Central Bank Digital Currency (CBDC): What Is This Digital Form of Money?

The rise of Central Bank Digital Currencies (CBDCs), in Europe often referred to as the digital euro, raises many questions. An increasing number of central banks are exploring a digital form of public money that, just like cash, is issued by the central bank. At the same time, concerns are growing about privacy, financial oversight and potential impacts on savers. 

This article provides a clear and factual overview of what a CBDC is, why central banks are developing it, and which benefits and risks are discussed in the public debate.

What is a CBDC?

A Central Bank Digital Currency (CBDC) is digital money issued and guaranteed directly by a central bank. It can be seen as a modern digital version of physical fiat money, accessible through a mobile app or digital wallet.

The major difference from the funds in a regular bank account is that CBDC balances do not originate from a commercial bank. Instead, they sit entirely on the balance sheet of the central bank. As a result, they carry no counterparty or default risk and offer the same reliability as banknotes.

A new form of Public Money

Today, two forms of money exist:

• Public money: physical banknotes and coins issued by the central bank.
• Private money: digital bank deposits held at commercial banks. 

A CBDC introduces a third category: digital public money, providing citizens with a digital version of the most reliable form of money available.

How would a CBDC work?

A CBDC would be stored in a digital wallet managed either by:

• commercial banks or payment institutions,
• or in some models: directly by the central bank. 

Payments could be made via smartphone, card, or other digital means. It would function similarly to today’s payment apps, with one crucial difference: the money is held directly at the central bank.

Key Features of a CBDC

• Digital equivalent of cash: its value is determined by the central bank, not a commercial institution.
• Safe and without credit risk: bank deposits technically represent loans to the bank; CBDCs carry no such risk.
• Possible offline use: the ECB is exploring ways to allow small offline transactions, similar to cash.
• Potential programmability: in theory, rules could be embedded into the money. The ECB states it does not intend to use such features, but the technical possibility remains. This is a major concern among critics.

Why is a CBDC different from the Euro in your bank account?

The money in your bank account is private bank money, a claim on your bank to pay out euros. A CBDC, however, is the euro itself, issued by the central bank. This means: 

• no counterparty risk
• no dependence on commercial banks
• the same legal status as physical cash

Difference between CBDCs and Cryptocurrencies

A CBDC is sometimes confused with cryptocurrencies, but they differ significantly:

Types of Central Bank Digital Currency

CBDCs do not come in a single format. Worldwide, central banks are experimenting with various models, each serving different functions within the financial system.

Generally, CBDCs are categorised into Wholesale CBDCs and Retail CBDCs, with Retail CBDCs further divided by technical design.

Wholesale CBDC

A Wholesale CBDC is intended for financial institutions such as banks and clearing houses. It focuses on the underlying infrastructure of the financial system, not on consumer payments.

Key characteristics:

• Designed for interbank transactions
• Reduces liquidity and settlement risks
• Enables faster, more efficient large-scale transactions
• Supports real-time payments between banks

Retail CBDC

A Retail CBDC is a digital version of public money for everyday use by consumers and businesses. It functions similarly to digital cash, accessible through a wallet or app.

Its aim is to offer everyone access to safe, central-bank-guaranteed digital money, independent of commercial banks.

Retail CBDCs can follow two main models:

1. Account-Based Retail CBDC

Users hold a digital account in which their CBDC balance is stored. Transactions are verified via identity, similar to a regular bank account. 

This offers strong security and traceability but also raises questions about privacy and the central bank’s role in payment systems.

2. Token-Based Retail CBDC

A token-based CBDC functions more like digital cash. Users hold digital tokens that directly represent value, without needing a formal account. Verification is based on token ownership, enabling more anonymous, peer-to-peer transfers, potentially even offline.

Both models come with unique advantages and challenges and will shape how accessible, private and flexible a future digital euro can be.

Why are Central Banks developing CBDCs?

Central banks worldwide are working on CBDCs to future-proof payment systems. Payment behaviour is changing rapidly: cash use is declining, digital payments are rising, and large tech companies are increasingly active in financial services.

A CBDC aims to ensure that public money remains accessible and reliable in a fully digital economy.

Benefits of CBDCs

Although CBDC development is ongoing, policymakers and central banks identify several potential benefits:

1. A safe public alternative in a Digital Economy

As cash usage declines worldwide, a CBDC provides a digital form of public money guaranteed by the central bank, offering a stable alternative to commercial payment systems.

2. Reduced dependence on private providers

Most digital payments rely on banks, processors and large tech platforms. A CBDC could strengthen national autonomy and reduce reliance on private infrastructures.

