Payments Academy
Central bank digital currency PAYMENT OPERATIONS STARTED LIVE 01 Central bank digital currency - CBDC, is digital money issued directly ACTIVE 02 Central banks exploring CBDCs - Most central banks exploring CBDCs are QUEUED 03 Intermediated model - where banks and payment providers distribute QUEUED 04 Emerging compromise - where small transactions are private QUEUED 05 Wholesale CBDC - also advancing, with projects testing QUEUED A central bank digital currency, or CBDC, is digital money issued directly by a central bank, as a liability of the central bank itself, in the same way that physical cash is. Step 1 of 5 Central bank digital currency STARTED Central bank digital currency CBDC, is digital money issued directly ACTIVE Central banks exploring CBDCs Most central banks exploring CBDCs are clear QUEUED Intermediated model where banks and payment providers QUEUED Emerging compromise where small transactions are private QUEUED Wholesale CBDC also advancing, with projects testing QUEUED A central bank digital currency, or CBDC, is digital money issued directly by a central bank, as a liability of the central bank itself, in the same way that physical cash is.
Central banks exploring CBDCs PAYMENT OPERATIONS IN PROGRESS LIVE 01 Central bank digital currency - CBDC, is digital money issued directly DONE 02 Central banks exploring CBDCs - Most central banks exploring CBDCs are ACTIVE 03 Intermediated model - where banks and payment providers distribute QUEUED 04 Emerging compromise - where small transactions are private QUEUED 05 Wholesale CBDC - also advancing, with projects testing QUEUED Most central banks exploring CBDCs are clear that it would sit alongside cash and bank deposits Step 2 of 5 Central banks exploring CBDCs IN PROGRESS Central bank digital currency CBDC, is digital money issued directly DONE Central banks exploring CBDCs Most central banks exploring CBDCs are clear ACTIVE Intermediated model where banks and payment providers QUEUED Emerging compromise where small transactions are private QUEUED Wholesale CBDC also advancing, with projects testing QUEUED Most central banks exploring CBDCs are clear that it would sit alongside cash and bank deposits
Intermediated model PAYMENT OPERATIONS IN PROGRESS LIVE 01 Central bank digital currency - CBDC, is digital money issued directly DONE 02 Central banks exploring CBDCs - Most central banks exploring CBDCs are DONE 03 Intermediated model - where banks and payment providers distribute ACTIVE 04 Emerging compromise - where small transactions are private QUEUED 05 Wholesale CBDC - also advancing, with projects testing QUEUED An intermediated model, where banks and payment providers distribute the CBDC and handle customers, keeps the existing financial structure and is the model most central banks favour. Step 3 of 5 Intermediated model IN PROGRESS Central bank digital currency CBDC, is digital money issued directly DONE Central banks exploring CBDCs Most central banks exploring CBDCs are clear DONE Intermediated model where banks and payment providers ACTIVE Emerging compromise where small transactions are private QUEUED Wholesale CBDC also advancing, with projects testing QUEUED An intermediated model, where banks and payment providers distribute the CBDC and handle customers, keeps the existing financial structure and is the model most central banks favour.
The emerging compromise: tiered privacy PAYMENT OPERATIONS IN PROGRESS LIVE 01 Central bank digital currency - CBDC, is digital money issued directly DONE 02 Central banks exploring CBDCs - Most central banks exploring CBDCs are DONE 03 Intermediated model - where banks and payment providers distribute DONE 04 Emerging compromise - where small transactions are private ACTIVE 05 Wholesale CBDC - also advancing, with projects testing QUEUED The emerging compromise is tiered privacy, where small transactions are private and large ones are subject to the usual checks. Step 4 of 5 The emerging compromise: tiered privacy IN PROGRESS Central bank digital currency CBDC, is digital money issued directly DONE Central banks exploring CBDCs Most central banks exploring CBDCs are clear DONE Intermediated model where banks and payment providers DONE Emerging compromise where small transactions are private ACTIVE Wholesale CBDC also advancing, with projects testing QUEUED The emerging compromise is tiered privacy, where small transactions are private and large ones are subject to the usual checks.
Wholesale CBDC work PAYMENT OPERATIONS COMPLETE LIVE 01 Central bank digital currency - CBDC, is digital money issued directly DONE 02 Central banks exploring CBDCs - Most central banks exploring CBDCs are DONE 03 Intermediated model - where banks and payment providers distribute DONE 04 Emerging compromise - where small transactions are private DONE 05 Wholesale CBDC - also advancing, with projects testing ACTIVE Wholesale CBDC work is also advancing, with projects testing whether tokenised central bank money can settle securities trades Step 5 of 5 Wholesale CBDC work COMPLETE Central bank digital currency CBDC, is digital money issued directly DONE Central banks exploring CBDCs Most central banks exploring CBDCs are clear DONE Intermediated model where banks and payment providers DONE Emerging compromise where small transactions are private DONE Wholesale CBDC also advancing, with projects testing ACTIVE Wholesale CBDC work is also advancing, with projects testing whether tokenised central bank money can settle securities trades

Key points of this lesson, in order.

