Central bank digital currency

Based on Wikipedia: Central bank digital currency

Imagine a future where your government could program your money to expire. In 2020, during a trial in Shenzhen, China did exactly that—issuing digital currency with a built-in expiration date that encouraged people to spend rather than save. Ninety percent of those digital vouchers were spent in shops before they vanished. This wasn't science fiction or a warning from a dystopian novel. It was a real experiment with what's called a Central Bank Digital Currency, or CBDC.

The stakes are enormous. As of 2024, central banks representing ninety-eight percent of the world's economic output are actively exploring whether to create their own digital currencies. Meanwhile, Florida has already banned them, citing privacy concerns. What's driving this global scramble, and why are some jurisdictions rushing to embrace CBDCs while others are racing to prohibit them?

What Exactly Is a Central Bank Digital Currency?

To understand CBDCs, you first need to understand what they're not.

They're not cryptocurrency. Bitcoin and its cousins are decentralized—no single entity controls them. They operate on blockchains, which are distributed networks where thousands of computers independently verify every transaction. No government issues Bitcoin. No central authority can freeze your Bitcoin wallet or create more of it on a whim.

A CBDC is the opposite in almost every way. It's digital money issued by your country's central bank—the same institution that issues the cash in your pocket. The Federal Reserve, the European Central Bank, the Bank of England, the People's Bank of China—these are the entities that would create and control CBDCs.

Think of it this way: you already have a kind of digital money. When you check your bank balance online, you're looking at digits on a screen, not physical bills in a vault. But that money is a promise from your commercial bank. A CBDC would be a direct claim on the central bank itself—more like having digital cash issued by the government than a balance at your local bank.

The technical implementation would likely involve a database run by the central bank or approved private entities. This database would record how much money every person and corporation holds, protected by encryption and privacy safeguards. Despite the original inspiration coming from cryptocurrency and blockchain technology, most CBDC designs wouldn't actually need a blockchain at all. When you're the central authority, you don't need a decentralized system to verify transactions—you are the verifier.

A Decades-Long Journey to a Buzzy Acronym

The term "CBDC" only entered widespread use after 2019, but central banks have been experimenting with digital currency concepts for decades.

Finland was surprisingly early to the game. In the 1990s, the Finnish central bank issued something called the Avant card—a stored-value electronic money card. It was essentially a prototype of the digital currency concept, though it never achieved widespread adoption.

Ecuador tried a different approach. From 2014 to 2018, the country's central bank operated a mobile payment system that let citizens transfer digital dollars using their phones. It was practical and ahead of its time, but it eventually shut down.

The project that would eventually reshape the global conversation started in China. In 2014, the People's Bank of China began researching the possibility of a digital renminbi—what would become the most ambitious CBDC project from any major economy. By the time other countries were still debating whether digital currencies were feasible, China was already running real-world trials.

Australia's central bank took a different tack, focusing on what's called "wholesale" CBDCs. In 2021, they conducted a proof of concept using Ethereum—yes, the cryptocurrency platform—to tokenize syndicated loans. The goal wasn't to create digital cash for ordinary citizens but to automate and secure high-value transactions between banks.

Retail Versus Wholesale: Two Very Different Beasts

This distinction between retail and wholesale CBDCs is crucial for understanding the debate.

Retail CBDCs are what most people imagine when they hear about digital currency. They're designed for you and me—for households and businesses to use in everyday transactions. Buying groceries. Paying rent. Sending money to your kids. A retail CBDC would be the digital equivalent of the cash in your wallet, issued directly by the central bank and usable by anyone.

Wholesale CBDCs are entirely different. They're designed for financial institutions—banks, investment firms, and other players in the high-finance world. They function similarly to the reserves that banks already hold at central banks, just in a more modern digital form. When Australia experimented with tokenizing syndicated loans, that was a wholesale application. The average person would never directly interact with a wholesale CBDC.

The retail variety is where most of the controversy lies. It's one thing for banks to settle transactions with digital tokens. It's quite another for the government to issue digital money that tracks every citizen's spending.

