Digital form of fiat money
A central bank digital currency (CBDC; also called digital fiat currency or digital base money) is a digital currency issued by a central bank, rather than by a commercial bank. It is also a liability of the central bank, unless it is dividend-paying, then it is an ownership stake in the central bank, and is a new form of legal tender, unlike regular retail CBDC which is denominated in the sovereign currency, as is the case with physical banknotes, coin and existing reserves.
The two primary categories of CBDCs are retail and wholesale. Retail CBDCs are designed for households and businesses to make payments for everyday transactions, whereas wholesale CBDCs are designed for financial institutions and operate similarly to central bank reserves.
Retail CBDCs can be distributed through various models. In the intermediated model, the central bank issues the CBDC and manages core infrastructures, while financial intermediaries offer customer services. The ECB and the Federal Reserve have proposed intermediated CBDCs. Alternatively, the central bank could either provide the full service or delegate responsibilities further.
While CBDCs may share some properties with virtual currency and cryptocurrency, such as programmability, they differ in that a CBDC is issued by a state. However, most retail CBDC implementations will likely not use any sort of distributed ledger such as a blockchain.
As of 2023, over 120 different jurisdictions, including major economies like the ECB, UK, and the US, were evaluating national digital currencies. As it currently stands, 9 countries and the 8 islands making up the Eastern Caribbean Currency Union have launched CBDCs; 38 countries and Hong Kong have CBDC pilot programmes; and 67 countries and 2 currency unions are researching CBDCs. In the United States, some states have introduced legislation to ban state payments using CBDCs with Florida being the first state to pass such a law citing privacy concerns.
CBDCs have faced a plethora of criticisms, including concerns about privacy and the potential for them to be used as a "tool for coercion and control". Their implementation could also have a displacement effect on the private sector, affecting bank balance sheets and private payment methods, necessitating carefully calibrated policies.
History.
Although the term "CBDC" did not become widely used until after 2019, central banks have researched and launched digital currency projects for decades. For example, Finland's central bank issued the Avant stored value e-money card in the 1990s. In 2014, the Chinese central bank began researching the idea of issuing a CBDC. Elsewhere, the Ecuadorian central bank operated a mobile payment system from 2014 to 2018. In 2021, Australia's central bank conducted a proof of concept for a wholesale CBDC using Ethereum to tokenize syndicated loans, aiming to automate and secure high-value transactions in the banking sector.
Implementation.
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, such as people and corporations.
In contrast to cryptocurrency, a central bank digital currency would be centrally controlled (even if it was on a distributed database), and so a blockchain or other distributed ledger would likely not be required or useful - even as they were the original inspiration for the concept.
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. These included the ECB, the UK, and the US. China's digital RMB was the first digital currency to be issued by a major economy. Six central banks have launched a CBDC: the Central Bank of The Bahamas (Sand Dollar), the Eastern Caribbean Central Bank (DCash), the Central Bank of Nigeria (e-Naira), the Bank of Jamaica (JamDex), People's Bank of China (Digital renminbi), the Reserve Bank of India (Digital Rupee), and Bank of Russia (Digital Ruble). The Central Bank of Brazil has been rolling out tests of a digital Brazilian currency (Drex) since March 2023. The ECB/Eurozone decided in October 2023 to move forward to the preparation phase for the potential issuance of a digital euro after a two-year study phase.
Some states have also issued, or have considered issuing, cryptocurrencies: these include Venezuela (Petro) and the Marshall Islands (Sovereign). These cryptocurrencies are often considered with the intent of increasing a state's independence from global financial systems, such as by reducing dependence on a foreign currency or by evading international sanctions.
Contrasting attitudes towards digital currencies were demonstrated by developments in the UK and Switzerland in February 2023. The UK Treasury and the Bank of England said a state-backed digital pound was likely to be launched some time after 2025. Two weeks later, a Swiss lobby group triggered a national vote on maintaining a "sufficient quantity" of cash in circulation over fears that electronic payments make it easier for the state to monitor its citizens' actions. In a comment on the British government's plans, the BBC's Faisal Islam said the issue was 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 eye here is on maintaining UK monetary sovereignty against upheaval from the likes of Big Tech."
A major problem with central bank digital currencies is deciding whether the currency should be easily traceable. If it's traceable, the government has more control than it currently does. Additionally, there's a technical aspect to consider: whether CBDCs should be based on tokens or accounts and how much anonymity users should have.
Characteristics.
A CBDC is a digital counterpart to fiat money, issued by central banks, unless it is dividend-paying, then it is an ownership stake and a new form of legal tender. Like paper banknotes, it is a means of payment, a unit of account, and a store of value. And like paper currency, each unit is uniquely identifiable to prevent counterfeiting. CBDC will have implications for commercial banks, probably in the field of lowering banks' commissions, no big customer data-selling ability, accumulating the deposits and deposit policies and credit policies due to higher funding costs for banks. 
Digital fiat currency is part of the base money supply, together with other forms of the currency. As such, DFC is a liability of the central bank just as physical currency is. It is a digital bearer instrument that can be stored, transferred and transmitted by all kinds of digital payment systems and services. The validity of the digital fiat currency is independent of the digital payment systems storing and transferring the digital fiat currency.
Proposals for CBDC implementation often involve the provision of universal bank accounts at the central banks for all citizens.
Benefits and impacts.
Governments and central banks are studying CBDCs and their implications for financial inclusion, economic growth, technology innovation, and the efficiency of bank transactions. Potential advantages include:
Risks.
Despite having potential advantages, CBDCs remain a controversial topic, and there are risks associated with their implementation.
References.
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