How-to guide: Understanding the legal and regulatory framework of Central Bank Digital Currency (CBDC) (USA)

Introduction

This guide provides an overview of the laws and regulations relevant to Central Bank Digital Currency (CBDC). It explores the challenges and benefits associated with CBDC and offers insights into its status in the United States. It is aimed at in-house counsel, private practice lawyers and compliance personnel.

This guide covers:

What is CBDC?
Benefits of adoption
Concerns and pitfalls
What businesses need to know about the status of CBDC in the United States

This guide can be used in conjunction with the following How-to guides: How to address tax and accounting considerations when using cryptocurrency, Implementing a policy to avoid cryptocurrency-related scams in business, How to assess your organization for money laundering and terrorist financing risk; Checklists: Currency transaction reporting requirements; and Quick view: Introduction to cryptocurrency and how it works.

1.1 Definition of CBDC

The US Federal Reserve defines Central Bank Digital Currency (CBDC) as ‘a digital liability of a central bank that is widely available to the general public.’ Essentially, CBDC is a digital form of a country’s fiat currency (a national currency not backed by a commodity such as gold or silver). It is designed to function similarly to physical cash or bank deposits, serving as a medium of exchange, a store of value, and a unit of account.

The key feature of CBDC is that they are issued and regulated by a nation’s central bank, making them an official and legal form of currency. As digital financial ecosystems expand, CBDC represent a significant evolution in how money is used, and how payments are made.

1.1.1 Central bank money

‘Central bank money’ refers to public money that is issued by and is a liability of the central bank. This includes physical currency, such as paper money and coins (cash) issued by the Federal Reserve, as well as digital balances held by commercial banks at the Federal Reserve. These forms of money are backed by the central bank and can be trusted. These are considered the most secure and stable forms of currency within the financial system as there is no associated credit or liquidity risk.

Central bank money serves as the backbone of the country’s monetary framework and is supported by the full faith and credit of the government, ensuring the stability and reliability of the financial system and the economy. In contrast to ‘commercial bank money’, which is private money created through the lending activities of private banks and is a liability of those banks’

1.1.2 Different from existing digital money

Existing digital money, such as the balances held in checking or savings accounts, is essentially a liability of the commercial bank where the account is held. This means that the security and stability of these digital funds carries the credit risk of the issuer and is subject to the financial health and risk management practices of the individual bank. Should a commercial bank face insolvency, the deposits held at that bank could be at risk, even with deposit insurance schemes in place.

In contrast, CBDC, as a direct liability of the central bank does not carry any credit risk and provides a more secure and stable form of digital currency. The central bank backing eliminates the counterparty risk associated with commercial bank deposits and offers a safer alternative for digital transactions and savings. With a CBDC, the public has direct access to a form of digital money that is as secure and stable as physical cash, but with the added convenience and efficiency of digital transactions. This has the potential to create a more resilient financial system, where individuals and businesses have a reliable alternative to private bank deposits, especially in times of financial stress.

1.1.3 Fiat money

CBDC, like traditional central bank money, are considered fiat money. Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical asset such as gold or silver. Instead, value is derived from the trust and confidence that individuals and businesses place in the issuing government and its central bank. The value of fiat money is maintained through the central bank’s monetary policy and regulatory framework. This allows for greater flexibility in managing the economy, as the central bank can adjust the money supply and interest rates to achieve economic objectives such as controlling inflation, managing employment levels, and promoting economic growth.

1.2 Types of CBDC

There are two types of CBDC: wholesale CBDC and retail CBDC.

Wholesale CBDC aim to enhance the efficiency and security of large-scale financial transactions and cross-border payments.
Retail CBDC focus on providing a secure, efficient, and inclusive payment method for the public.

Each type of CBDC serves distinct purposes and targets different user groups within the financial markets; however, both retail and wholesale CBDC can be used domestically and cross-border. The US Treasury Department is exploring the implementation of CBDC but has yet to make any decision on this (for further details see section 4 below).

1.2.1 Wholesale CBDC

Wholesale CBDC are designed primarily for use by financial institutions such as banks, payment service providers, and other entities that participate in large-scale financial transactions. These digital currencies act like central bank reserves and are used to facilitate the settlement of interbank transfers, securities transactions, and other high-value payments. The primary goal of wholesale CBDC is to improve the efficiency and security of the existing financial infrastructure.

