## ftnea2023008 - 1. Introduction ## Source details **Canonical URL:** [ftnea2023008 - 1. Introduction](https://www.imf.org/-/media/files/publications/ftn063/2023/english/ftnea2023008.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ftn063/2023/english/ftnea2023008.pdf.md) - [Structured JSON version](/-/media/files/publications/ftn063/2023/english/ftnea2023008.pdf.json) --- ### Major themes - A majority of central banks across the world are exploring retail CBDC. - CBDC projects take time; central banks need a vision for the monetary and payment system beyond the medium term (for example, a time horizon of at least 5 to 10 years). - Even where the current case for CBDC is not compelling, CBDC could become necessary as the economy becomes more digitalized. - CBDC exploration involves complex decisions in a rapidly changing digital environment and may require new technology and new public-facing central bank roles. - Central banks often face resource constraints and limited room for costly trial and error. - Central banks face uncertainty about the future and must balance caution with proactive exploration to avoid becoming unprepared. - The paper presents a structured framework (with a companion paper “A Guide to CBDC Product Development”) to guide decision makers and analysts in exploring CBDC. ### Framework and scope - Decision framework incorporates the 5P CBDC management methodology: preparations, proof of concepts, prototype, pilot, and production (the “5 Ps”). - This paper focuses on policy management (e.g., whether to issue CBDC and what purpose it should fill); the companion paper focuses on product development. - Focus is on retail CBDC (widely accessible to the public); wholesale CBDC is not covered though much analysis can apply. ### Policy management and decision making - Phases are sequential but iterative; central banks decide within each phase and when to progress to the next. - The 5P methodology emphasizes early specification of phase transition points ("go/no go" points). At each go/no go point a central bank has four options: - (1) stay in the same phase, iterate to continue learning or building, - (2) move forward to the next phase, - (3) move forward with some elements that are ready, but stay in the same phase for some other unresolved question, or - (4) pause or stop the project. - Criteria for transitions and the decision-making process should be established early and can be updated. - Iterative project management (e.g., agile or scrum) is recommended though public procurement and institutional constraints may impede iterative approaches. - External environment is a critical factor in go/no go decisions; teams must continually update assessments of external factors affecting mandate fulfillment. ### Example: Israel — Potential Scenarios for Deciding to Issue a Digital Shekel (summary of Box 1) - Scenarios identified by the Bank of Israel Steering Committee that could lead to issuing a digital shekel: - Other countries issue CBDCs (decisions by the United States, the euro area, or many developed economies would influence Israel). - Decline in legitimate use of cash and acceptance in transactions undermining public ability to transact using central bank money. - Significant penetration of stablecoins or private means of payment that impair the payment system; non-pegged stablecoins might harm monetary transmission. - Diminished competition in the domestic payment system, concentration, incomplete competition in deposits, and high entry barriers warrant issuing CBDC to support competition. - Technology developments could justify issuing a digital shekel as a secure platform for advanced technological use cases. ### Preparation phase — objectives and key tasks - Purpose: establish rationale and focus of CBDC project and ensure sufficient resources. - Key tasks: - Define CBDC policy objectives. - Begin exploring technology options. - Analyze potential risks, design features, and success criteria. - Country circumstances determine scope: - In underdeveloped private digital payments jurisdictions, CBDC may directly address current pain points. - In jurisdictions without immediate pain points, motivation is future-proofing; case contingent on future need. ### Designating policy objectives - Policy objectives are core to the project and inform all phases; they should answer why and how and guide design choices. - Consider technology options in parallel and assess whether objectives are achievable via other means. - Objectives should reflect short- and long-term central bank mandates and tools. - Future-proofing: even absent short-term motivation, preparations may be warranted to prevent or mitigate potential future risks. ### Box 2. UK: Motivations for the Digital Pound (selected points) - Motivations and high-level rationale: - Sustain access to UK central bank money; underpins monetary and financial stability and sovereignty. - Promote innovation, choice, and efficiency in domestic payments as economy digitalizes. - Decision-making principles and design priorities: - Ground CBDC decisions in central bank mandates (price stability; financial stability; full employment; economic growth; financial inclusion; competitiveness; consumer protection; financial integrity). - Prioritize objectives, state them specifically, and attach suitable success metrics. - Early identification of technology options is necessary. - Access to payments and financial inclusion (potential benefits and alternatives): - Improve/safeguard payments access, provide public access to risk-free central bank money in digital form, support accessible user interfaces, lower barriers to inclusion, channel government payments