In my experience the best way to answer this question is by asking a different question: How do bank transfers work? That is, when you, as a regular person, tra

In my experience the best way to answer this question is by asking a different question: How do bank transfers work? That is, when you, as a regular person, transfer money electronically from your account to somebody else's, what's actually happening on a technical level? Obviously, both banks that are involved adjust their databases to reflect the change in balances. But now your bank owes you less, and the other person's bank owes their customer more. This is only fair if some form of settlement occurs between the banks. In principle, this settlement could happen in cash, but that would be extraordinarily wasteful (because of the overhead of handling cash). You really want some form of electronic settlement. As a first approximation, the electronic inter-bank-settlement works by all banks having an account at the central bank, and transactions at the consumer level are reflected by corresponding transactions at the level of central bank accounts. (Obviously, reality is more complicated both because it makes sense to aggregate lots of small transactions into a few bigger ones, and because the whole system has grown organically without anybody designing it from first principles.)