0:00 / 2:40 Step 1 of 5

Central Bank Digital Currencies

CBDCs, Stablecoins and AI in Payments, Lesson 1 of 9, Narration 2:40, D15 Advanced and emerging payments

Correspondent bankingReconciliationSettlement

What you will learn

Your objective. By the end of this lesson, you will be able to explain central bank digital currencies. A central bank digital currency, or CBDC, is digital money issued directly by a central bank, as a liability of the central bank itself, in the same way that physical cash is.

Why it matters. For a BA, the practical point is that CBDCs are not a distant theory, they are a real product area, and the requirements skills used for any payment product, user journeys, limits, privacy, reconciliation and reporting, apply directly to them.

Chapter objective: Learner explains central bank digital currencies, stablecoins, and AI in payments, comparing them with existing rails on speed, settlement, risk, and regulation, and assesses a realistic use case. Learner practises this skill on realistic banking cases, explaining the reasoning clearly and using correct terminology throughout the work.

Key learning points

  • Central bank digital currency
  • Central banks exploring CBDCs
  • Intermediated model
  • The emerging compromise: tiered privacy
  • Wholesale CBDC work

Key terms

Correspondent banking: A service where one bank holds accounts for another bank so the second bank can make payments in currencies or countries where it has no branch.

Reconciliation: The process of comparing records from two sources, such as a bank statement and an internal ledger, to confirm they agree.

Settlement: The final movement of funds between banks to discharge obligations created by cleared payments. Settlement is usually made in central bank money or through correspondent accounts.

Payment flow diagram showing Central Bank Digital Currencies.

Practise this lesson

Exercise

Apply the concept in this lesson to a real banking scenario.

Use the definition, the example and the key points in this lesson.

  1. What to do. Explain the concept in your own words, give a banking example with an amount, and state what goes wrong if it is misunderstood.

Correct result. A correct answer names the concept accurately, uses a realistic banking example with a concrete amount, and identifies the consequence of getting it wrong.

Why. Understanding is not memorising a definition. It is being able to explain it, apply it, and spot the failure it prevents.

Check your understanding

Practice question

What is the key difference between a central bank digital currency and a stablecoin?

Takeaway and next step

What to remember

For a BA, the practical point is that CBDCs are not a distant theory, they are a real product area, and the requirements skills used for any payment product, user journeys, limits, privacy, reconciliation and reporting, apply directly to them.

Follow a payment through every stage, from instruction to beneficiary credit, and note where it can stop.

Open the Payment Lifecycle Simulator →

Builds on "System design deep dive: payment APIs at scale".

Transcript and full text

Show transcript

A central bank digital currency, or CBDC, is digital money issued directly by a central bank, as a liability of the central bank itself, in the same way that physical cash is. This is what makes a CBDC different from the money in a commercial bank account, which is a liability of the commercial bank, and different from a stablecoin, which is a liability of a private issuer. A retail CBDC is intended for use by the general public, as a digital alternative to cash, while a wholesale CBDC is intended for use between banks and financial institutions, as a settlement asset. Most central banks exploring CBDCs are clear that it would sit alongside cash and bank deposits, not replace them, and that its purpose is to keep central bank money relevant in an economy where cash use is falling. The design choices for a CBDC are significant and still being debated. A direct model, where the central bank holds accounts for everyone, gives the central bank a direct relationship with the public but creates enormous operational and privacy challenges. An intermediated model, where banks and payment providers distribute the CBDC and handle customers, keeps the existing financial structure and is the model most central banks favour. Other choices include whether the CBDC pays interest, whether it works offline, how much transaction data the central bank can see, and what limits apply to holdings. Privacy is particularly sensitive, because a CBDC that lets the state see every transaction would be unacceptable, while a fully anonymous CBDC would be unusable for anti money laundering purposes. The emerging compromise is tiered privacy, where small transactions are private and large ones are subject to the usual checks. Live pilots are already running. China has the most advanced retail CBDC, the digital yuan, which has been used in major cities and at large events. India has piloted the digital rupee for both retail and wholesale use. The European Central Bank is preparing a digital euro, and several other central banks are at various stages of research or pilot. Wholesale CBDC work is also advancing, with projects testing whether tokenised central bank money can settle securities trades and cross border payments faster than today's correspondent banking. For a BA, the practical point is that CBDCs are not a distant theory, they are a real product area, and the requirements skills used for any payment product, user journeys, limits, privacy, reconciliation and reporting, apply directly to them. A retail CBDC is money issued by the central bank, in digital form, for use by the public. It is different from the reserves that banks hold at the central bank, because reserves are only for banks, and it is different from commercial bank money, because it is a direct claim on the central bank, not on a commercial bank. The design choices are the architecture, whether the CBDC is held directly at the central bank or through intermediaries, the privacy, whether transactions are anonymous or traceable, and the limits, whether holdings are capped to prevent a run on commercial banks. The Bank of England's digital pound consultation proposes a cap of 10,000 to 20,000 pounds per person, precisely to prevent a run. A wholesale CBDC is different: it is for settlement between banks, not for the public. A wholesale CBDC settles in central bank money, in real time, and can be used for cross-border payments, for securities settlement, and for the settlement of tokenised assets. Project mBridge, run by the Bank for International Settlements Innovation Hub with the central banks of China, Hong Kong, Thailand, the UAE and Saudi Arabia, uses a wholesale CBDC platform to settle cross-border payments in seconds, with the central banks as participants. The platform reached minimum viable product stage in 2024, and the participating central banks are now deciding whether to operate it as a live service. The two-tier model is the design most central banks have chosen. The central bank issues the CBDC and holds the liability, and the commercial banks and payment firms distribute it, onboard the customers, and handle the compliance. The model preserves the role of commercial banks, avoids the central bank having to serve millions of retail customers, and allows innovation at the distribution layer. The model requires the central bank to set the rules for the distributors, including the onboarding, the screening, and the limits, and to supervise them. A CBDC that is distributed without rules will be misused, and a CBDC with rules that are too strict will not be used.

