This research analyses the issuance considerations surrounding retail Central Bank Digital Currency (CBDC), a digital form of sovereign currency issued by a country’s central bank and accessible to the general public. This research focuses solely on the retail CBDC intended for public use. The discussion primarily revolves around CBDC directly issued by the central bank, which is privately issued digital currency backed by central bank reserves and subject to central bank regulation.
Objective – Central Bank Digital Currency (CBDC)
The objective of this research is not to support retail CBDC issuance. Instead, it provides an overview of central bank digital currency, recent research, ongoing projects, CBDC models, challenges, and stakeholder discussions. The research summarizes existing literature to explore policy considerations beyond the binary decision of introducing retail CBDC. It covers operating models, design factors, and risk management. However, the observations are preliminary and not meant to offer strict guidelines, exhaustive coverage, or universally applicable recommendations.
The research provides an overview of central bank digital currency (CBDC), including recent research, ongoing projects, CBDC models, challenges, and stakeholder discussions. It aims to summarize existing literature, exploring policy considerations beyond the decision to introduce retail CBDC. The observations are preliminary and not meant to provide strict guidelines or universally applicable recommendations.
Many central banks exploring CBDC issuance have similar approaches. They begin by identifying objectives and assessing advantages and risks. The primary goals are to enhance financial inclusion and maintain the central bank’s relevance. Other goals include reducing cash expenses, improving payment systems, executing monetary policy, ensuring financial integrity, addressing concerns with private payment systems, and enhancing the distribution of stimulus payments and payment system resilience in the post-COVID-19 era.
At a conceptual level, many prominent central banks and monetary authorities exploring CBDC issuance follow similar approaches. This involves beginning with a clear identification of objectives and subsequently conducting a comprehensive assessment of anticipated advantages and risks.Â
Central banks exploring the issuance of Central Bank Digital Currency (CBDC) are evaluating diverse business models encompassing the issuance, distribution, and payment execution processes of CBDC. While most central banks are inclined to maintain control over the issuance aspect, they are inclined to delegate the distribution and payment aspects to private financial institutions. This entails various strategies, including utilizing traditional centralized ledgers and emerging distributed ledger technology (DLT) platforms. In the context of DLT, the ledger is duplicated and shared among trusted participants within a controlled and permissioned network.
A crucial aspect of CBDC design involves striking a balance between safeguarding user identity and transaction data privacy while adhering to standards of financial integrity. Achieving this equilibrium presents a significant design challenge for central banks.
In CBDC functionality, particular academic research suggests the potential implementation of variable interest rates for CBDC holders. This mechanism could be used to regulate demand or establish a novel instrument for monetary policy. However, among the central banks contemplating CBDC issuance, only a limited number are considering incorporating such interest rate mechanisms from the outset.
Challenges – Central Bank Digital Currency (CBDC)
The decision to embrace Central Bank Digital Currency (CBDC) presents a formidable challenge requiring significant technical expertise and resources, even for well-equipped central banks. This challenge is exacerbated by the rapidly changing technological and risk environment. Successfully implementing CBDC demands meticulous planning, robust infrastructure, and agile response mechanisms to address evolving threats and opportunities. Central banks must navigate complex regulatory frameworks, cybersecurity concerns, and public trust considerations while striving to foster financial inclusion and innovation. As the digital landscape continues to evolve, central banks must remain vigilant and adaptable to ensure the successful integration of CBDC into the global financial ecosystem.