What is a CBDC? Understanding Central Bank Digital Currencies in 2025

Central bank digital currencies represent one of the most significant developments in modern finance. With 137 countries representing 98% of global GDP exploring CBDCs, understanding what these digital currencies are and how they differ from existing payment methods has become essential for anyone interested in the future of money.

A central bank digital currency (CBDC) is a digital currency issued by a central bank, rather than by a commercial bank. It is also a liability of the central bank and represents a new form of legal tender that exists purely in digital form. Unlike physical cash, CBDCs enable electronic transactions while maintaining the same government backing and regulatory oversight as traditional currency.

As a liability of the Federal Reserve, however, a CBDC would be the safest digital asset available to the general public, with no associated credit or liquidity risk. This fundamental characteristic distinguishes CBDCs from all other forms of digital payment methods currently available.

Central banks are motivated to explore CBDCs for several reasons. The COVID-19 crisis induced a shift in payment habits towards digital, contactless payments and e-commerce, accelerating the decline in cash usage worldwide. Additionally, the rise of private cryptocurrencies and stablecoins has prompted central banks to consider issuing their own digital alternatives to maintain monetary sovereignty.

CBDCs operate through sophisticated digital infrastructure that varies depending on the implementation model chosen by each central bank. A central bank digital currency would likely be implemented using a database run by the central bank, government, or approved private-sector entities. The database would keep a record (with appropriate privacy and cryptographic protections) of the amount of money held by every entity.

Retail CBDCs are designed for use by the general public, households, and businesses for everyday transactions. These function similarly to digital cash, allowing direct payments between parties without requiring traditional banking intermediaries.

Wholesale CBDCs serve financial institutions and are used for interbank transfers and large-value transactions. This report highlights the transformative potential of wholesale CBDC (wCBDC) in modernizing financial markets by improving the efficiency of systemically important payments between financial institutions.

Central banks can choose between different implementation strategies. In the intermediated model, the central bank issues the CBDC and manages core infrastructures, while financial intermediaries offer customer services. This approach allows banks to maintain their customer relationships while the central bank retains control over the monetary system.

CBDCs offer several potential advantages over traditional payment systems and even some benefits compared to physical cash.

CBDCs can be designed to replicate some of the desirable properties of cash, for instance, access to payments without a bank account, trust associated with central bank money, low or no fees. This makes digital payments accessible to unbanked populations who currently rely solely on cash transactions.

CBDCs can enable 24/7 real-time payments, eliminating the delays associated with traditional banking systems. CBDCs also offer a way to cut down on the inefficiencies of printing and moving money — the cost of managing physical cash can be as much as 1.5% of a country's GDP.

Central banks can directly use CBDCs to implement monetary policy, including setting the interest rate on CBDC deposits or even varying the supply of CBDCs. This direct relationship between central banks and citizens could make monetary policy transmission more effective and immediate.

CBDCs can incorporate smart contract functionality, enabling programmable money capabilities similar to those found in blockchain-based financial systems. Smart contracts allow for condition-based transactions, including time-limited transactions, conditional payments, automatic tax deductions, spending restrictions.

Despite their potential benefits, CBDCs face significant implementation challenges that central banks must carefully consider.

If CBDC were susceptible to cyber risks, it could undermine consumer confidence and trust in the financial system. The interconnected nature of digital currency systems creates multiple potential points of failure that must be secured against increasingly sophisticated cyber threats.

Privacy is one of the most important design feature: the consultation launched by the ECB in October 2020 revealed that privacy is considered as the most important feature of a digital euro by both citizens and professionals. Balancing the need for regulatory oversight with individual privacy rights remains one of the most complex challenges in CBDC design.

Citizens could pull too much money out of banks at once by purchasing CBDCs, triggering a run on banks—affecting their ability to lend and sending a shock to interest rates. This potential for disintermediation requires careful design to maintain financial stability.

CBDC adoption faces many hurdles, including the classic chicken-and-egg problem wherein adoption by consumers is dependent on the participation of merchants, and vice versa. Central banks must develop comprehensive strategies to encourage adoption by both consumers and businesses.

One of the most important distinctions for users to understand is how CBDCs differ from stablecoins, which are already widely used in digital finance.

The first significant difference between CDBCs and stablecoins is their governing authority. Stablecoins are usually governed by private companies such as Circle or Binance, while CBDCs are issued and controlled directly by central banks.

CBDCs don't have any assets backing them; they only have the promise of the country and its central bank, while stablecoins are typically backed by reserves of fiat currency or other assets. However, CBDCs have the advantage of being legal tender, making them equivalent to traditional government-issued currency.