A central bank digital currency, or CBDC, is digital money issued directly by a central bank, as a liability of the central bank itself, in the same way that physical cash is. This is what makes a CBDC different from the money in a commercial bank account, which is a liability of the commercial bank, and different from a stablecoin, which is a liability of a private issuer. A retail CBDC is intended for use by the general public, as a digital alternative to cash, while a wholesale CBDC is intended for use between banks and financial institutions, as a settlement asset. Most central banks exploring CBDCs are clear that it would sit alongside cash and bank deposits, not replace them, and that its purpose is to keep central bank money relevant in an economy where cash use is falling.

The design choices for a CBDC are significant and still being debated. A direct model, where the central bank holds accounts for everyone, gives the central bank a direct relationship with the public but creates enormous operational and privacy challenges. An intermediated model, where banks and payment providers distribute the CBDC and handle customers, keeps the existing financial structure and is the model most central banks favour. Other choices include whether the CBDC pays interest, whether it works offline, how much transaction data the central bank can see, and what limits apply to holdings. Privacy is particularly sensitive, because a CBDC that lets the state see every transaction would be unacceptable, while a fully anonymous CBDC would be unusable for anti money laundering purposes. The emerging compromise is tiered privacy, where small transactions are private and large ones are subject to the usual checks.

Live pilots are already running. China has the most advanced retail CBDC, the digital yuan, which has been used in major cities and at large events. India has piloted the digital rupee for both retail and wholesale use. The European Central Bank is preparing a digital euro, and several other central banks are at various stages of research or pilot. Wholesale CBDC work is also advancing, with projects testing whether tokenised central bank money can settle securities trades and cross border payments faster than today's correspondent banking. For a BA, the practical point is that CBDCs are not a distant theory, they are a real product area, and the requirements skills used for any payment product, user journeys, limits, privacy, reconciliation and reporting, apply directly to them.

A retail CBDC is money issued by the central bank, in digital form, for use by the public. It is different from the reserves that banks hold at the central bank, because reserves are only for banks, and it is different from commercial bank money, because it is a direct claim on the central bank, not on a commercial bank. The design choices are the architecture, whether the CBDC is held directly at the central bank or through intermediaries, the privacy, whether transactions are anonymous or traceable, and the limits, whether holdings are capped to prevent a run on commercial banks. The Bank of England's digital pound consultation proposes a cap of 10,000 to 20,000 pounds per person, precisely to prevent a run.

A wholesale CBDC is different: it is for settlement between banks, not for the public. A wholesale CBDC settles in central bank money, in real time, and can be used for cross-border payments, for securities settlement, and for the settlement of tokenised assets. Project mBridge, run by the Bank for International Settlements Innovation Hub with the central banks of China, Hong Kong, Thailand, the UAE and Saudi Arabia, uses a wholesale CBDC platform to settle cross-border payments in seconds, with the central banks as participants. The platform reached minimum viable product stage in 2024, and the participating central banks are now deciding whether to operate it as a live service.

The two-tier model is the design most central banks have chosen. The central bank issues the CBDC and holds the liability, and the commercial banks and payment firms distribute it, onboard the customers, and handle the compliance. The model preserves the role of commercial banks, avoids the central bank having to serve millions of retail customers, and allows innovation at the distribution layer. The model requires the central bank to set the rules for the distributors, including the onboarding, the screening, and the limits, and to supervise them. A CBDC that is distributed without rules will be misused, and a CBDC with rules that are too strict will not be used.

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