CBDC (Central Bank Digital Currency)

Unlike the balance in a bank account, which represents a claim on a commercial bank, a CBDC is a direct liability of the central bank of a nation itself. This makes it identical in rights to a banknote, just in digital form.

While somewhat similar to some cryptocurrencies, particularly stablecoins, CBDCs do not operate on a decentralized blockchain ledger. Instead, most are recorded and controlled on a centralized ledger operated by the central bank which issues and backs the digital currency.

The CBDCs launched thus far come in two main varieties, divided by the intended user. Wholesale CBDCs are offered to whitelisted financial institutions, for settling transfers between banks. Retail CBDCs have wider distribution to the general public for use in everyday payments. In either case, users typically hold funds in a digital wallet, sometimes operated through their existing commercial bank and sometimes through the central bank directly.

China's digital yuan (e-CNY) is the largest live example, while the European Central Bank is currently developing a digital euro.

Proponents of CBDCs point to faster settlement, lower fees and greater financial inclusion as some of their benefits. However, some critics have raised concerns about privacy and surveillance, as centralized digital cash can reveal the exact spending patterns of users. Crypto-native alternatives could therefore offer a more censorship-resistant alternative.