In 2021, the Bank of International Settlements (BIS) Innovation Hub, Banque de France, Swiss National Bank, and Accenture demonstrated the feasibility of using wholesale CBDC for foreign currency clearing through Project Jura.

Several countries have progressed in wholesale CBDC experimentation. Early experiments were conducted by the Bank of Canada with Project Jasper, and the South African Reserve Bank has focused on wholesale pilots rather than retail. In Europe, the Swiss National Bank successfully issued bonds settled with a wholesale CBDC. Central banks considering wholesale CBDC include the Reserve Bank of Australia, which conducted a proof of concept in 2021 and a pilot scheme this year.

Until recently, the BIS was collaborating with central banks from China, Hong Kong, the United Arab Emirates, and Thailand to test an interoperable Multiple Central Bank Digital Currency (m-CBDC) after four years of involvement. The BIS announced in October 2024 that it was handing the project over to the partners.

The European Central Bank (ECB) is investigating the use of distributed ledger technology, and the New York Federal Reserve has been exploring the potential benefits and risks of CBDC from a variety of angles through technological research and experimentation. See, CBDCs come in two forms: retail and wholesale. What’s the difference?

1.2.2 Retail CBDC

Retail CBDC are designed for use by the general public in their daily transactions. They aim to provide a digital form of central bank money that is accessible to everyone, similar to cash but in a digital format. This will enable individuals and businesses to make payments, store value, and conduct transactions directly. The primary aim of retail CBDC is to provide a secure, efficient, and inclusive payment method for the general population.

The first retail CBDC, the Sand Dollar, was launched in the Bahamas in 2019. Pegged to the US dollar, it aims to enhance financial access for the 18% of the Bahamian population that is unbanked and to strengthen the country’s payment system resilience.

In the Asia–Pacific region, growing demand for digital payments drives the exploration of retail CBDC. The area boasts a booming e-commerce market and widespread mobile payment usage. China has extensively promoted retail CBDC payments with its e-CNY, even marketing it to foreigners during the Winter Olympics in February 2022, with transactions reaching approximately $315,000 daily. Since that promising start, however, continued adoption of the e-CNY has slowed. The currency remains available in only a few selected pilot cities, and the total volume of transactions conducted by means of e-CNY since its introduction is US $260 billion, as of January 2023. The Bank of Thailand is also testing a retail CBDC to keep up with rapid digitization impacting financial infrastructure. A pilot launch of retail CBDC in 2023 was embraced by 140 merchants, 4,000 consumers, and two of the country’s largest banks. However, the central bank recently announced that it has no ’immediate plan’ for a digital currency.

Elsewhere, the ECB, Bank of England, and Bank of Japan are developing prototypes and conducting consultations on potential privacy and financial stability concerns, according to the Atlantic Council’s CBDC Tracker, an interactive tool that monitors the development and implementation of CBDC globally. In contrast, the development of a retail CBDC in the United States remains in the research phase.

1.3 Difference between CBDC and cryptocurrency

Whilst CBDC and cryptocurrency are both forms of digital currency, there are some differences between them.

1.3.1 CBDC is issued and backed by a central bank

Legal tender

CBDC are legal tender and are recognized by law as an acceptable means of payment for all public and private debts within the issuing country. This offers a significant advantage over cryptocurrencies, which are often treated as assets or commodities rather than as official means of payment.

Direct liability of central bank

CBDC are directly issued and managed by the central bank, which means they operate within the existing financial system and are subject to governmental policy and regulation. Central banks ensure the integrity and security of the currency, providing safeguards against systemic risks and financial crises. In times of financial instability, the central bank can act as a lender of last resort, further ensuring the security and reliability of CBDC.

Stability of value

The value of CBDC is fixed by the nation’s fiat currency (which indirectly is stabilized by the central bank’s regulatory framework and monetary policies). This stability makes CBDC suitable for everyday transactions, savings, and other financial activities, providing a consistent and predictable medium of exchange.

Consumer protection

CBDC are officially recognized for transactions and offer consumer protections like traditional fiat currencies. This can include protections such as fraud prevention and regulatory oversight to prevent illicit activities.