directly, and potentially reduce cross-border frictions contingent on interoperability. - Evaluate alternatives like instant payment systems and complement CBDC with digital literacy programs. - Payment system competition, efficiency, and resilience: - CBDC can serve as redundancy, complement cash for resilience, act as a platform to stimulate innovation/competition, and underpin settlement finality for tokenized finance. - Monetary sovereignty and monetary/financial stability: - CBDC could help maintain central bank roles as cash usage declines; a well-designed CBDC could improve domestic currency competitiveness while credibility of domestic currency value is paramount. - CBDC effects on monetary policy transmission depend on design; could strengthen transmission via inclusion but risk undermining deposit franchises. - CBDC could enable targeted monetary policy (direct transfers) if within mandate. - Non–interest-bearing CBDC could preserve seigniorage as cash declines. - Macrofinancial risk and impact considerations: - Analyze monetary policy, transmission, and financial stability implications across adoption scenarios. - Risk-mitigating design choices include nonremuneration and limits on holdings; central banks can use traditional operations to counteract effects. - Disintermediation, bank responses, run risk, and cross-border foreign CBDC risks noted; design and policy measures (e.g., holding caps, conversion limits, deposit insurance, discount window policies, capital flow management) can mitigate. ### Foundational capacity assessment - Assess central bank internal capacity and jurisdiction readiness. - Infrastructure foundations required: electricity grids, mobile networks, internet coverage; gaps may prompt pausing project or government coordination. - Institutional capacity: technical expertise, law, communication, change and risk management, policy capacity, cybersecurity experts, and ongoing operational capabilities (monitoring, redundant systems, 24/7/365 security operations center). - Cybersecurity readiness: strong posture essential; introduce architecture risk analysis and threat modeling and maintain capacity to upgrade cybersecurity posture continually. ### Governance, stakeholder engagement, and public communication - Strengthen governance and involve relevant decision-making bodies and nonexecutive boards early. - Stakeholder mapping and tailored engagement strategies across public sector, private sector, PSPs, infrastructure providers, end users (banked, unbanked, merchants, nonresidents), and others. - Government coordination essential (example: Bank of England and HM Treasury collaboration on Digital Pound); political approval often required for legal reforms. - Communication and trust-building: clarify CBDC usefulness and differences from other payment means; examples: Bank of England and ECB stated potential CBDCs will not be programmable by central bank or government. - Engagement channels: whitepapers/reports at milestones, digital social media, discussion forums, representative surveys, and regular briefings with political bodies. ### Box 3. The Bahamas and the Exuma Pre-pilot Research (selected points) - Exuma pre-pilot survey (December 2019) preceding CBDC pilot: random resident sampling by phone or in-person. - Key findings: - Affirmation of demand for increased digital payments. - Digital payments could increase financial inclusion. - High mobile phone ownership. - Public awareness about CBDC infrastructure security important. - Design principles: - Center design on policy goals; understand user expectations on usability, security, cost. - Interoperability with existing payment networks and convertibility into public money as confidence source. - Legal/regulatory compatibility (data protection, AML/CFT). - Resiliency, instant settlement, scalability, risk-mitigation (caps), and upgradability. - Operating models: - One-tier: central bank carries out all functions. - Two-tier: central bank issues CBDC and delegates operational roles to private intermediaries (central bank remains responsible for standards). - Practical preference for two-tier to limit central bank operational burden; intermediaries handle end-user engagement and AML/CFT controls. - Design features for specific purposes: - Holdings caps and wallet tiers to reduce disintermediation risk; automatic transfer of excess holdings to bank accounts. - Low connectivity/offline options: SMS, USSD, smart card pilots; context stat: "40 percent of the global population covered by a mobile broadband network is not using the internet." - Cross-border functionality: cross-border interoperability objectives require early cooperation with counterparts and international organizations. - Remuneration: none launched/piloted to date have been remunerated; interest-bearing CBDC is a policy choice; tiered remuneration can mitigate store-of-value risk; legal and Sharia considerations noted. - Privacy: three privacy forms (fully transparent to central bank; transparent to intermediary; privacy threshold with high privacy for low-value transactions). Complete anonymity conflicts with AML/CFT; most opt for privacy threshold. - Programmability: possible via smart contracts; raises concerns about restricting spending; distinction between smart money and smart payments highlighted. - Technology platform choice guided by policy objectives, use cases, regulatory context; decision between centralized ledger and DLT. ### Technology choices: centralized databases versus permissioned DLT - All DLT-based CBDC approaches to date are permissioned; non-permissioned systems are seen as incompatible with financial integrity. - Payment system design