How Would a Retail CBDC Actually Work?

Several distribution models have been proposed, and the choice matters enormously for how the system would feel to ordinary users.

In the intermediated model—favored by the European Central Bank and the Federal Reserve—the central bank would issue the CBDC and manage the core technical infrastructure, but you'd never interact with the central bank directly. Instead, commercial banks and other financial institutions would provide the customer-facing services. You'd download your bank's app, and somewhere in the background, the CBDC would be flowing through central bank systems.

More radical proposals would have the central bank provide accounts directly to every citizen. This would be a profound shift. Today, the Federal Reserve doesn't offer bank accounts to ordinary Americans—that's what commercial banks are for. A direct CBDC model would essentially put every citizen into a banking relationship with the central bank itself.

Some proposals even suggest providing universal bank accounts as a form of financial inclusion—giving every legal resident access to a free or low-cost basic account. For the millions of people worldwide who are "unbanked" and excluded from the traditional financial system, this could be transformative.

The Global Race—and the Backlash

The numbers tell a striking story of global momentum.

Nine countries and the eight island nations of the Eastern Caribbean Currency Union have already launched CBDCs. The Bahamas has the Sand Dollar. Jamaica has JamDex. Nigeria has the e-Naira. China's digital renminbi is by far the largest experiment, and the world is watching closely.

Thirty-eight countries and Hong Kong are running pilot programs. Sixty-seven countries and two currency unions are actively researching the possibility. Brazil has been testing the Drex since March 2023. The European Central Bank decided in October 2023 to move into the "preparation phase" for a potential digital euro.

But not everyone is enthusiastic.

In the United States, the Republican Party is broadly opposed to CBDCs. Florida became the first state to pass legislation banning state payments using CBDCs, explicitly citing privacy concerns. Other states are considering similar measures.

Sweden's parliament has been notably unenthusiastic about the Riksbank's push for a CBDC. Poland's central bank is outright opposed. Ukraine flagged concerns about disintermediating commercial banks—a technical term for the risk that CBDCs could suck deposits away from traditional banks and into the central bank.

The contrast between the United Kingdom and Switzerland in February 2023 captured the tension perfectly. The UK Treasury and the Bank of England announced that a digital pound would likely launch sometime after 2025. Just two weeks later, a Swiss lobby group triggered a national referendum on maintaining adequate physical cash in circulation—directly responding to fears that electronic payments make it too easy for the state to monitor citizens.

The Tracking Question

This gets to the heart of the controversy: if your money is digital and issued by the government, what can the government see?

With physical cash, transactions are essentially anonymous. You hand someone a twenty-dollar bill, and no database anywhere records that exchange. The money itself has a serial number, but in practice, cash transactions are untraceable.

A CBDC could maintain that anonymity. But it could also do the opposite—creating a complete record of every transaction, stored in government databases, visible to authorities at the flip of a switch.

Proponents of traceability point to genuine benefits. Tax evasion becomes much harder when you can't hide income in offshore accounts or unreported cash payments. Money laundering becomes nearly impossible when every transaction leaves a trail. Stolen funds could potentially be frozen instantly and returned to victims. For law enforcement, a fully traceable CBDC would be an extraordinarily powerful tool.

Critics see the same features as a nightmare. A government that can see every transaction can also control every transaction. In the extreme case—and remember China's expiring currency experiment—authorities could program money to only work at certain stores, or only for certain purchases, or only until a certain date. The BBC's Faisal Islam noted that the real issue is about "access to the data attached to every spending transaction, and whether people might choose to trust a global company more than the state."

The technical design choices matter enormously. Should CBDCs be "token-based," where ownership of the digital token itself proves your right to spend it (more like cash)? Or "account-based," where your identity is verified for every transaction (more like a bank account)? How much anonymity should users have? These aren't just technical questions—they're political and philosophical ones about the proper relationship between citizens and the state.

