CBDC Explained Simply: Digital Money of the State and How It Works

CBDC (central bank digital currency) is an official digital currency — in other words, a digital form of a national currency issued directly by a central bank.

In this article, you’ll learn:

• what a central bank digital currency is and how it works,
• why governments need an official digital currency,
• how digital currency functions in practice,
• how it differs from cryptocurrencies and stablecoins,
• and what benefits and risks it brings for users, businesses, and the financial system.

By 2025, global interest in CBDCs is growing. More and more countries are running pilots, implementing offline modes, and testing cross-border settlements. Central banks are also exploring how digital currency can interact with tokenized assets.

A CBDC is state-issued digital money backed by the national economy and issued directly by the central bank. Unlike cashless (non-cash) funds, which exist in commercial bank accounts, a central bank digital currency is a direct liability of the central bank to the citizen.

Thus, a central bank digital currency is a digital form of cash transferred into an electronic environment — while retaining all government guarantees.

Central banks see CBDCs as a tool for economic resilience and sovereignty over payment infrastructure. But behind this concept lie specific practical reasons:

• Payment efficiency. Instant settlements, lower fees, and reduced dependence on global systems. Example: the mBridge project (China, UAE, Thailand, Hong Kong).
• Financial inclusion. The ability to use money without a bank account. Sand Dollar (Bahamas) and JAM-DEX (Jamaica) proved that digital currency can integrate remote regions into the economy.
• Programmable money. CBDCs can support targeted payments — for instance, social benefits that can be spent only on certain categories of goods.
• Sovereignty and stability. Governments reduce reliance on private stablecoins and international payment networks.

In effect, central banks’ roles in the digital economy are expanding. They no longer just issue money — they ensure the entire digital system remains reliable and secure.

To understand how a digital currency operates, it’s important to examine its architecture. There are three main models of CBDC:

1. Direct model: The central bank manages citizens’ accounts and wallets itself.
2. Two-tier model: The central bank issues the currency, while commercial banks and fintechs handle distribution.
3. Hybrid model: Combines both approaches.

Such a system enables offline payments, wallet limits, and programmable money — where transfers execute automatically when smart contract conditions are met.

In short, digital currency vs crypto is not a battle of technologies but a balance between speed and reliability. Cryptocurrencies offer freedom; CBDCs provide stability and government backing.

As of mid-2025, only a few countries have fully launched CBDCs. Their experience is valuable for understanding real-world numbers, pilot results, and lessons learned. Below are key examples — digital yuan, eNaira, and Sand Dollar — with confirmed data and rollout status.

• By mid-2024, e-CNY transactions exceeded ¥7 trillion (≈ $986 billion USD).
• In September 2024, the monthly pilot volume reached $56 billion USD.
• By July 2024, the e-CNY app had 180 million wallets.
• Earlier reports (June 2023) showed ¥16.54 billion in circulation, total transactions ¥1.79 trillion, and 118.26 million wallets.
• The pilot covers 26 cities and 17 provinces, integrated with major platforms and retail chains — usable via WeChat Pay / Alipay, public transport, and even vending machines.

e-CNY is the largest retail CBDC pilot, though data are published selectively, and per-capita activity remains under study.

• The Sand Dollar officially launched in October 2020.
• In 2023, the Central Bank of the Bahamas reported B$1,691,858 (≈ $1,691,858 USD) in circulation.
• During early pilots in 2020, small sums were issued: B$130,000 (~ $130,000) then B$75,125 (~ $75,125).
• KYC-based limits were applied: unregistered users up to B$500 (~ $500), monthly B$1,500 (~ $1,500); verified users up to B$8,000 (~ $8,000), monthly B$10,000 (~ $10,000); business wallets up to B$1,000,000 (~ $1 million).
• There were 118,955 user wallets (~ 30 % of the population).
• However, transaction activity largely depended on government stimulus — wallet top-ups fell when subsidies declined (e.g., from B$38.4 million to B$7.1 million).

The Sand Dollar remains one of the few fully launched CBDCs, though user engagement is still moderate.

• JAM-DEX launched in July 2022.
• Within three years, circulation reached J$257 million (~ $1.64 million USD).
• At launch, the government distributed J$1 million (~ $6,330) to employees for testing.
• By 2024, adoption exceeded initial handouts, though overall transaction activity remains modest.

JAM-DEX is an interesting case of incentivizing digital adoption through direct payments — but sustaining usage after incentives remains challenging.

• eNaira launched in October 2021 as Nigeria’s national digital currency.
• Although live, its share of the money supply remains small compared with cash and deposits.
• IMF and Nigerian reports frame eNaira as a driver for cashless payments and financial inclusion.
• It is one of Africa’s few CBDCs, but public data are limited, and integration with government services continues.

Each case shows a different approach: user incentives (Jamaica), tiered KYC (Bahamas), or integration with payment networks (China). Figures often include stimulus distributions rather than purely organic demand.

CBDCs balance security, transparency, and privacy. Projects like the Digital Euro and e-CNY use privacy-by-design principles — minimizing data and preserving “cash-like” privacy for offline payments.

In China’s pilots, limits for anonymous wallets reach ¥2,000 (≈ $280 USD) per transaction — illustrating how governments seek compromise between privacy and oversight.

Security of storage is equally critical — from hardware wallets to offline backup modules enabling transactions without an internet connection.

CBDC rollout poses both technological and economic challenges. Key risks include:

• Bank deposit outflow if users shift funds to central bank wallets.
• Cybersecurity and resilience: a single attack could impact an entire nation.
• Geopolitical barriers in cross-border settlements (e.g., mBridge).
• UX risks: accessibility without smartphones, wallet recovery, usability.

Central banks mitigate these threats through transaction limits, multi-level KYC, and architectures supporting offline modes.

In the coming years, CBDCs will evolve across several fronts:

• Mass-market retail use in Asia and Africa;
• Wholesale settlements and asset tokenization;
• Programmable government payments via smart contracts;
• Expansion of cross-border projects (mBridge, DREX).

For businesses, CBDCs offer fast, secure payment channels; for citizens, new forms of state-guaranteed digital payments. Cryptocurrencies and stablecoins will likely coexist with them — in symbiosis rather than competition.

CBDC is a state-backed digital form of national money integrated into the modern financial ecosystem. It combines fiat stability with blockchain flexibility, opening new horizons for the digital economy.

For some nations, it strengthens the central bank’s role in the digital economy; for others, it drives financial inclusion and technological independence. What’s clear is that official digital currencies are no longer experiments — they are becoming part of the future monetary landscape.