What Is Digital Currency? The Four Kinds of Digital Money

Most dollars are already digital

Paper money is a small share of the dollars Americans hold. In September 2026 the M2 money supply was $23.4 trillion, and currency held by the public was $2.40 trillion of it, about 10%, according to the Federal Reserve's H.6 release. Checking, savings and small time deposits made up $19.2 trillion and retail money market funds $3.1 trillion, before an adjustment that removes retirement accounts.

The Federal Reserve sorts money into three forms in its 2022 paper on money and payments:

• Central bank money, a liability of the Fed: paper currency, plus the digital balances that banks hold at the Fed.
• Commercial bank money, the balances in bank accounts. The Fed calls it the digital form of money most commonly used by the public.
• Nonbank money, balances held at payment firms and apps outside the banking system.

Stablecoins and decentralized digital assets sit outside that scheme. The Fed's paper treats them separately, as digital assets.

The four kinds compared

Deposits are at US commercial banks in the week ended 14 October 2026 (Federal Reserve H.8). The CBDC count is from the Atlantic Council's tracker as of May 2026, stablecoin supply from DefiLlama on 27 October 2026, and bitcoin supply, against a fixed limit of 21 million coins, from Blockchain.com on 28 October 2026. Scale is only part of the comparison. The sections below set out who stands behind each kind.

Which kinds count as money in law

The four kinds are not equal in law. Three tests separate them: legal tender status, inclusion in the Fed's M2 money supply, and treatment as property by the IRS. The US has no CBDC to test.

The legal tender statute, 31 U.S.C. 5103, names coins and currency. The Fed builds M2 from currency, deposits and retail money market funds, so stablecoins and bitcoin sit outside the official money supply. The IRS says that for federal tax purposes digital assets are property, not currency, and lists stablecoins among them alongside bitcoin. The federal income tax return asks every filer whether they received, sold, exchanged or otherwise disposed of a digital asset during the year.

The GENIUS Act draws the same line from the other side. It bars stablecoin issuers from marketing a token in a way that would lead a reasonable person to think it is legal tender, issued by the United States, or guaranteed by the government.

Bank deposits: digital money with a bank behind it

A bank balance is a claim on the bank. It moves by card, check, wire, ACH or the Fed's instant service, and in every case a bank keeps the record. The Fed's paper says commercial bank money carries very little credit or liquidity risk because of deposit insurance, bank supervision and banks' access to Fed lending.

Deposit insurance covers $250,000 per depositor, per FDIC-insured bank, for each ownership category. It does not cover stocks, bonds, Treasury bills or digital assets, according to the FDIC.

Control sits with the bank and, through it, the government. Banks must verify customers' identity under federal rules and report cash transactions over $10,000 to the Treasury, as our guide to currency transaction reports explains. An account can also be frozen by legal process. When the IRS levies a bank account, the funds are frozen as of the moment the bank receives the levy, according to the IRS. The Fed's instant payment service changes the speed of a transfer, not who holds the money, as our FedNow guide sets out.

Central bank digital currencies: the global picture

A CBDC is a digital form of central bank money that ordinary people can hold. The Fed's 2022 paper defined it as a digital liability of a central bank that is widely available to the general public, "analogous to a digital form of paper money". The difference from a bank deposit is that the debtor is the central bank itself.

The Atlantic Council's CBDC tracker, last updated in May 2026, counts 146 countries and currency unions exploring one, representing over 98% of world GDP. Very few have gone live.

The three launched are the Bahamas, Jamaica and Nigeria. The pilots include China's e-CNY, the digital euro, India's digital rupee, Japan, Russia, Brazil and Sweden's e-krona. Nine are listed as canceled: Ecuador and eight Eastern Caribbean islands.

The tracker sees a split. Outside the euro area, it says, advanced economies are retreating from retail CBDCs while emerging markets press ahead, and Canada, Australia and Norway have deprioritized retail versions. Bank-to-bank projects are growing instead. The tracker counts 13 cross-border wholesale CBDC projects, including mBridge, where the e-CNY makes up more than 95% of the volume.

The United States has stepped away. Executive Order 14178 of 23 January 2025 bars federal agencies from establishing, issuing or promoting a CBDC. Title XI of Public Law 119-101, law since 11 July 2026, prohibits the Federal Reserve from issuing one, directly or through banks, until the ban expires on 31 December 2030. It exempts any dollar currency that is "open, permissionless, and private" and fully preserves the privacy of coins and paper money. Our CBDC and Stablecoin Tracker follows each country and the US bills.

Stablecoins: private tokens tied to the dollar

A stablecoin is a token on a blockchain that a private company promises to redeem at a fixed price, usually $1. The company holds reserves of cash and short-term Treasury bills. Supply was $303.3 billion on 27 October 2026, and two coins dominate it: Tether's USDT at $181.8 billion and Circle's USDC at $71.3 billion, according to DefiLlama.

The GENIUS Act, Public Law 119-27, sets the US rules from 18 January 2027: licensed issuers only, 1 to 1 reserves, no interest to holders, no FDIC insurance, and the technical ability to freeze or seize tokens on a lawful order. A stablecoin is a claim on the issuer, so its safety rests on the reserves and the rules. Our stablecoin guide covers how they work.

Decentralized digital assets: no issuer at all

Bitcoin is the main example of a decentralized digital currency. No company or central bank issues it or promises to redeem it. New coins are created on a fixed, declining schedule until issuance stops at 21 million, and every node on the network rejects transactions that break the rules, according to bitcoin.org. On 28 October 2026 about 20.1 million had been created, according to Blockchain.com.

That design removes the issuer and with it the promise of a fixed value. The Fed's 2022 paper described such assets as subject to extreme price volatility, little used for payments in the United States, and hard to use without service providers.

Congress has not settled how these assets are regulated. The CLARITY Act would create a category of "digital commodities" overseen mainly by the CFTC, but a Senate procedural vote failed 49 to 50 on 15 September 2026, as our guide to the CLARITY Act explains.