distinct from technological options; various technologies can implement designs. - Potential advantages of centralized databases: - Competencies readily available, better control of privacy, easier to scale, easier to upgrade, large product base. - Potential advantages of permissioned DLT (if implemented properly): - More resilient by design, new governance options, central bank not holding private data, compatibility with DLT-based tokenized financial assets, innovative domain. - Trade-offs: - Decentralization may complicate claims on central bank balance sheet. - Centralized platforms generally more scalable in throughput. - Centralized models impose stronger administrative burden on central bank. - If DLT chosen, central bank must define access and roles and consider compatibility with domestic bank infrastructure. ### Legal framework, regulation, and oversight (overarching points) - CBDC issuance requires sound legal basis and robust regulatory foundations; involve legal experts in monetary, payment systems, and financial law. - Legal framework provides legal certainty, contributes to financial stability, and ensures accountability and transparency. - AML/CFT regime may need updates; rule of law and institution quality important to protect rights and mitigate corruption/fraud. - Ensure legal basis to issue CBDC under chosen design; legal amendments likely needed to give CBDC private transactions legal certainty and to enable supervisory/regulatory frameworks. - Design should facilitate compliance with capital flow management measures and respect foreign jurisdictions' monetary sovereignty. - Data security, privacy, and confidentiality laws must be taken into account. ### Legal basis and monetary law considerations - CBDC requires legal underpinning in public and private law; necessary reforms depend on design and use cases. - Key legal distinction: account-based versus token-based CBDC. - Account-based: digital balance linked to specific users on central bank books; deploys conventional banking techniques. - Token-based: sui generis claim incorporated in an immaterial token; transfer equals transfer of claim and raises novel legal issues. - Central bank law may need explicit functions/powers to issue digital currency and to open accounts for intended users. - Maintaining flexibility by not amending law during pilot can be useful when CBDC not yet an actual central bank liability. - Monetary law mechanisms to consider: monopoly of issuance, cours forcé, legal tender status, private law privileges, and criminal law protection. ### Private law, payments supervisory law, and financial integrity - Review the “legal life” of CBDC to ensure consistency with existing legal mechanisms and legal certainty between holders and intermediaries. - CBDC systems should observe Principles for Financial Market Infrastructures. - In two-tier models, holders should have a direct legal claim toward issuing central bank regardless of intermediaries. - Manage risks from critical third-party service providers; procurement must avoid vendor lock-in. - Financial integrity and AML/CFT: - Assess risks to financial integrity given design features. - Implement sound AML/CFT preventive frameworks: customer due diligence, record-keeping, suspicious transaction reporting, and targeted financial sanctions per FATF standards. - Identify legal/regulatory changes needed prior to launch; major AML/CFT shortcomings should be addressed first. - Supervisors need capacity and expertise; conflicts of interest (e.g., central bank as AML/CFT supervisor) must be addressed. - Law enforcement, prosecutorial, and judiciary capacity/independence are critical; criminal law amendments may be necessary. ### Experimentation and development: PoC, Prototype, Pilot (summary) - Experimentation is crucial: PoCs, prototypes, and pilots guide decisions and test viability. - Specification of Key Success Measures: - Define success and metrics linked to policy objectives; stakeholders can help set KPIs. - Examples of KPI categories (Table 3 entries preserved as templates in source): Number of CBDC Accounts; Number of Active CBDC Accounts; Transaction Volume; Average Transaction Value; Adoption Rate among Target Population; Geographic Reach; Merchants Accepting CBDC; System Availability; System Resilience; Response Time — all with placeholders for jurisdiction-specific targets. - Proof of Concepts (PoC): - Empirical investigation in simulated environments with limited scope, cost, and time; funnel approach to narrow options and inform prototype go/no go. - PoCs should test technological, economic, sociological, and user aspects. - Prototype: - First functional model incorporating technology and design features aligned with desiderata. - Preliminary platform selection, iterative testing with representative stakeholders, interoperability testing, committed personnel and funding, KPIs in place, procurement/legal issues addressed, resilience scenarios identified, decision committee established, communication/marketing strategies prepared. - Prototype ≠ readiness to issue; it increases understanding to inform pilot decisions. - Pilot: - Real-life testing using real-value CBDC at limited scale to test operations, scalability, risk management, and adoption plausibility. - Design scale/duration carefully: small scale to limit risk but large enough to draw conclusions; gradual expansion to increase learnings. - Stakeholder onboarding via communications and marketing; continuous engagement and iterative additions of use cases. - If pilot demonstrates feasibility, readiness, and value, consider progressing to production. ### Production phase and post-launch management (conclusions