Central Bank Digital Currency
Central bank digital currency (CBDC) is publicly-issued form of digital money. It is distinct from existing digital currencies in that it represents a direct claim on the central bank, and would therefore be 100% risk-free, just like physical cash in the form of notes and coins.
The technical term for a CBDC designed to be widely used by the public is ‘retail CBDC’. Retail CBDC is effectively a digital form of cash, and is commonly referred to by advocates of monetary reform as ‘digital cash’.
The term ‘retail’ refers to the ability for the CBDC to be used for everyday transactions by people and businesses. This would be the most transformative kind of CBDC, as it would open up the safety of the central bank’s balance sheet to households and businesses, and be a competitor to commercial bank accounts. This lack of risk makes CBDC is a key feature that makes distinct from commercial bank deposits (and other privately issued forms of digital currency, such as stablecoins).
An alternative form of CBDC would be provided exclusively to financial institutions. This form is known as a ‘wholesale’ CBDC, and would be used for settling large volumes of payments safely and efficiently. However, the motivations of central banks experimenting with wholesale CBDCs are generally improving financial stability and efficiency. Such projects are functionally similar to improving the interbank settlement services provided by central banks to commercial banks.
For a comphrensive overview of CBDC, we recommend the Bank of England’s discussion paper:
Central Bank Digital Currency: opportunities, challenges and design.