1.3.2 Cryptocurrency is issued by a private party on an exchange

Less secure system

Cryptocurrencies, such as Bitcoin and Ethereum, are typically issued by private entities and exist on decentralized blockchain networks. They are not controlled by a central authority to oversee and protect the system. Users are responsible for their own security, which can lead to significant risks if they do not take adequate precautions. Hacks, fraud, and technical failures have plagued the cryptocurrency ecosystem, resulting in substantial financial losses for users.

Volatile value

Cryptocurrencies are highly volatile, with values influenced by speculative trading, market sentiment, and regulatory changes. This volatility leads to significant price fluctuations, making them unreliable as a medium of exchange and store of value.

No protection if exchange collapses

A major risk of cryptocurrencies is the lack of protection if an exchange collapses. Cryptocurrency exchanges, where users buy, sell, and store their digital assets, are often unregulated and uninsured. If an exchange goes bankrupt or is hacked, users can lose their funds without any recourse. High-profile cases like Mt. Gox, FTX, and QuadrigaCX have exposed these vulnerabilities leading to significant financial losses for users.

No consumer protection or oversight

Cryptocurrencies are typically decentralized and not government-issued, often lacking the consumer protection and regulatory oversight of CBDC. This can heighten the risks of fraud, theft, and volatility.

In summary:

CBDC	Cryptocurrency
Issued and backed by a central bank	Issued by a private party on an exchange
Legal tender	Less secure system
Stable value	Volatile value
Consumer protection	No protection if exchange collapses
Direct liability of central bank	Increased risk of fraud, theft, and volatility

Section 2 – Benefits of adoption

2.1 Universally accepted electronic currency

CBDC has universal appeal across all sectors of the economy. This brings significant benefits to consumers and small businesses by making financial transactions more accessible and inclusive. Small businesses can streamline operations and reduce reliance on traditional banking services, leading to increased efficiency and lower operational costs.

Additionally, CBDC are designed to complement physical cash, providing a seamless transition for those who prefer cash transactions while offering a convenient and secure digital alternative.

2.1.1 Financial inclusion

Central banks aim to enhance financial inclusion by providing improved access to fiat currency through CBDC. However, evidence supporting this claim in existing projects is limited. For instance, Nigeria launched the e-Naira in October 2021, with the Central Bank of Nigeria promoting financial inclusion by offering services to underserved communities. Yet, access to e-Naira currently requires a bank account, which excludes a sizable portion of Nigeria’s population, as 55% are unbanked. As a result, the e-Naira has not reached most Nigerians and remains unpopular, with only 0.5% actively using it. The MIT Digital Currency Institute research, in collaboration with Maiden Labs, highlights similar shortcomings in CBDC initiatives regarding financial inclusion noting that ‘assertions that CBDC could strengthen inclusion are difficult to prove’ because they vary widely in design and function across different countries. The potential of CBDC to improve financial inclusion depends on careful consideration of the needs of users (especially the most vulnerable), the design of the CBDC, and the specific attributes that could make the CBDC more accessible.

2.2 Reduce transaction costs and times

One of the key advantages of CBDC is their potential to significantly reduce transaction costs and times.

Traditional financial transactions often involve multiple intermediaries, including private exchanges that charge fees for each transaction, thereby increasing the overall cost. CBDC eliminates the need for these intermediaries by enabling direct transfers between parties, which can drastically reduce transaction fees. This is particularly beneficial for international transactions, which are typically subject to high fees and lengthy processing times due to the involvement of multiple banks and clearinghouses.

Wholesale CBDC can streamline the settlement process by leveraging blockchain and distributed ledger technologies, enabling real-time gross settlement (RTGS) systems that reduce counterparty risk and enhance liquidity management.

Wholesale CBDC can improve cross-border payments by providing a more efficient and transparent mechanism, allowing for faster cross-border transactions, better cash-flow management and a reduction in the need for short-term borrowing. The instantaneous nature of CBDC transactions can offer real-time financial management and reporting, providing businesses with up-to-date information on their financial status.

Retail CBDC can offer faster, more secure digital transactions, minimizing fraud and theft risks.