and Box 5) - Production phase: formal launch and ongoing management; open-ended until cancellation. - Practical experience: to date only three jurisdictions have entered production (The Bahamas, Jamaica, and Nigeria). - Ongoing requirements: continual evaluation, iteration, improvement, and risk management; CBDC is never “finished”. - Adoption: adequate adoption depends on policy objectives; define adequate adoption relative to objectives and monitor via KPIs. - Network effects and entry barriers: realistic adoption goals and measures to establish network effects may be necessary. - Areas for ongoing evaluation: operational resilience (scalability, cyber resilience, recovery plans), design appropriateness, adequate reception and engagement with PSPs. - Box 5 — Bahamas Sand Dollar experience: - Official launch October 2020 after a 10-month pilot; uptake slow due to low e-money penetration. - Postlaunch efforts: merchant training, promotional events, “Sand Dollar Ambassadors,” integration with commercial banks’ ACH. - Communications: monthly public updates; planned upgrades to allow PSP branding on wallet apps. *Source: ftnea2023008 - 1. Introduction (IMF Fintech Notes, Policy Perspectives on CBDC).* ### 1. Introduction ........................................................................................................ ### ftnea2023008 - 1. Introduction ................................................................................................ ### Glossary (selected acronyms) - AML/CFT: anti-money laundering and combating the financing of terrorism - CBDC: central bank digital currency - DLT: distributed ledger technology - KPI: key performance indicators - PoC: proof of concept - PSP: payment service provider - SMS: short message service ### Major themes from the Introduction - A majority of central banks across the world are exploring retail CBDC. - CBDC projects take time; central banks need a vision for the monetary and payment system beyond the medium term (for example, a time horizon of at least 5 to 10 years). - Even where the current case for CBDC is not compelling, CBDC could become necessary as the economy becomes more digitalized. - CBDC exploration involves complex decisions in a rapidly changing digital environment and may require new technology and new public-facing central bank roles. - Central banks often face resource constraints and limited room for costly trial and error. - Central banks face uncertainty about the future and must balance caution with proactive exploration to avoid becoming unprepared. - The paper presents a structured framework (with a companion paper “A Guide to CBDC Product Development”) to guide decision makers and analysts in exploring CBDC. ### Framework and scope - The decision framework incorporates the 5P CBDC management methodology, which divides the CBDC project into five distinct phases (the “5 Ps”): preparations, proof of concepts, prototype, pilot, and production. - This paper focuses on policy management (answering questions such as whether to issue CBDC and what purpose it should fill); the companion paper focuses on product development. - The paper focuses on retail CBDC (widely accessible to the public) and does not cover wholesale CBDC, though much of the analysis can apply to wholesale CBDC. ### Structure and approach - The paper is organized sequentially but acknowledges that many issues are worked on across multiple phases and that iterative cycles are expected. - Earlier phases (preparations) contain more established knowledge; later phases (approaching launch) have less established knowledge and will be elaborated in subsequent IMF publications forming the CBDC Handbook (IMF 2023). - Decision points and phase transitions should be specified early; criteria can be updated as new information becomes available. ### Figures referenced - Figure 1: A Roadmap of the CBDC Process (visualization of phases and key activities). - Figure 2: The Go/No Go Decision Points (shows options at each phase transition). --- ### Policy Management and Decision Making (summary) - Policy management must decide within each phase and when to progress to the next phase; phases are sequential but iterative, and central banks can move back to earlier phases. - The 5P methodology emphasizes early specification of phase transition points ("go/no go" points). At each go/no go point a central bank has four options: - (1) stay in the same phase, iterate to continue learning or building, - (2) move forward to the next phase, - (3) move forward with some elements that are ready, but stay in the same phase for some other unresolved question, or - (4) pause or stop the project. - Criteria for transitioning between phases and the decision-making process should be established early and can be updated over time. - Iterative project management (e.g., agile or scrum) is recommended to adapt quickly to new data or unforeseen events; however, cumbersome public procurement procedures and institutional hindrances may challenge iterative approaches. - External environment is a critical factor in go/no go decisions; central banks must continually update assessments of positive and negative external factors affecting mandate fulfillment. - The CBDC team may need to reiterate earlier phases and revisit design choices as environment changes. ### Example: Israel — Potential Scenarios for Deciding to Issue a Digital Shekel (Box 1) - The Bank of Israel Steering Committee on the Potential Issuance of a Digital Shekel outlined scenarios that could lead to issuing a digital shekel (Bank of Israel, 2023): - Other countries issue CBDCs. A decision by the United States or the euro area, or by a significant