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Central Bank Digital Currencies Explained: Promise, Risks and the Global Race

More than a hundred countries are researching digital versions of their national currencies. The designs, motives and trade-offs differ widely, and the debate is far from settled.

By Wells Love Editorial Desk · October 25, 2026 · 8 min read

Cash is the only form of central-bank money most people can hold, and its use is shrinking in many economies as cards and mobile wallets spread. That trend has prompted central banks around the world to ask a basic question: should the public be able to hold a digital form of the national currency issued directly by the central bank? The answer is not obvious, and the debate reveals much about how modern money works.

What a central bank digital currency is

A central bank digital currency, usually abbreviated as CBDC, is a digital liability of the central bank denominated in the national unit of account. It differs from the money in a bank account, which is a claim on a commercial bank, and from cryptocurrencies such as Bitcoin, which are not issued by any authority and whose value fluctuates. It also differs from stablecoins, which are issued by private companies and aim to hold a steady value against a currency, backed by reserves of varying quality.

Most people already use digital money, but it is money created by commercial banks and payment companies. A CBDC would add a third form alongside cash and bank deposits, one that carries no credit risk to a commercial institution because the central bank stands behind it.

Retail and wholesale designs

Two broad models dominate discussion. A retail CBDC would be available to households and businesses, either directly from the central bank or through banks and regulated payment providers. A wholesale CBDC would be limited to financial institutions and used to settle large payments, securities trades and interbank transfers. Wholesale systems already exist in a sense, because commercial banks hold reserve accounts at the central bank, but proposals to use new technology could make settlement faster and allow it to occur around the clock.

Most central banks prefer an intermediated model, in which commercial banks and payment firms distribute the digital currency and handle customer relationships, while the central bank operates the core system. This arrangement preserves the role of existing institutions and spreads the burden of customer service and compliance.

Why central banks are interested

Motives differ by country. Some want to ensure that the public retains access to a safe, simple means of payment as cash declines. Others hope to improve efficiency and lower costs in payments, especially across borders, where transfers can be slow and expensive. Emerging economies sometimes see a CBDC as a tool for financial inclusion, giving people without bank accounts access to digital payments through a mobile phone.

There is also a strategic dimension. Policymakers worry about the growth of private digital money, including stablecoins and the payment systems of large technology firms, which could reduce a country's control over its currency. A public digital option is seen by some as a way of keeping the monetary system anchored in central-bank money.

Where things stand

Progress has been uneven. The Bahamas launched the Sand Dollar in 2020, one of the first national retail CBDCs. China has run extensive pilots of its digital yuan, known as e-CNY, across many cities since 2020. Nigeria introduced the eNaira in 2021, and adoption proved modest, a reminder that building a digital currency does not guarantee people will use it. Many other central banks remain in research or pilot stages.

In the euro area, the European Central Bank has been moving through investigation and preparation phases for a digital euro, while legislation at the European level has been debated. In the United Kingdom, the Bank of England and HM Treasury have been exploring the design of a possible digital pound. In the United States, policymakers remain divided, and the Federal Reserve has said it would not proceed without clear support from the executive branch and Congress. Because positions change, readers should consult each authority's latest publications.

Lessons from the early adopters

The first launches offer cautionary and encouraging signals alike. Adoption has depended less on technology than on whether people have a reason to switch from what they already use. Where mobile payments were already convenient and cheap, a new public wallet had to offer something clearly better, such as lower merchant fees, offline use or access for people outside the banking system. Central banks that engaged merchants, banks and consumer groups early generally reported a smoother rollout, while those that treated the project as a purely technical exercise struggled to build habits. For countries still deciding, these early experiences argue for clear goals, measurable targets and a willingness to adjust or stop if a pilot does not deliver.

The main trade-offs

Privacy. Cash offers anonymity, while digital payments leave records. Designers must decide who sees transaction data, how much is stored and under what legal conditions authorities can access it. Proposals range from strong privacy for small payments to full traceability, and the choice affects public trust.

