What do the Bahamas, Nigeria, the UAE, South Africa, China, and Sweden all have in common? On the surface, not much, so you may not have guessed that these countries and many others are home to an emerging revolution in financing. At the time of this writing, there are 25 countries that have either launched or are in the pilot phase of their central bank digital currency (CBDC) program. Not far behind them are over 65 countries that are in the research and development stages of their CBDC programs including the European Union (EU), Canada, the United Kingdom, and the United States. With this revolution continuing to gain momentum, people, understandably, have questions about what central bank digital currencies are and how they work.

What is a Central Bank Digital Currency and How Does It Work?

When we talk about CBDCs, it’s important to understand what exactly they are and how they work. Before we do, though, let’s define what a central bank is, since they’re critical to the CBDC model. This is a model we’re all familiar with, though we may not realize it. A central bank is a public institution responsible for managing a country’s money supply—which is the amount of money the country circulates. In the United States, the Federal Reserve is the central bank.

A Central Bank Digital Currency is a digital form of the central bank’s money. The central bank creates and backs this legal tender, which represents a claim against the central bank, rather than against a commercial bank or a Payment Service Provider (PSP).

How do they work? Each CBDC is a digital representation of a country’s existing fiat currency, so they mostly work the same way. Since so many countries are working on or using CBDCs, there are minor differences from one currency to another, but they do follow the same basic model. With the backing of the respective federal government, the central bank issues the CBDC, which can be used as legal tender for transactions and purchases.

What are the Benefits of CBDC?

At this point, you may be wondering what makes CBDCs different from fiat (or paper) money. We transfer money between different banks all the time, and these transfers are often done through digital means. Through CBDCs, though, the transactions don’t need to pass through multiple banks to be completed, which can take days to complete; on the contrary, CBDCs can happen in an instant through a digital ledger. This digital ledger—the blockchain—is used to manage the central bank’s digital currency.

Central Bank Digital Currencies are a digital representation of a bank's paper money.

Central Bank Digital Currencies stand to offer a variety of benefits. In addition to increased speed of transactions, they also provide households and businesses a convenient, electronic form of central bank money, along with the safety that comes with it. They also give business owners a platform to create new financial products and services and expand consumer access to the financial system.

Central Bank Digital Currency vs Cryptocurrency

When we think of digital currencies, our minds often turn to cryptocurrencies—which is understandable considering how Bitcoin has come to the forefront of many of our minds—but there is one key difference between cryptos and CBDCs.

As discussed, CBDCs are regulated through the country or state’s central bank and based on a digital version of the fiat currency.

Cryptocurrencies, though, don’t have a central issuing or regulating authority, which is why they are closely associated with decentralized ledger technology.

In sum, CBDCs are under the purview of one centralized authority, while cryptocurrencies have no such oversight.


When it comes to governments seeking to implement blockchain into the way they interact with citizens in more efficient ways, CBDCs are a great opportunity to streamline their financial environments and make transactions happen faster for people and businesses alike.