2.3 Public policy considerations

Central banks have direct control over CBDC, which simplifies the implementation of monetary policy. This can help manage interest rate adjustments and quantitative easing, by allowing central banks to distribute money more efficiently and transparently. The availability of real-time data on money flows and economic activity can help central banks to implement targeted monetary policies, such as direct transfers to individuals during economic downturns.

Another significant public policy benefit of CBDC is the enhanced ability to detect and prevent financial crimes. With transactions recorded on a secure and transparent ledger, it becomes easier to track and analyze financial flows, aiding in the detection of illicit activities such as money laundering and fraud. This increased transparency also enhances regulatory oversight and compliance, reducing the risk of financial instability caused by fraudulent activities.

CBDC can streamline international trade and investment, facilitating economic cooperation and growth. This is particularly beneficial for small and medium-sized enterprises (SMEs), which often face significant barriers when engaging in cross-border transactions due to high costs and regulatory complexities.

2.4 Safety and liquidity

The safety and liquidity of CBDC are crucial considerations in their design and implementation. As the use of physical cash declines in favor of digital payments, CBDC offers a secure and liquid alternative that can sustain economic activity and consumer confidence. Unlike private digital currencies, which may be subject to volatility and lack of regulatory oversight, CBDC provide a stable and reliable medium of exchange backed by the central bank. This stability can enhance economic resilience during financial crises, thereby contributing to overall economic stability.

Additionally, CBDC can mitigate the risks associated with the decline in cash usage, ensuring that all segments of the population have access to a secure and efficient means of payment, thus bolstering financial system stability and public trust. The introduction of CBDC can also reduce the risks associated with private digital currencies, such as cybersecurity threats and operational failures, by providing a regulated digital currency.

Section 3 – Concerns and pitfalls

3.1 Privacy

One of the primary concerns surrounding CBDC is the potential erosion of privacy. Unlike traditional cash, which offers a high degree of anonymity, CBDC transactions can be traced back to the individuals involved. While this traceability is beneficial for preventing illicit activities such as money laundering and terrorism financing, it poses a significant threat to personal privacy. Potentially, every financial transaction could be monitored, creating a detailed record of an individual’s spending habits and financial history. Such a system could lead to a surveillance state, where the government has unprecedented access to private financial information.

3.2 Complexity

The implementation of CBDC adds complexity to the existing financial infrastructure. The digital infrastructure required to support CBDC must be robust, secure, and resilient against cyber threats, necessitating significant investments in technology and continuous updates to maintain system integrity and security. Integrating CBDC into current financial systems can be technically challenging and poses substantial risks, potentially disrupting operations and requiring extensive modifications to banking and payment systems.

Regulators must keep pace with rapid technological advancements to effectively oversee and manage the new digital currency landscape. The regulatory framework needs to evolve quickly to address issues related to security, privacy, and anti-money laundering (AML) compliance, demanding significant resources and expertise.

3.3 Disruption of financial sector

The introduction of CBDC has the potential to significantly disrupt the traditional financial sector. Banks may face increased competition as individuals and businesses might prefer holding CBDC directly with the central bank rather than in commercial bank accounts. This shift could reduce the deposits held by banks, affecting their ability to lend, altering their operations, and potentially impacting their profitability.

However, the beneficial effects of CBDCs on monetary policy remain uncertain. While CBDCs could provide central banks with new tools for implementing monetary policy, and while, as noted above, transactions will be simplified and speeded up, CBDCs will also introduce new challenges. For instance, the ease of transferring funds from traditional bank accounts to CBDCs during a financial crisis will facilitate transfers of funds but could also exacerbate bank runs. Additionally, the velocity of money and how quickly it circulates through the economy could be affected in unpredictable ways, complicating the central bank’s efforts to manage economic stability and inflation.

Section 4 – Current status of CBDC in the United States

4.1 CBDC in the United States

In the United States, the development of a CBDC is being approached with caution. The Federal Reserve is actively researching the potential for a digital dollar, focusing on financial stability, monetary policy, and banking sector implications.

Ongoing pilot programs and collaborations with academic and private sector entities are exploring the digital dollar’s technical and operational feasibility. The US approach involves a comprehensive examination of risks and benefits, emphasizing stakeholder engagement and public consultations to shape the future of digital currency.

