Central bank digital currency is the central bank's own money in digital form. How it works, and why central banks are studying it.
Central bank digital currency, known as CBDC, is money issued directly by the central bank in digital form. It is a claim on the central bank, just like cash.
Cash is the only central bank money ordinary people have access to. The money in a bank account is bank money, a claim on the bank.
A CBDC can be aimed at the public, as a digital version of cash that anyone can use for payments. It can also be used only for settlement between banks and other financial institutions, often called wholesale CBDC.
The two forms solve different problems and can be introduced separately.
When cash use falls and payments increasingly go through private companies, often foreign ones, central banks want to ensure there is still a public, safe means of payment. They also want to avoid the payment system becoming too dependent on single players.
Stablecoins and tokenization add new arguments. Many central banks believe tokenized securities should be able to settle in central bank money, not only in private digital money.
Critics, including many banks, fear that a CBDC for the public could draw deposits out of banks and weaken their ability to lend. That is why limits on how much each person can hold are often discussed.
Privacy is another concern. A digital system gives more insight into payments than cash, and how to limit that is one of the hardest questions.
The choices made by the European Central Bank affect all of Europe. That applies both to a digital euro for the public and to settling tokenized securities in central bank money. Central banks outside the euro area, including in the Nordics, therefore follow developments in the euro area closely.
Each central bank must still decide for itself whether, when and in what form a CBDC is needed. The answer depends on how cash use, payment habits and private digital money develop in each country.