Stablecoins have proven particularly valuable for cross-chain transactions and DeFi applications, enabling seamless transfers between different blockchain networks. CBDCs, by contrast, are designed primarily for domestic use and mainstream payment applications.

The CBDC landscape has evolved rapidly, with numerous countries at different stages of development and implementation.

3 countries have fully launched a digital currency—the Bahamas, Jamaica, and Nigeria. All three countries are focused on expanding the reach of their CBDCs domestically. These early implementations provide valuable insights into both the opportunities and challenges of CBDC deployment.

By March 2024, the central banks of 134 countries accounting for 98% of the world's GDP were said to be in various stages of evaluating the launch of a national digital currency. The European Central Bank continues its digital euro project, while China's digital yuan remains the largest CBDC pilot globally.

In 2025, President Trump issued an executive order to halt all work on a retail CBDC, making the US the only country to do so. Instead, the US administration has focused on developing regulatory frameworks for stablecoins as an alternative approach to digital currency innovation.

Successfully implementing a CBDC requires careful consideration of numerous technical and policy factors.

Central banks must decide whether to use blockchain technology or alternative database systems. Most retail CBDC implementations will likely not use any sort of distributed ledger such as a blockchain, opting instead for more traditional database architectures that offer greater control and efficiency.

The digitalization of information and programmability of transactions—leading to the automation of compliance checks—could bring efficiency gains compared to today's implementation of CFMs, though raise operational risks. Central banks must balance regulatory compliance with user privacy expectations.

For CBDCs to achieve widespread adoption, they must integrate seamlessly with existing payment systems. Eco's cross-chain infrastructure demonstrates how digital currency systems can achieve interoperability, lessons that central banks can apply to CBDC design.

As we look ahead, CBDCs will likely play an increasingly important role in the global financial system, though their exact trajectory remains uncertain.

It is possible to envisage the coexistence of fast payment systems, e-money, and CBDC in many payment landscapes across the world. Rather than replacing existing payment methods entirely, CBDCs may complement current systems while providing additional benefits.

CBDCs could serve as a foundation for further financial innovation, potentially enabling new types of programmable money applications. The stablecoin ecosystem already demonstrates the potential for digital currencies to enable new financial products and services.

New payments systems create externalities that impact the daily lives of citizens, and can possibly jeopardize the national security objectives of the country. The development of CBDCs by major economies will likely influence international monetary relationships and financial sovereignty.

While the timeline for widespread CBDC adoption remains uncertain, businesses and individuals can prepare for this potential future by understanding digital currency systems and staying informed about developments in their jurisdictions.

Companies should consider how CBDCs might affect their payment processing, accounting systems, and customer relationships. Understanding the differences between CBDCs and existing digital payment methods will be crucial for strategic planning.

Citizens should stay informed about CBDC developments in their countries and consider the privacy and security implications of digital currency adoption. Familiarity with existing digital payment systems can provide valuable preparation for potential CBDC use.

Central bank digital currencies represent a fundamental shift in how money operates in the digital age. While CBDCs offer significant potential benefits including enhanced financial inclusion, improved payment efficiency, and stronger monetary policy tools, they also present challenges related to privacy, cybersecurity, and financial stability.

By 2025, several economies are expected to have already initiated large-scale CBDC adoption, while others will continue evaluating their implications. Understanding what CBDCs are and how they differ from existing digital payment methods will be essential as these technologies continue to evolve.

The success of CBDC implementation will ultimately depend on central banks' ability to design systems that balance efficiency with privacy, innovation with stability, and technological advancement with public trust. As this field continues to develop, staying informed about CBDC progress will be crucial for anyone interested in the future of money and payments.

What makes a CBDC different from a bank deposit?

A CBDC is a direct liability of the central bank, making it equivalent to cash, while bank deposits are liabilities of commercial banks with different risk profiles and regulatory protections.

Can CBDCs work offline like cash?

Some CBDC designs include offline functionality, though this typically requires specialized hardware and may have limitations compared to internet-connected transactions.

Will CBDCs replace physical cash entirely?

Most central banks view CBDCs as complementing rather than replacing physical cash, recognizing that cash serves important functions for privacy, accessibility, and system resilience.

How do CBDCs affect commercial banks?

CBDCs could reduce banks' role in payments while potentially affecting their deposit funding, though the exact impact depends on specific design choices and implementation approaches.

Are CBDCs the same as cryptocurrency?

No, CBDCs are issued by central banks and backed by government authority, while cryptocurrencies are typically decentralized and not backed by any central authority.