Front Matter
  • 1, International Monetary Fund
  • | 2, International Monetary Fund
  • | 3, International Monetary Fund
  • | 4, International Monetary Fund
  • | 5, International Monetary Fund
  • | 6, International Monetary Fund

Front Matter Page

Monetary and Capitals Markets Department, Information Technology Department, and the World Bank

Table of Contents

  • Executive Summary

  • I. Introduction: Retail CBDC

  • II. CBDC Definition

  • III. Motivations and Policy Considerations for Issuing CBDC

    • A. Why Central Banks are Exploring CBDC Issuance

    • B. The Risk of Issuing CBDC

    • C. The Preconditions for Issuing CBDC

    • D. Weighing the Alternatives, Costs and Benefits of CBDC

  • IV. CBDC Design Considerations

    • A. CBDC Operating Model

    • B. Centralized Versus Decentralized Authorities

    • C. Financial Integrity, Privacy and Transparency

    • D. Availability and Limitations

    • E. Interest and Transaction Fees

    • F. Smart Contracts and Programmability

    • G. Technology Selection and Project Management

  • V. Legal, Governance, and Regulatory Perspectives

    • A. Central Bank Legislation and Legal Tender

    • B. Central Bank Governance and Risk Management

    • C. Regulatory Considerations and Pre-Requisites

  • VI. Cybersecurity Considerations

  • VII. Conclusion and Summary

  • Tables

  • 1. Costs Associated with Developing and Operating CBDC

  • 2. CBDC Legal Framework Analysis

  • 3. CBDB Central Bank Internal Organization Analysis

  • 4. Summary of Retail CBDC Implementation Consideration

  • Figures

  • 1. Main Elements of the Paper

  • 2. Retail Money Key Attributes

  • 3. Overview of the Main Elements Covered in the Paper

  • 4. Central Banks can Adopt Different Degrees of Responsibilities

  • 5. CBDC Platform Model

  • 6. CBDC Risk Landscape

  • 7. OSI Threat, Target, Protection Model

  • Boxes

  • 1. Synthetic Central Bank Digital Currency

  • 2. DLT-Basked vs Traditional Centralized Ledger Approaches

  • References

  • Annexes

  • 1. Countries Where Retail CBDC is Being Explored

  • 2. Process, Roles, and Responsibilities

  • 3. Additional Cybersecurity Considerations

  • 4. Blockchain Primer

Executive Summary

Central bank digital currency (CBDC) is a digital representation of sovereign currency that is issued by a jurisdiction’s monetary authority and appears on the liability side of the monetary authority’s balance sheet. By surveying published research, this paper examines in detail the issuance considerations, focusing solely on retail CBDC for use by the general public.3 This paper focuses mainly on CBDC issued directly by the central bank, as opposed to “synthetic” CBDC (sCBDC) which is privately-issued digital money backed by central bank reserves, regulated and supervised by the central bank (Adrian and Mancini-Griffoli, 2019a). The intention of the paper is not to advocate for retail CBDC issuance, but to take stock of recent research, central bank experiments, and ongoing discussions among stakeholders on the topic. It also intends to summarize existing literature, providing central bankers and researchers with a deep dive into the complex interrelated policy issues beyond just whether to issue retail CBDC, including operating models, design considerations and risk management issues. Given the limited practical experience with the topic, these are just initial observations and are not meant to be prescriptive, exhaustive, or universal.

At the conceptual level, most of the major central banks and monetary authorities considering CBDC issuance are following similar workflows that start with clearly identifying objectives and then thoroughly assessing expected benefits, costs, and risks. The authorities exploring CBDC issuance cite different objectives, two primary ones being to improve financial inclusion and to maintain the central bank’s relevance in the monetary system. Other objectives include reducing costs associated with physical cash, increasing payment system efficiency, improving monetary policy formulation and implementation, strengthening financial integrity, addressing potential issues related to private payment systems such as privacy or monopolistic power, and more recently following the COVID-19 global crisis, to expedite stimulus payments and to make payment systems more resilient against shocks.

On the other hand, some observers have highlighted significant potential risks with CBDC issuance. These include hampering monetary policy transmission, competing with bank deposits and undermining bank intermediation, and facilitating runs from bank deposits to CBDC during banking crises. Operational risks include issues relating to cyber-resilience, misdirection of funds, data loss or leakage, outsourcing/third-party dependency, and reputational risks. These can also lead to serious financial stability risks.

Central banks exploring CBDC issuance are considering different business models based on issuance, distribution, and transfer of CBDC to execute payments. All are thinking to retain the issuance function, but most are planning to outsource the distribution and payments components to private financial institutions. Some are focusing on running on a traditional centralized ledger, and some on a distributed ledger technology (DLT) platform in which the ledger is replicated and shared across several trusted participants within a private permissioned network. Balancing the need to ensure privacy of user identity and transaction data while meeting financial integrity standards is also an important design challenge. Some academic research advocates paying variable interest rates to CBDC holders to modulate demand or provide a new monetary policy instrument, but few central banks are considering doing so at the outset.

This paper also reviews some of the processes, roles, and responsibilities that would need to be defined for creating, issuing, distributing, freezing, deactivating, and destroying CBDC. Central banks considering issuing CBDC are also discussing how to address up-front cybersecurity risks at the business, process, and infrastructure layers.

Central banks considering moving beyond the pilot stage are deliberating whether to spell out the status of CBDC as legal tender in the appropriate laws and regulations. Some central banks may find that their governance frameworks need amending to accommodate CBDC issuance (addressing objectives and functions, technical requirements, internal organization requirements, and arrangements for transparency and accountability). Regulatory and supervisory frameworks may also need amending to cover new roles and players.

A decision to issue CBDC will stretch the technical capacity and resources of even the best-equipped central banks, in an environment where technology and risks are evolving rapidly. At the same time, outsourcing vital central bank functions to external vendors calls for great care and vigilance, given the functions’ systemic importance and significant financial, operational, and reputational risks to the central bank. Based on a comprehensive survey of published research, this paper aims to suggest general foundations for discussions on whether to issue CBDC, and if the decision is made to go ahead, present concrete operational considerations.

A Survey of Research on Retail Central Bank Digital Currency
Author: Mr. John Kiff, Jihad Alwazir, Sonja Davidovic, Aquiles Farias, Mr. Ashraf Khan, Mr. Tanai Khiaonarong, Majid Malaika, Mr. Hunter K Monroe, Nobu Sugimoto, Hervé Tourpe, and Peter Zhou