4.2 Federal Reserve study

The US Federal Reserve has been actively exploring the concept of a CBDC, but it has yet to make a formal decision on whether to issue one. In January 2022, the Federal Reserve published a discussion paper titled Money and Payments: The US Dollar in the Age of Digital Transformation highlighting the need to maintain transaction privacy and security while ensuring compliance with AML and combating the financing of terrorism (CFT) regulations. This paper outlines the potential benefits and risks of a US CBDC and invited public comments to guide further research and policymaking. The summary report of the public comments, from April 2023, is published here.

The Federal Reserve’s exploration of CBDC is rooted in ensuring that any future digital currency would enhance, rather than disrupt, the current financial system. The study examines several aspects of CBDCs, including their potential to enhance financial inclusion, improve cross-border payments, and provide the public with access to a risk-free digital form of money. However, the MIT study at section 2.1.1 did not find proof of CBDC leading to financial inclusion.

On March 1, 2023, the US Treasury Department announced the formation of an interagency working group (IWG) dedicated to exploring the development of a US CBDC. This initiative assesses the viability of launching either a wholesale CBDC, a retail CBDC, or both. The IWG convenes regularly to discuss how each option could advance US policy goals, considering the evolving landscape of digital finance and its implications for the economy.

On April 18, 2023, the US Federal Reserve Board (FRB) highlighted key questions for policymakers about adopting a US CBDC. The FRB stressed the need to thoroughly examine potential risks to US financial stability. Key considerations include protecting consumer and business privacy, enhancing payment system efficiency, promoting financial inclusion, and assessing the impact of CBDCs on cross-border payments and the US dollar’s role in international trade. These discussions highlight the complexities and opportunities associated with integrating digital currencies into the existing financial framework.

The Working Paper Financial Stability Implications of CBDC (April 2024) delves further into several critical concerns, particularly from a financial stability perspective. The paper discusses the potential risks a CBDC could pose to the traditional banking system, such as the possibility of a large-scale shift of deposits from commercial banks to the central bank. This could reduce the availability of credit, as banks would have fewer deposits to lend out, leading to tighter financial conditions.

The paper also examines the impact of a CBDC on monetary policy. For example, a widely adopted CBDC could alter how the Federal Reserve implements monetary policy. The paper suggests that new tools or approaches might be necessary to manage the economy effectively.

The introduction of a CBDC could enhance financial inclusion by providing unbanked populations with easier access to digital payments and financial services. However, as noted at section 2.1.1, the effectiveness of this inclusion is still under scrutiny (see MIT study above).

4.3 The Federal Reserve’s ongoing technological initiatives related to CBDC

The Federal Reserve is actively exploring digital currencies through various experiments to understand their potential and limitations better. Notable examples include Project Hamilton, a multiyear research collaboration between the Federal Reserve Bank of Boston and MIT's Digital Currency Initiative, which examines the technical feasibility of a CBDC for a large economy such as the United States. Additionally, the Innovation Center at the Federal Reserve Bank of New York collaborates with the Bank for International Settlements on financial innovations, while the Technology Lab at the Board of Governors of the Federal Reserve System is conducting several CBDC experiments.

4.4 Legislative response

4.4.1 CBDC Anti-Surveillance State Act (HR 5403)

The CBDC Anti-Surveillance State Act (HR 5403) was introduced in the US Congress on September 12, 2023, seeking to amend the Federal Reserve Act to restrict the authority of Federal Reserve Banks concerning CBDC. The legislation prohibits Federal Reserve Banks from offering products or services directly to individuals, maintaining individual accounts, or issuing a CBDC or similar digital asset to individuals. The bill also forbids Federal Reserve Banks from indirectly issuing CBDCor employing them for monetary policy purposes. The bill passed the House, and as of June 4, 2025 is under review by the Senate Committee on Banking, Housing, and Urban Affairs. It is unclear whether further action will be taken before Congress adjourns.

4.4.2 The Digital Dollar Pilot Prevention Act (HR 3712)

The Digital Dollar Pilot Prevention Act (HR 3712) was introduced in May 2023 to prevent the Federal Reserve from testing the feasibility of issuing a CBDC. The bill is currently under review by the House Committee on Financial Services.

