by Kristoffer Mousten Hansen
There has been a lot of talk about central bank digital currency (CBDC) recently, as central bankers around the world are discussing the possibility of launching their own CBDCs. Some of the problems of CBDCs have been pointed out already (see, e.g., here and here), and I will not discuss them too much here. The purpose of the present article is to answer the simple question: What exactly is a CBDC? How is it different from physical cash, demand deposits, and cryptocurrencies?
What It’s Not
Let us begin with what CBDCs definitely are not: they are not a new kind of cryptocurrency akin to bitcoin. While central banks have discussed issuing CBDC in the form of a token and using distributed ledger technology (DLT), this does not mean that central banks intend to let people trade and hold it without oversight, let alone that they will not centrally control the overall supply of it.