC?

CBDCs are generally divided into retail and wholesale systems.

	Retail CBDC	Wholesale CBDC
Main users	Individuals and businesses	Banks and financial institutions
Typical purpose	Everyday payments	Financial-market settlement
Similar to	Digital cash	Digital central-bank reserves
Public access	Yes, depending on design	Restricted
Main policy goals	Payments, resilience, inclusion	Settlement efficiency, tokenization, cross-border finance

BIS defines retail CBDCs as central-bank digital money intended for the general public, while wholesale CBDCs are designed mainly for financial intermediaries.

Retail CBDC

A retail CBDC can potentially be used for activities such as:

• Paying a merchant
• Sending money to another person
• Receiving government payments
• Making online purchases
• Holding central-bank money digitally

The exact features vary by country.

Wholesale CBDC

Wholesale CBDCs are aimed primarily at financial institutions rather than consumers.

Potential uses include:

• Interbank settlement
• Securities settlement
• Tokenized assets
• Foreign-exchange transactions
• Cross-border payments

This part of CBDC development has become increasingly important. The BIS’s latest survey found that wholesale CBDC exploration was, overall, more advanced than retail CBDC work.

How does a CBDC work?

There is no single CBDC architecture.

A central bank first creates the digital monetary liability. Distribution and customer interaction can then follow different models.

Direct model

The central bank could theoretically maintain CBDC accounts or wallets directly for users.

That would give the central bank a much larger operational role than it normally has in retail banking.

Intermediated model

Commercial banks or payment providers can manage:

• Customer onboarding
• Wallets
• KYC checks
• Payment interfaces
• Customer service

while the underlying CBDC remains a central-bank liability.

Many current CBDC designs favor some form of intermediated structure because it preserves roles for private payment providers and banks.

Token-based or account-based models

A CBDC can also differ in how ownership is verified.

An account-oriented design focuses on verifying the identity or authority of the account holder.

A token-oriented design can place greater emphasis on verifying the validity and control of the monetary instrument itself.

Real systems can combine elements of both.

CBDC vs stablecoin vs bank deposit vs cryptocurrency

One of the easiest ways to understand CBDCs is to ask who owes you the money.

Type of money/asset	Who issues or backs it?	Central-bank liability?	Value model
CBDC	Central bank	Yes	National currency
Cash	Central bank/monetary authority	Yes	National currency
Commercial-bank deposit	Commercial bank	No	National currency
Fiat-backed stablecoin	Private issuer	No	Designed to track reference asset
Bitcoin	No issuer	No	Market determined

This distinction matters because two assets can both be worth approximately one dollar while carrying completely different legal, credit, technological and redemption risks.

Is a CBDC the same as a stablecoin?

No.

A CBDC represents central-bank money.

A stablecoin is generally issued by a private entity or protocol and attempts to maintain a stable value relative to another asset, commonly a fiat currency.

A dollar-backed stablecoin therefore does not become a digital U.S. dollar issued by the Federal Reserve simply because its market value is designed to remain close to $1.

The distinction has become increasingly relevant to central banks. The BIS found that more than one-third of surveyed jurisdictions had accelerated CBDC work in response to developments in stablecoins and other crypto assets.

Is a CBDC the same as money in a bank account?

No.

Most money used electronically today is already digital.

When someone checks a mobile-banking app and sees ₹10,000, $1,000 or €1,000, that does not make the balance a CBDC.

An ordinary deposit is a liability of the user’s commercial bank.

A CBDC is a liability of the central bank.

This difference is more important than whether both forms of money appear on a phone screen.

Is a CBDC the same as UPI, FedNow or an instant payment system?

No.

A payment system moves money.

A CBDC is itself a form of money.

India’s UPI, for example, can transfer commercial-bank deposits between users. India’s e₹ is a separate form of central-bank money.

Similarly, the Federal Reserve explicitly says FedNow is an instant payment service for financial institutions and is not a CBDC or a form of currency.

A fast payment system can therefore deliver many of the speed benefits associated with CBDCs without creating a new form of central-bank money.

Why are central banks exploring CBDCs?

Different countries have different motivations.

There is no single global CBDC objective.

Preserve access to public money

As cash use declines in some economies, central banks are examining ways to maintain public access to central-bank money in digital form.

The BIS found that preserving the role of central-bank money amid declining cash use and increasing tokenization remains an important motivation.

Improve payment infrastructure

CBDCs could potentially:

• Reduce some payment costs
• Increase settlement speed
• Improve payment resilience
• Encourage competition
• Enable new forms of digital settlement

Whether those benefits are significant depends on how efficient a country’s existing payment system already is.

Financial inclusion

Retail CBDCs could potentially provide access to digital payments for people underserved by traditional banking.

The IMF notes that appropriately designed CBDCs could help users who lack conventional bank accounts or face barriers to accessing formal financial services.

Technology alone, however, cannot solve financial exclusion caused by lack of connectivity, identification, financial literacy or merchant acceptance.

Cross-border payments

Central banks are also studying whether CBDCs can make international settlement faster and more efficient.

