Central bank digital currencies (CBDCs) may have been out of the spotlight in recent years, but behind the scenes the race is on — and the stakes are high.
What would be different about CBDCs, why do some central banks want to introduce them, and who is ahead?
What are CBDCs?
CBDCs are digital public money issued by a central bank. There are two types: wholesale CBDCs for financial institutions, and retail CBDCs for individual users.
Wholesale CBDCs would be used to settle interbank payments and other transactions between financial intermediaries, both domestically and internationally.
Retail CBDCs, by contrast, are a digital alternative to paper money for everyday transactions. They can be account-based, meaning that transactions are validated by verifying the identity of the payer (similar to a commercial bank transfer), or token-based, meaning that transactions are validated by verifying the validity of the token itself (similar to a cash transaction). The latter offers more anonymity.
Why are central banks thinking about wholesale CBDCs?
Wholesale CBDCs are in many respects similar to central bank reserves. The key difference is that they are tokenised, which could simplify financial markets transactions and cross-border payments.
With respect to financial markets transactions, in the current system the central bank acts as the settlement authority and the process contains a number of steps, with messaging, settlement and execution functions performed separately.
By contrast, in a tokenised system financial markets participants would transact with each other in a programmable platform that could bundle these separate functions. Tokenisation could also automate payments conditional on the fulfilment of certain conditions, a feature known as smart contracts.
Finally, the central bank does not necessarily serve as the central settlement authority: under distributed ledger technology, for instance, transactions are verified on a shared ledger, rather than on a ledger that is maintained by the central bank.
These features could substantially improve the efficiency and speed of transactions in capital markets.
Tokenisation could also simplify and accelerate the correspondent banking system of cross-border payments, which is slow and expensive. In 2022, the Bank for International Settlements showed that multiple experiments in executing cross-border payments using wholesale CBDCs resulted in lower fees and faster settlement times.
And beyond making international payments easier, some countries also have strategic reasons to move away from the correspondent banking system because it is dominated by western infrastructure.
The Swift messaging system that commercial banks use to notify each other of impending cross-border transfers is overseen by western central banks and operates under EU law.
In recent years, western countries have occasionally politicised access to Swift. In 2012, Iranian banks were cut off from the system. In March 2022, many large Russian commercial banks were excluded from the network after the country’s invasion of Ukraine, curtailing their ability to send or receive international payments.
Moreover, the US dollar is often used as an intermediary currency for better exchange rates between most non-dollar currency pairs. Yet Washington’s frequent weaponisation of the currency in recent years has prompted western adversaries to seek to reduce their exposure to it.
Why are central banks thinking about retail CBDCs?
Retail CBDCs give consumers a digital alternative to physical cash, which is still the only form of public sector currency available to the non-financial sector.
For central banks, a key motivator for a retail CBDC is that if private digital currencies such as crypto and stablecoins (which, unlike crypto, are backed by underlying assets) proliferate, consumers could eventually shift most of their payments on to platforms where monetary authorities have no oversight or access.
“A concerning scenario is if consumers start transacting in different currencies for different purposes. For example, you might use Amazon dollars to shop on Amazon and Starbucks dollars to pay for coffee,” said Lewis McLellan, editor at OMFIF’s Digital Money Institute.
“Central banks are especially worried about the power of Big Tech companies to leverage their market power to keep transactions mostly within their own systems, undermining the singleness of money.”
Here, too, geopolitical considerations play a role. The European Central Bank, for instance, is worried about its current reliance on foreign payment service providers as key enablers of digital transactions across the Eurozone, as highlighted by executive board member Piero Cipollone in a recent speech.
Where are central banks right now?
The most advanced wholesale cross-border CBDC project worldwide is mBridge. Spearheaded by the central banks of China, Thailand, the United Arab Emirates and Hong Kong, it aims to build a multi-CBDC platform to facilitate cross-border payment transfers that bypass correspondent banks.
Until recently, the BIS was also involved in the project, which hosted its first real-money transactions in 2022. Earlier this year the BIS announced that mBridge had reached minimum viable product stage, allowing it to be rolled out to interested external adopters including central banks and firms.
However, in October 2024 the BIS announced it would drop out of the project. Officials denied that the exit was prompted by geopolitical considerations, but observers believe differently.
“The BIS’s departure from mBridge was certainly motivated by the geopolitical implications of the project. Probably, the BIS does not want to further a project that could eventually undermine the west’s dominance over global payment rails,” said Brunello Rosa, author of Smart Money.
Led by the BIS, western central banks are currently developing an alternative to mBridge, known as Project Agora. Other active participants include the central banks of Korea, Switzerland and Mexico, as well as a host of commercial banks. However, the project is still at an early stage — and, because it seeks to improve correspondent banking rather than bypass it, is not as radically innovative as mBridge.
“The reality is that every central bank is now experimenting with wholesale CBDCs. The question is: to what extent will the different rails be interoperable with each other? There is a risk that these parallel experiments will lead to fragmentation,” says Rosa.
In parallel, several western central banks are also considering the development of wholesale CBDCs for domestic use in order to prepare for the potential widespread adoption of tokenisation in the financial system. The ECB carried out exploratory work on wholesale CBDCs this year, building on earlier trials conducted by the Banque de France. In July, the Bank of England said it intended to launch experiments to test wholesale CBDCs, among other innovations in wholesale payments.
In terms of retail CBDC, China is furthest ahead. Total transaction volumes in the e-CNY quadrupled between mid-2023 and mid-2024, according to the Atlantic Council. Yet, at 180mn as of July, the number of active e-CNY wallets is still dwarfed by the number of people who use WeChat Pay and Alipay, the country’s two leading private digital payment systems. Monthly active WeChat users numbered 1.36bn in March 2024.
Of the major western central banks, the ECB’s retail CBDC project is most advanced. In late 2025, the Frankfurt-based institution is set to announce whether it intends to move forward with the next phase of a digital euro.
The US, meanwhile, is lagging behind — and with Donald Trump’s impending ascent to the White House, substantial progress is very unlikely over the next four years.
“In terms of retail digital currencies, the new US administration seems to have anti-establishment suspicions about a state-issued CBDC and is much more likely to prioritise private digital currencies like crypto or dollar-based stablecoins,” said Andrea Filtri, co-head of research at Mediobanca.
“With respect to wholesale CBDCs, the US is the key architect of the global payment rails we use today, and therefore has no incentive to accelerate the development of a new system. Yet the Fed is still learning from others’ experiments — and, when the time comes, it could move quickly to play a key role in the new infrastructure, which will probably be more fragmented than the current one as digital currencies break the dollar’s monopoly and geopolitics is heading for deglobalisation.”