Congressman Alex Mooney (R-WV) (who introduced the bill) stated:

Congress cannot afford to compromise on the issue of CBDCs. These digital currencies pose a threat to the freedoms of law-abiding Americans and are already being used by authoritarian regimes to suppress dissent. That’s why it’s crucial to close this loophole and prevent the Federal Reserve from circumventing the will of Congress. I am proud to introduce this legislation to accomplish that goal.

4.4.3 Financial services and general government appropriations (HR 4664)

The Financial Services and General Government Appropriations Act of 2024 (HR 4664), which includes an amendment to limit the authority of the US Securities and Exchange Commission (SEC) over crypto-asset transactions, has passed the House of Representatives. As of June 4, 2025, further proceedings on the bill have been postponed.

4.4.4 The Electronic Currency and Secure Hardware Act (ECASH) (HR 5410)

The Electronic Currency and Secure Hardware (ECASH) Act (HR 5410), was introduced in September 2023 to create a digital version of the US dollar. The bill aims to promote financial inclusion, consumer protection, and data privacy. The bill has been referred to the House Committee on Financial Services for review. The committee may hold hearings, propose amendments, and vote on whether to send the bill back to the House floor. If approved, it proceeds to the full House for debate and voting. If the House passes the bill, it will be sent to the Senate for consideration. If both chambers approve the bill, it goes to the President for signing into law or veto.

Rep. Lynch (D-MA 8^th District) said:

The ECASH Act will establish a Treasury-led pilot program to develop an electronic US Dollar, supporting ongoing efforts by the Federal Reserve and President Biden. This program will also preserve the use of cash-like transactions in the digital realm.

The ECASH Act proposes a two-stage pilot program by the US Treasury to develop e-cash, ensuring consumer safety, privacy, and financial inclusion. The bill mandates that e-cash maintains anonymity, minimal data generation, and is interoperable with existing financial systems, allowing peer-to-peer offline transactions. E-cash will be regulated similarly to physical currency, adhering to AML, CFT, and know your customer (KYC) requirements.

4.4.5 Latest developments

Under President Trump's second term, significant legal developments have occurred regarding CBDCs. A pivotal moment came in January 2025, when President Trump signed an executive order titled ‘Strengthening American Leadership in Digital Financial Technology.’ This order explicitly prohibited federal agencies from taking any steps to establish, issue, or promote CBDCs, effectively halting any plans for a US digital dollar. The executive order also revoked prior directives from the Biden administration, specifically the 2022 Executive Order 14067 and the Treasury Department's Framework for International Engagement on Digital Assets, both of which had explored the feasibility of a US CBDC.

In a move to shape the broader digital asset landscape, the executive order established a working group on digital asset markets within the National Economic Council. This group is tasked with recommending regulatory and legislative proposals for the digital asset industry. The administration's policy further emphasizes the promotion of dollar-backed stablecoins and aims to foster a more innovation-friendly regulatory environment for digital assets, thereby supporting the growth of the crypto industry within the United States. Following the executive order, Senator Mike Lee (R-UT) reintroduced the ‘No CBDC Act,’ seeking to enact a permanent legislative ban on CBDCs.

The Trump administration's firm stance against CBDCs is rooted in several key concerns. Chief among these is the worry about potential government overreach, with critics arguing that CBDCs could grant the government excessive control over individuals' finances and facilitate the surveillance of transactions. There are also significant concerns about the threat to financial privacy, as the traceability inherent in CBDCs could undermine an individual's right to financial anonymity. Furthermore, the administration has considered the potential impact on traditional financial institutions, fearing that a CBDC could fundamentally alter the role of banks as financial intermediaries.

Looking ahead, despite the Trump administration's strong opposition to a US CBDC, the Federal Reserve continues its research and engagement with international CBDC forums. However, the absence of a US prototype may limit their influence in these global discussions. The long-term ramifications of this policy shift on the global digital currency landscape are yet to fully unfold.

Additional resources

RAND Corporation – Central Bank Digital Currencies and US Strategic Competition with China (January 2024)
Federal Reserve Board – ‘Money and Payments: The U.S. Dollar in the Age of Digital Transformation’ (January 2022)
Congressional Research Services – ‘Central Bank Digital Currencies: Policy Issues’ (February 2022)
World Economic Forum – ‘CBDCs come in two forms: retail and wholesale. What’s the difference?’