Bank funding. If households could move large sums from bank deposits into a safe central-bank account, banks might lose a cheap source of funding, which could reduce lending or raise its cost. In a crisis, the speed of digital transfers could accelerate a run on weaker banks. To address this, many designs include holding limits, caps on the amount an individual can keep, or lower or zero interest on balances.

Technology and resilience. A system used by millions of people must be secure, fast and available at all times, including offline in emergencies. Designers must weigh whether to use conventional centralised infrastructure or distributed ledger technology, and how to guard against cyberattack and outages.

Inclusion and access. Digital systems can exclude people without smartphones, identification or reliable connections. Many central banks therefore stress that a digital currency should complement cash, not replace it.

Competition and the role of banks. Payment firms and banks may worry that a public option will reduce their revenue from payments, while advocates argue that a shared public infrastructure could encourage innovation on top of it.

Cross-border payments and wholesale experiments

International transfers remain a major motivation. Moving money between countries usually passes through chains of correspondent banks, which adds time, cost and complexity. Experiments by central banks and the Bank for International Settlements have tested ways to link national systems. Projects such as mBridge, involving central banks in Asia and the Middle East, and Project Agorá, which explores tokenised deposits and central-bank reserves on a shared platform, aim to learn whether common infrastructure can speed up settlement while respecting each country's rules.

These trials also highlight difficult questions about governance: who sets the rules of a shared platform, how disputes are resolved, how sanctions and anti-money-laundering requirements apply, and how to avoid creating new dependencies. For now, most projects remain experimental.

CBDCs, stablecoins and tokenised deposits

Policymakers increasingly view CBDCs as one option among several. Tokenised bank deposits, which put commercial-bank money on programmable platforms, could deliver some of the same benefits without a central bank serving the public directly. Regulated stablecoins offer another route, and several jurisdictions have introduced or are drafting rules for them. Whether these forms will complement or compete with CBDCs depends on regulation, technology and the choices of consumers and businesses.

How a retail CBDC might work day to day

In most proposals, a person would hold digital central-bank money in a wallet provided by a bank or an authorised payment firm, and pay by phone, card or a dedicated device. Merchants would receive funds almost immediately, and banks could be asked to offer the wallet as a basic service. Some designs add offline payments, so that two devices can exchange value without a network connection during a power or telecom outage. Others explore programmable features, such as payments that release automatically when conditions are met, although central banks have been cautious about features that could restrict how people spend their own money.

Operating such a system requires clear rules for onboarding customers, verifying identity, handling complaints and preventing fraud. These responsibilities are why intermediaries are given a large role, and why the cost of running a CBDC, and who bears it, is one of the less glamorous but most consequential questions for policymakers.

The case for patience

Critics argue that existing instant-payment systems already deliver fast, cheap domestic transfers in many countries, which weakens the case for a new public currency. They also point to the risk of building expensive infrastructure that few people use. Supporters respond that central banks should prepare in advance, because designing a safe system takes years and the shape of the monetary system could change quickly. Both sides agree on one point: the choice should be made through open public debate, given the effects on privacy, banks and the broader economy.

What to watch

• Decisions on holding limits and interest, which reveal how central banks balance innovation and financial stability.
• Privacy rules and the legal safeguards that surround transaction data.
• Whether pilot projects attract meaningful everyday use.
• Progress on cross-border platforms and the standards that connect them.
• How lawmakers handle the relationship between CBDCs and private stablecoins.

A digital currency is not a single product but a family of design choices, and the debate is as much about politics and trust as about technology. The central question is not whether digital money will exist, because it already does, but who will issue it and on what terms.

This article is for information and education only and is not investment, tax or legal advice. Figures, rules and dates change; verify details with official sources before acting. See our Financial Disclaimer and Editorial Policy. Spotted an error? Tell us.