Too embarrassed to ask: what is a central bank digital currency?
Governments around the world are considering creating their own digital currencies. But what are they and how do they compare to cryptocurrencies such as bitcoin?
Cryptocurrencies such as bitcoin and ethereum have divided investor opinion. Some people think that they represent the future of money and a huge technological advance. Others think that the whole thing is a scam, a bubble, or just hopelessly idealistic.
But one thing is clear: governments are increasingly keen on the possibilities that might arise from issuing fully-digital currencies themselves. Hence the growing interest in central bank digital currencies, or CBDCs for short.
A CBDC is simply a government-backed digital currency. A digital pound – or “Britcoin”, as it’s been nicknamed – would be similar to the paper pound, in that the central bank would control its issuance.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
This is perhaps the most important difference between CBDCs and cryptocurrencies. Cryptocurrencies are decentralised. The whole point of bitcoin is that it represents a form of money that cannot be created at will by a government or a central bank. Instead it derives its value from a network of freely-participating individuals.
There are some benefits to CBDCs. In theory they should cut down on transaction costs. And in developing markets in particular, they should make it easier for everyone to get a bank account.
However, there are also some serious disadvantages. Bitcoin is anonymous, but transactions made using CBDCs would be easily tracked by the authorities. This gives rise to privacy concerns.
CBDCs might also replace cash altogether. That would make it easier for central banks to impose policies – such as negative interest rates – that effectively operate as a tax on savers. So the next time the economy is deemed to require monetary stimulus, the central bank could effectively force people to go out and spend their money.
This might sound like something from a dystopian science-fiction novel, but most governments around the world are now working on CBDCs. The Bahamas already has the “sand dollar” which was launched last year. Among major economies, trials of a digital yuan are well advanced in China. And in the UK, the Bank of England and the Treasury are now looking into the idea of “Britcoin”.
So even if cryptocurrencies aren’t the future of money, there’s a good chance that they’ve helped to bring forward the end of cash.
To find out more about the monetary system and central banks in general, subscribe to MoneyWeek magazine.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
-
Top 10 areas with the biggest inheritance tax bills – is your town on the list?
People in some of the wealthiest parts of London pay the most inheritance tax – but there are a few areas outside the capital where big bills are paid when a loved one dies
-
Inheritance tax reform ‘largely protects family farms’ – what are the alternatives?
Independent analysis of the government’s inheritance tax reforms has found eight out of 10 farming estates will be able to pay their IHT bill without having to sell off parts of the farm
-
Halifax: House price slump continues as prices slide for the sixth consecutive month
UK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?
UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
-
Pension savers turn to gold investments
Investors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
-
Where to find the best returns from student accommodation
Student accommodation can be a lucrative investment if you know where to look.
-
The world’s best bargain stocks
Searching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
-
Revealed: the cheapest cities to own a home in Britain
New research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
-
UK recession: How to protect your portfolio
As the UK recession is confirmed, we look at ways to protect your wealth.
-
Buy-to-let returns fall 59% amid higher mortgage rates
Buy-to-let returns are slumping as the cost of borrowing spirals.