How Central Bank Digital Currencies Could Change How Money Works

134 Countries Are Now Exploring a New Form of Money

As of early 2024, 134 countries representing 98% of global GDP were actively exploring central bank digital currencies (CBDCs). Three countries had fully launched retail CBDCs: the Bahamas (Sand Dollar, 2020), Nigeria (eNaira, 2021), and Jamaica (JAM-DEX, 2022). China had piloted its digital yuan (e-CNY) to over 260 million users across 26 cities. The European Central Bank was in the preparatory phase for a digital euro. The Federal Reserve was conducting research, though no launch timeline had been set.

The concept is straightforward: a CBDC is a digital form of sovereign currency issued directly by a central bank. Unlike commercial bank deposits — which are private liabilities of banks — CBDC is direct digital cash: a claim on the central bank itself, the same institution that issues physical banknotes.

The Architecture of Digital Money

CBDCs can be designed along two fundamental axes: who holds them, and how they are issued.

Retail vs. Wholesale: Retail CBDCs are accessible to the general public, functioning like digital cash. Wholesale CBDCs are restricted to financial institutions for interbank settlement. Most current CBDC projects focus on retail, given its greater transformative potential.

Direct vs. Indirect issuance: In a direct model, individuals hold CBDC wallets directly with the central bank. In an indirect (or two-tier) model — the most commonly proposed structure — commercial banks distribute CBDC on behalf of the central bank. This preserves the existing banking relationship while giving the central bank the underlying liability.

Why Central Banks Want a Digital Currency

Several forces have pushed central banks toward CBDC research.

• Declining cash use: In Sweden, cash accounts for fewer than 9% of retail transactions. In China, mobile payments already dominate. If cash disappears and private digital money fills the void, central banks lose direct access to citizens' money.
• Private stablecoin risk: Facebook's 2019 announcement of the Libra project alarmed regulators globally. A privately issued digital currency used by billions could undermine monetary sovereignty and financial stability. CBDC is partly a defensive response.
• Financial inclusion: An estimated 1.4 billion adults globally remain unbanked. A CBDC accessible via basic smartphone — or offline via hardware wallets — could provide payment access without requiring a bank account.
• Payment system efficiency: Cross-border payments currently take 2–5 business days and cost 5–7% in fees on average. CBDC-to-CBDC settlement between central banks could reduce this to seconds with minimal cost.

The Programmability Question: Opportunity and Danger

The most radical and controversial potential feature of CBDCs is programmability — the ability to embed conditions into money itself.

Beneficial uses are clear: automatic tax withholding at the moment of transaction; smart contract-based welfare payments that trigger when conditions are met; anti-money-laundering rules enforced at the protocol level; interest payments automated by the central bank directly to wallets.

But the same technology enables disturbing possibilities:

• Expiring money that must be spent within a set period (eliminating hoarding and forcing consumption).
• Restricted money usable only for approved categories of spending.
• Denial of access to individuals or entities for political or social reasons without judicial process.
• Negative interest rates enforced at the wallet level — impossible with physical cash.

No major CBDC currently deployed has activated coercive programmability features. However, the technical capability — and the absence of clear legislative prohibition in most jurisdictions — remains a legitimate civil liberties concern.

What CBDCs Do to Banks

The two-tier distribution model was developed specifically to address one danger: disintermediation of commercial banks.

If citizens could hold unlimited digital currency directly with the central bank — which carries zero default risk and potentially pays interest — why would anyone keep money in a commercial bank? During a financial crisis, the availability of safe CBDC could trigger instantaneous digital bank runs at a speed impossible before digital infrastructure existed.

The Cross-Border Dimension: mBridge and Beyond

The most consequential near-term application of CBDCs may be international. Project mBridge, developed by the BIS Innovation Hub with central banks of China, Hong Kong, Thailand, and the UAE, demonstrated multi-currency CBDC payments settling in seconds at near-zero cost. A 2022 pilot processed $22 million in real transactions across 164 payment transfers.

If major economies can settle trade directly in their own digital currencies — bypassing the U.S. dollar and the SWIFT messaging system — it could meaningfully erode dollar dominance in global trade settlement. The geopolitical dimensions are significant. The U.S. dollar's reserve currency status depends partly on no alternative existing for efficient cross-border settlement. CBDC infrastructure could change that calculus within a decade.

The Road Ahead

The technical challenges of CBDC are largely solved. The remaining obstacles are institutional, legal, and political. Questions about privacy architecture, interoperability between national systems, handling offline transactions securely, and the right legislative guardrails against misuse require political consensus that is harder to achieve than the engineering.

What is clear is that the digital transformation of money is no longer hypothetical. Whether CBDCs expand financial access and modernize payment systems, or become instruments of surveillance and financial control, depends entirely on the design choices made in the coming years.