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Central Bank Digital Currencies: A common misunderstanding

There has been a lot of talk recently about Central Bank Digital Currencies (CBDCs)

Central banks around the world, including those in China (People’s Bank of China) and the UK (Bank of England) have shared plans or ideas about how they will make their currencies digital.

The idea of a digital pound (or digital Yuan, or digital dollar) is often misunderstood. Many people have virtually stopped using cash:

  • In China, people use AliPay or WeChat for virtually all daily transactions
  • In the UK and US, people use credit/debit cards to pay businesses, and apps like Venmo or Zelle to pay individuals

People’s day-to-day experience with money is that it’s all digital: numbers on computers. So how might CBDCs be any different?

Let’s take a simple transaction: I send money from my UK bank account to someone else’s UK bank account. This sure seems like I’m transferring digital pounds. But this transaction simply transfers an obligation (a debt) denominated in pounds between parties. Before the transaction, the bank owed me some money. Now, the bank (or some other bank) owes a different customer some money. No actual pounds (i.e. no central bank currency) changed hands.

The fact that a payment happens electronically doesn’t mean that the thing you’re trading is digital

You can trade ‘pork bellies futures’ quickly, and using nothing but a computer. But no one claims pork bellies are digital. When people trade, they’re effectively trading IOUs, and not the actual bellies.

CBDCs already exist, but not everyone can use them

Retail banks and other important financial institutions already have digital central bank money. In the UK, these are called ‘central bank reserves’. They’re just like bank accounts that you and I have, except that the ‘bank’ where the account is held is the Bank of England, i.e. the entity that issues the money in which the account is denominated.

If you have a piece of paper signed by the Bank of England governor, saying that the Bank owes you 50 GBP, this is actually 50 GBP. The same goes for a numbers on a screen (say if the Bank of England gave you an account, along with a way to see your balance online). But the ‘money’ shown in your regular bank account is not central bank money: it’s an obligation/debt of your bank (HSBC, Barclays, etc.).

Bank balances are similar, but not the same

Maybe you’re not convinced by what I’ve written above. Maybe you think that, because the money in your current account (aka checking account) is just as useful as central bank money, that it really isn’t any different.

If so, consider this question: If you have 200k GBP in your current account, and the bank goes bust, do you still own 200k GBP? (BTW I chose 200k GBP as as the figure here, because then any arguments about FSCS, the UK’s FDIC equivalent, are irrelevant.)


A Central Bank Digital Currency would allow individuals to hold and transfer ‘real’ pounds (M0). Currently, only banks and selected other financial institutions can open accounts at the Bank of England.