The IMF notes that retail CBDCs could provide an opportunity to redesign parts of cross-border payment processes, but questions involving access, compliance, foreign exchange and interoperability need to be addressed from the beginning.

Tokenized financial markets

Wholesale CBDCs are increasingly being studied alongside tokenized deposits, securities and other financial assets.

BIS initiatives such as Project Agorá explore whether tokenized commercial-bank money and wholesale central-bank money can operate on shared programmable infrastructure for cross-border settlement.

What are the potential benefits of a CBDC?

Benefits depend on design rather than simply on labeling a payment system “CBDC.”

Potential benefit	How it could help
Digital access to central-bank money	Gives users another form of sovereign money
Payment efficiency	Could lower costs or simplify settlement
Financial inclusion	Can create another digital-payment access point
Payment resilience	Creates an additional payment rail
Settlement finality	Central-bank money can reduce some counterparty settlement risks
Cross-border innovation	Could simplify parts of international settlement if systems interoperate
Tokenization	Wholesale CBDCs can support settlement of tokenized financial assets
Competition	Public infrastructure could put competitive pressure on private payment services

The IMF and BIS both emphasize that these advantages must be weighed against costs and financial-stability risks rather than assumed automatically.

What are the risks of CBDCs?

Privacy and data governance

Digital payments create data.

A key question is who can see that data:

• Central bank
• Commercial bank
• Payment provider
• Government agency
• Law-enforcement authority
• Merchant

The answer depends on system design and national law.

It is therefore inaccurate to claim either that:

“CBDCs are completely anonymous”

or:

“Every CBDC lets governments see everything citizens buy.”

Neither is universally true.

BIS identifies privacy and data governance as central policy challenges for retail CBDCs.

Cybersecurity

A nationally important digital-money infrastructure would be an attractive target for cyberattack.

CBDC systems therefore need:

• Strong authentication
• Infrastructure redundancy
• Fraud controls
• Incident response
• Secure software
• Resilience against outages and attacks

The IMF warns that CBDC ecosystems can amplify existing cyber risks and create new exposures.

Bank disintermediation

Suppose households move significant deposits from commercial banks into CBDCs.

Banks could lose an important source of funding.

That could influence:

• Lending
• Funding costs
• Interest rates
• Financial stability

The problem could become more severe during a banking crisis if users rapidly move deposits into perceived safer central-bank money.

BIS identifies both ordinary disintermediation and potential “flight-to-safety” dynamics as important CBDC design challenges.

Potential mitigations include CBDC holding limits and remuneration rules.

Operational risk

If consumers depend heavily on a CBDC system, an outage could disrupt payments at national scale.

Operational resilience therefore matters as much as cryptographic security.

Digital exclusion

A purely digital system can disadvantage people without:

• Smartphones
• Internet access
• Digital literacy
• Formal identification
• Reliable electricity

Offline-payment functionality and alternative access methods are consequently important design questions.

Government and policy risk

A CBDC’s monetary value remains tied to the underlying national currency.

Digitizing a currency does not protect users from:

• Inflation
• Currency depreciation
• Capital controls
• Monetary-policy changes

A CBDC digitizes sovereign money; it does not remove sovereign monetary risk.

Can governments program how CBDCs are spent?

Technically, some CBDC systems can support programmable payments, but programmability is a design choice rather than an inherent property of CBDCs.

Programmability can refer to very different things.

For example, a payment might execute automatically when agreed conditions are met.

A government transfer could potentially be designed for a specific purpose.

A business could automate settlement once goods are delivered.

But allowing users to create conditional payments is not the same as allowing a central authority to dictate all spending.

The distinction between programmable payments and programmable money should be clearly explained whenever this issue is discussed.

India is already experimenting with programmable e₹ use cases in its continuing CBDC pilot. The RBI confirms that the digital rupee remains in pilot testing across retail and wholesale use cases.

Can CBDCs work offline?

Potentially.

Offline payment capability is an important design area because it can:

• Improve resilience during network outages
• Expand access in areas with poor connectivity
• Make CBDCs behave more like physical cash

But offline systems create additional challenges involving double spending, device security, transaction limits and synchronization.

Whether offline functionality is available depends on the specific CBDC.

How many countries are developing CBDCs?

There are two useful ways to answer this, depending on the dataset.

The BIS’s latest published central-bank survey found that 85 of 93 central banks, or 91%, were exploring a retail CBDC, wholesale CBDC or both.

The Atlantic Council’s broader tracker, updated in May 2026, counts 146 countries and currency unions representing more than 98% of global GDP as exploring CBDCs. Of those, 77 were in an advanced development, pilot or launch phase, and 41 CBDC pilot projects were underway.

The figures should not be treated as contradictory: the BIS survey measures participating central banks, while the Atlantic Council uses a broader country-and-currency-union tracking methodology.