The Promises

Advocates for CBDCs make a compelling case about efficiency.

Today's payment systems are surprisingly slow and expensive. When you swipe your credit card, the merchant pays a fee—typically two to three percent of the transaction—to Visa, Mastercard, or American Express. That cost gets baked into prices. A CBDC could potentially eliminate or dramatically reduce these fees, leading to lower prices for everyone.

Current payment systems also introduce delays. When you pay a merchant, the money doesn't actually move instantly—it goes through a complex clearing process that can take days to fully settle. Merchants accept the risk that some payments might fail. With a CBDC, payments could be truly instant and final, eliminating risk and simplifying business operations.

Financial inclusion is another major argument. Billions of people worldwide lack access to basic banking services. They can't receive direct deposits, can't pay bills online, can't participate in the modern economy. A CBDC with universal accounts could bring these people into the financial system at essentially no cost.

Then there's the somewhat arcane but important issue of seigniorage—the profit a government makes by issuing currency. Physical cash generates seigniorage because it costs very little to print but carries face value. As society moves toward digital payments through private companies, governments lose this income stream. CBDCs would preserve it.

Some economists see CBDCs as a powerful new tool for monetary policy. Central banks currently influence the economy indirectly, by adjusting interest rates or buying and selling bonds. A CBDC could allow "helicopter money"—direct transfers to citizens' accounts during economic crises. This would be far more immediate than traditional stimulus measures.

The Perils

The risks are equally significant.

The most discussed danger is bank disintermediation. If citizens can hold money directly at the central bank—which is inherently safer than any commercial bank—why would they keep deposits at ordinary banks? In a crisis, the rational response might be to move everything to the CBDC instantly. This could trigger or accelerate bank runs, destabilizing the entire financial system.

The Bank of England has argued that careful design can mitigate this risk—for example, by capping how much CBDC any person can hold. But critics note that during a genuine crisis, such caps might prove politically impossible to maintain.

Centralization creates another category of risk. Most cryptocurrency enthusiasts prize decentralization precisely because it prevents any single authority from controlling the system. With a CBDC, the central bank can add or remove money from anyone's account. In responsible hands, this power could be used for legitimate law enforcement. In irresponsible hands, it could be used for political repression, economic coercion, or arbitrary punishment.

There's also the specter of "digital dollarization." Just as some countries have abandoned their own currencies in favor of the US dollar, a well-designed foreign CBDC could become more attractive than a poorly-run local currency. The announcement of Facebook's Libra project—a proposed global digital currency that was eventually abandoned—spooked central bankers precisely because it represented a private-sector threat to monetary sovereignty. China's progress with its digital renminbi raises similar concerns for countries that might prefer not to depend on Beijing-controlled financial infrastructure.

The Bigger Picture

Perhaps the deepest issue is philosophical rather than technical.

Money is not just an economic tool—it's a form of power. The ability to transact freely, privately, and without permission is a foundation of personal liberty. Cash, for all its inconveniences, guarantees a sphere of financial privacy. You can spend it without leaving a trace, save it without asking permission, give it away without filing paperwork.

Digital money, by its nature, creates records. The question is who controls those records and what they can do with them. A CBDC designed with strong privacy protections could preserve most of the freedom that cash provides. A CBDC designed for maximum surveillance could create an unprecedented tool for monitoring and controlling citizens' economic lives.

Different societies will make different choices, reflecting different values and different levels of trust in government. China's enthusiasm for CBDCs reflects a governance model comfortable with extensive state oversight. Florida's ban reflects deep skepticism of government power. Most countries are still grappling with where they fall on this spectrum.

What's certain is that the era of purely physical money is ending. Whether that money is replaced by private digital payment systems, decentralized cryptocurrencies, or government-issued CBDCs will shape the economy—and the society—of the coming century. The decisions being made now, in pilot programs and legislative chambers around the world, will determine whether digital money becomes a tool for efficiency and inclusion or a mechanism for surveillance and control.

Perhaps both. That's what makes the experiment so consequential.