CBDC: What Is a Central Bank Digital Currency and How Does It Work?

A CBDC, short for central bank digital currency, is money issued directly by a central bank in digital form, rather than by a private company. The concept covers a whole family of projects around the world, and the European Central Bank has its own version under development: the digital euro, meant to give the euro area a digital counterpart to cash. According to the ECB, it “would be a digital form of cash, issued by the central bank and available to everyone” in the euro area, designed to sit alongside banknotes and coins rather than replace them. The detail that matters most is who stands behind it: because it would be backed by a central bank, a CBDC is not a crypto-asset.

What a CBDC actually is

The most common mix-up is treating a CBDC as a cryptocurrency, since both would live on a phone. The ECB, however, defines the digital euro as central bank money: it would be issued and guaranteed by the Eurosystem, and like banknotes and coins it would carry legal tender status. Bitcoin and Ether, by contrast, are not backed by any institution; their value depends on what the market will pay, not on a public guarantee.

A second misunderstanding concerns the technology. The ECB states plainly that the digital euro would not be based on distributed ledger technology, the DLT that underpins many cryptocurrencies, even though it borrows “some key design principles” from it. Anyone searching for “CBDC blockchain” expecting a project built on a chain of blocks would find a different answer than expected; to see how that technology actually functions, it helps to read about how blockchain works.

How a CBDC payment would work

In its technical tests, the ECB explored a holding limit of up to 3,000 euros per person: anything above that threshold would automatically move to a linked bank account, much like a savings account sweeping extra cash into a checking account it’s tied to. That figure is not yet a final legal limit; it would only become one once EU legislation is adopted.

Practical example: You step into a tunnel with no signal and need to pay for a train ticket. With the digital euro, according to the ECB, you could still do it through an offline payment: only you and the ticket seller would know the transaction details, while your balance would stay within the holding limit set for each person.

Privacy is one point where the ECB has taken an especially firm stance. For online payments it says it could not identify who a user is or what they buy from the payment data it would receive; for offline payments it goes further, stating that only the two parties to a transaction would know its details.

CBDC, cash and cryptocurrencies compared

	Cash	Digital euro	Cryptocurrencies
Issued by	Eurosystem central banks	European Central Bank	No institution
Legal tender	Yes	Yes, like banknotes and coins	No
Underlying technology	Physical, none	Not blockchain, only DLT-inspired principles	Often public distributed ledgers
Holding limit	None	Threshold tested up to 3,000 euros per person	None set by an institution
Works offline	Always	Planned, with privacy between the two parties	Not addressed by this source

Why it is coming up now

The decline of cash is one factor behind the push for a CBDC, but not the only one. According to the ECB’s 2024 SPACE survey, cash fell from 59% to 52% of point-of-sale transactions between 2022 and 2024; by value, though, it stayed close to cards (39% versus 45%), and 62% of euro area residents considered it important or very important to keep the option of paying with cash. Over two years, the decline amounted to a few percentage points.

Two more factors show up across the many central banks working on CBDCs, according to the Bank for International Settlements’ 2024 survey of 93 of them. More than one jurisdiction in three had accelerated its CBDC work in response to the spread of stablecoins and other crypto-assets, and many central banks pointed to wanting to preserve the role of central bank money as payment habits shift. In 2024, 91% of the 93 central banks surveyed were exploring a retail CBDC, a wholesale CBDC, or both; overall, wholesale projects, the ones used between banks, were further along than retail projects aimed at ordinary consumers.

Outside the euro area, some CBDCs are already running. The Bahamas’ Sand Dollar has been in nationwide distribution since October 2020, making it the first CBDC actually in circulation anywhere. India took a different route, running two separate tracks: the Reserve Bank of India launched a wholesale digital rupee in 2022 to settle government securities trades between banks, alongside a retail digital rupee distributed through banks such as State Bank of India and ICICI Bank and piloted in five cities (Mumbai, New Delhi, Bengaluru, Bhubaneswar and Chandigarh).

What it would cost, and who pays

Cost estimates published by the ECB cover different scopes and should be read separately. For the Eurosystem itself, total development costs are estimated at around 1.3 billion euros, with annual running costs of about 320 million euros once issued. For Europe’s banking sector, which would need to adapt its own systems, the estimate is higher, between 4 and 5.8 billion euros. These figures come from different sources covering different scopes, and the ECB does not present them as figures that should be added together.

When it might arrive

The ECB is aiming to be ready for a first issuance of the digital euro during 2029, but it presents that as a conditional goal: the necessary EU legislation would need to be adopted by 2026 first. Without that law, the date slips. It is worth keeping that condition in mind, because the legislative process that decides Europe’s monetary rules runs through the same institutions that shape how the European Union works more broadly.

Anyone reading about cryptocurrencies or inflation often finds CBDCs mentioned as part of the same broader conversation about money and payments. For a fuller picture of how cryptocurrencies work, or what happens to prices when inflation rises, those two related Recaps help place a project like the digital euro in context.