3. Faster and more efficient payments

Especially for cross-border transactions, a CBDC can:

• shorten processing times
• lower settlement costs
• reduce intermediaries

4. Improved financial inclusion

In countries with limited access to banking services, CBDCs could offer broad access to digital money, even without a traditional bank account.

5. Greater transparency and oversight

Depending on design, digital money flows may become more transparent, helping regulators to:

• combat fraud and money laundering
• strengthen integrity of payment systems
• gain faster insight into financial stability

The CBDC is still in development by the Central Bank.

CBDC Risks: Is the Digital Euro Dangerous?

While CBDCs offer potential benefits, they also raise legitimate concerns. The debate focuses on privacy, government control and disruptions to the financial system.

Even though policymakers emphasise that the digital euro will be designed with strong privacy protections, risks remain part of the public discussion.

1. Reduced payment privacy

The biggest concern among citizens and experts is loss of privacy. Unlike physical cash, digital payments always leave a trace. Although the ECB states transaction data will not be accessible to commercial parties or governments, future laws or technological changes might alter this.

Core concern: Could the digital euro enable extensive monitoring of payment behaviour?

2. Potential programmability of money

A widely discussed risk is programmability. Technically, a CBDC could include conditions such as spending limits, time restrictions or designated use cases.

The ECB says it has no intention to apply such features, but the possibility remains.

Fear: Could money be steered or restricted through policy?

3. Shift of deposits to the Central Bank

If consumers can hold money directly at the central bank, this may weaken commercial bank balance sheets. In times of stress, people might move funds en masse into digital euros, increasing bank-run risks.

4. Increased central influence on payments

A digital euro could expand the central bank’s role in day-to-day payments. Supporters see this as stabilising; critics fear excessive central control.

International Examples of CBDCs

Countries worldwide are testing or launching CBDCs. Implementations differ widely depending on national goals and system design.

China – Digital Yuan (e-CNY)

China leads globally with its e-CNY pilot programmes across cities and sectors such as transport and e-commerce. Goals include modernising payments, reducing reliance on private platforms and strengthening the yuan’s international position.

Bahamas – Sand Dollar

The world’s first officially launched Retail CBDC, intended to improve financial inclusion on remote islands where banking access is limited.

Sweden – e-krona

With cash use rapidly declining, Sweden’s Riksbank aims to provide a safe public alternative to private digital payment solutions.

Eurozone – Digital Euro

The European Central Bank is exploring a digital euro that would function alongside cash as a public digital payment method within the EU. The project is currently in the preparation phase, focusing on design, privacy and the role of banks.

Is introduction of the digital euro dangerous?

CBDC in the Netherlands and Europe

The Netherlands and the rest of the Eurozone are actively researching the digital euro. The ECB leads the project, supported by national central banks such as De Nederlandsche Bank (DNB).

Current status

The digital euro is in its preparation phase, running until the end of 2025. Key activities include:

• system design
• technical options (wallet structure, privacy mechanisms) 
• collaboration with banks and payment institutions
• legal and regulatory frameworks 

Only after this phase will the ECB decide whether to introduce the digital euro. Implementation would still take several years.

What does this mean for the Netherlands?

DNB contributes through research, pilots and public communication. Focus areas include:

• Accessibility: easy to use, even without a bank account
• Privacy: payment data not visible to governments or commercial parties
• Role of banks: banks remain involved in distribution and customer services 

The Netherlands, being highly digitised, is a logical testing ground for future pilots.

CBDCs vs. Physical Gold and Silver

CBDCs and precious metals fulfil very different roles. A CBDC is state-issued digital money within the existing monetary system. It offers convenience and broad acceptance, but relies on digital infrastructure and may involve certain forms of oversight.

Physical gold and silver operate outside digital payment systems. They carry no counterparty risk, cannot be printed, and are globally recognised stores of value. They provide financial autonomy independent of banks, central authorities and technology.

For many investors, CBDCs and precious metals are therefore complementary, not substitutes: digital money for payments, precious metals for long-term stability and independence.

Conclusion: are CBDCs the future?

CBDCs represent a major step in the digital evolution of money. The digital euro aims to keep public money reliable and accessible in a digital economy. While CBDCs offer benefits such as efficient payments and reduced dependence on private providers, there are also concerns regarding privacy, programmability and the impact on banks.

The digital euro is still in the design phase, and many crucial decisions remain open. For investors, diversification remains sensible: CBDCs for practical use, and physical gold and silver for stability and independence.