2023-Public-Sector-Perspectives

How to design a CBDC: Considerations and challenges The viability and uptake of a CBDC is dependent on design. Central banks’ goal is to create a useable, widely accepted and trustworthy digital currency that balances confidentiality and financial stability – this is challenging. Key design issues include: • Access: Secure wallets and custody for retail or wholesale CBDC customers are required; they are likely to be provided by private entities. • System type: CBDCs can be token-based or account-based, intermediated through banks or non-bank financial institutions, or directly held by households and small businesses. • Remuneration: Should a CBDC pay interest? This choice will impact uptake and has implications for the role of banks (i.e. the potential for disintermediation and credit disruption). • Security: Privacy should be optimized without compromising crime-fighting; a CBDC should support or strengthen existing anti-money laundering/know your customer mechanisms; help fight financial crime; and protect consumer transactions from unfettered surveillance. Programmability can play an important role. Central banks will need to augment their cybersecurity capabilities or outsource this role to expert third parties. • Managing the money supply: The launch of CBDC can include sequenced onboarding and institutional holding limits, allowing time for wider public and business buy-in and to iron out any glitches. • Protecting private investment and credit creation: CBDCs should not crowd out private investment and innovation in payment systems; diversification brings resilience. Similarly, private credit creation is fundamental to economic growth, job creation and social mobility, and should not be impacted by the creation of a CBDC that channels consumer deposits to the central bank. CBDCs also should not result in incremental obligations on regulated financial institutions. • Interoperability across platforms and jurisdictions: CBDCs should allow value to transfer seamlessly between different platforms and easily integrate into existing financial markets, both domestically and internationally. Policymakers also need to consider the unintended consequences of cross-border availability of CBDCs in jurisdictions vulnerable to capital outflows. The viability and uptake of a CBDC is dependent on design. Central banks’ goal is to create a useable, widely accepted and trustworthy digital currency that balances confidentiality and financial stability. 52 Central Bank Digital Currencies: Opportunities, Challenges and Interoperability