Major CBDC projects in 2026

Country/region	CBDC	Status in 2026	Main focus
Bahamas	Sand Dollar	Launched	Retail payments
Nigeria	eNaira	Launched	Retail payments and inclusion
Jamaica	JAM-DEX	Launched	Retail payments
China	e-CNY	Large-scale pilot/evolving system	Retail and cross-border experimentation
India	e₹ / Digital Rupee	Retail and wholesale pilots	Payments, programmability and institutional settlement
Euro area	Digital euro	Preparation/development; not issued	Retail central-bank money
United States	Potential digital dollar	No retail CBDC; current federal policy opposes issuance	Research continues in some wholesale-payment areas

The global picture is therefore much more nuanced than a simple “CBDC race.”

Bahamas: Sand Dollar

The Bahamas was the first country to launch a nationwide retail CBDC.

The Sand Dollar represents a digital version of the Bahamian dollar issued as part of the Central Bank of The Bahamas’ payments-modernization strategy.

Nigeria: eNaira

Nigeria launched the eNaira in October 2021.

The Central Bank of Nigeria describes it as legal tender and the digital form of the naira.

Adoption, however, has historically been difficult, illustrating an important point: launching a CBDC does not guarantee that consumers will use it. IMF research found relatively limited adoption during the eNaira’s early period.

Jamaica: JAM-DEX

Jamaica’s CBDC is called JAM-DEX.

The Bank of Jamaica says JAM-DEX is central-bank money held in CBDC wallets and exchangeable one-for-one with Jamaican banknotes and coins.

China: e-CNY

China operates the world’s largest retail CBDC pilot.

The Atlantic Council reported that by December 2025, retail e-CNY had processed billions of transactions, while changes introduced in 2026 continued to evolve its operating model.

China’s project is therefore far beyond the limited experiments described in many older CBDC explainers, but it should still be distinguished from a conventional nationwide mandatory replacement for cash.

India: Digital Rupee

India’s digital rupee, or e₹, is issued by the Reserve Bank of India.

As of April 29, 2026, the RBI says pilot testing continues across both:

• Retail CBDC
• Wholesale CBDC

The retail e₹ can be stored in a digital wallet and used to make or receive payments.

India has also expanded experimentation with programmable CBDC payments and government-transfer use cases.

Also Read: RBI Governor: e-Rupee Is Not a Substitute for Cash—For Now

Euro area: Digital euro

The digital euro has not yet been issued.

The ECB completed its preparation phase in October 2025 and moved into a further stage of technical preparation.

The ECB currently aims to be ready for a potential first issuance in 2029, assuming the necessary EU legislation is adopted. A 12-month pilot is expected to begin in the second half of 2027.

The final decision to issue a digital euro will come later.

United States: Digital dollar

The United States has not launched a retail CBDC.

The Federal Reserve published a discussion paper on a potential CBDC in 2022 but did not endorse a specific outcome.

The federal policy environment subsequently changed.

A January 2025 executive order prohibited federal agencies from taking action to establish, issue or promote CBDCs.

Meanwhile, some institutional research into wholesale and cross-border settlement technology continues, including New York Fed participation in international research projects.

Will CBDCs replace cash?

Not necessarily.

Most CBDC discussions position digital central-bank money as an additional form of money rather than assuming physical currency will immediately disappear.

India’s RBI, for example, describes e₹ as another form of the rupee, while the proposed digital euro is intended to complement existing payment options.

Whether cash use eventually declines further will depend on consumer behaviour, government policy and the evolution of private payment systems—not CBDC technology alone.

Will CBDCs replace stablecoins or cryptocurrencies?

Probably not in a simple one-for-one manner.

CBDCs, stablecoins and decentralized crypto assets solve different problems.

CBDCs provide sovereign digital money.

Stablecoins can provide privately issued digital representations of fiat value that move across crypto networks and applications.

Bitcoin and similar decentralized assets operate outside a central-bank issuance model.

They may compete in some payment use cases, but they have different:

• Issuers
• Risk models
• Settlement systems
• Privacy characteristics
• Monetary policies
• Regulatory treatment

CBDC development should therefore be viewed as one part of a much broader transformation of money and payments.

Conclusion

A CBDC is best understood not as a government version of Bitcoin, but as central-bank money redesigned for a digital economy.

Its defining feature is not blockchain.

It is the fact that the money represents a direct claim on a central bank.

That distinction separates CBDCs from commercial-bank deposits, stablecoins and decentralized cryptocurrencies.

CBDC development has also become much more diverse than early discussions suggested. Some countries have launched retail currencies, China and India are conducting large-scale pilots, Europe is preparing for a possible digital euro, the United States has moved against a retail CBDC, and central banks increasingly focus on wholesale settlement and tokenized financial markets.

Whether CBDCs ultimately become widely used will depend less on technological novelty and more on whether they solve real problems better than cash, bank deposits, stablecoins and increasingly sophisticated instant-payment systems.

For central banks, the central challenge remains balancing innovation, privacy, resilience, financial stability and public trust.

Frequently asked questions

Disclaimer: This article is for educational and informational purposes only and does not constitute financial, legal or investment advice. CBDC projects and policies are evolving, and readers should consult official central-bank sources for the latest information.