number of other developed economies, to issue CBDCs would influence the decision in Israel. - The legitimate use of cash, and its acceptance in transactions, declines in Israel. The use of cash as a means of payment is widely expected to decline in the future. As a result, the public’s ability to make transactions using central bank money may decline rapidly. - Significant penetration of stablecoins or other private means of payment that would be broadly used might impair the payment system. A stablecoin that isn’t pegged to the shekel might also harm monetary transmission. - Competition in the domestic payment system diminishes. Continued concentration in some segments of the domestic payments system, incomplete competition in the deposits market, and relatively high entry barriers may justify the issuance of CBDC to support competition in the payments system and in the financial system in the digital era. - Technology in the payments system continues to develop. It may turn out in the future that there would be significant justification for issuing a digital shekel, since it would be able to serve as an efficient and secure platform for advanced technological use cases. --- ### Preparation Phase (summary) - The preparation phase establishes the rationale and focus of the CBDC project and ensures sufficient resources to execute it. - Key tasks in preparation: - Define the policy objectives of CBDC. - Begin exploring technology options. - Analyze potential risks, design features, and success criteria. - Country circumstances and jurisdictional characteristics determine the scope and focus of preparations: - In jurisdictions with underdeveloped privately provided digital payments, CBDC may directly address current payment system pain points. - In jurisdictions without immediate pain points, the motivation is likely future-proofing; the case for CBDC is contingent on future need. ### A. Designating the Policy Objectives of CBDC (summary) - Policy objectives constitute the core of the project and inform every subsequent phase; they should answer the why and how of the project and guide design choices. - Central banks should in parallel consider technology options and how technology may help achieve policy objectives. - Policy objectives may be achievable through other means; jurisdictional context affects whether CBDC is a fruitful approach. - Decision-making should reflect both short- and long-term perspectives of central bank mandates and policy tools. - Even if no compelling short-term motivation exists, central banks should consider future developments that could argue for immediate preparations; many objectives are about preventing or mitigating potential future risks (future proofing). - Box 2 (referenced) provides an example of articulating motivations from a future-proofing perspective. *Source: ftnea2023008 - 1. Introduction (IMF Fintech Notes, Policy Perspectives on CBDC).* ### Box 2. UK: Motivations for the Digital Pound ### Box 2. UK: Motivations for the Digital Pound ### Motivations and high-level rationale - The Bank of England and HM Treasury (2023) judge it likely that a digital pound will be needed in the future for the following reasons: - To sustain access to UK central bank money, ensuring its role as an anchor for confidence and safety in the monetary system and to underpin monetary and financial stability and sovereignty - To promote innovation, choice, and efficiency in domestic payments as lifestyles and economy become ever more digital ### CBDC decision-making principles and design priorities - CBDC decision-making should be grounded in the central bank’s official mandates, which typically include: - price stability - financial stability (to differing degrees) - full employment - economic growth - financial inclusion - competitiveness of financial and payment systems - consumer protection - financial integrity - CBDC should be designed and issued to contribute to the central bank’s ability to fulfill its mandate. - Policy objectives should be: - prioritized - stated and justified in a specific and granular way - accompanied by suitable success metrics (not all objectives require significant daily usage) - Early identification of different technology options is necessary because later trade-offs and resource constraints may limit feature development. ### Access to payments and financial inclusion - Potential benefits and uses: - Improve or safeguard individuals’ ability to make payments by overcoming cash shortages and merchants’ unwillingness to accept cash. - Provide public access to risk-free central bank money in digital form where cash usage is declining; also prepare jurisdictions where cash usage is not currently declining. - Be designed with accessible user interfaces for individuals with physical or cognitive disabilities. - Address needs of small target populations where private firms may not find development commercially viable. - Lower barriers to financial inclusion in countries with underdeveloped financial systems, low financial penetration, and limited access to affordable and safe financial products and services. - Channel government payments directly to households (e.g., subsidies, fiscal stimulus) and provide additional means of payment for government services, fees, or taxes, reducing cost, risk, and lack of transparency associated with cash transfers. - Potentially reduce frictions in cross-border payments through interlinking domestic CBDC systems or common platforms (examples cited: Project Icebreaker; Project mBridge), contingent on early central bank cooperation for interoperability. - Complementary measures and alternatives: - Evaluate alternative solutions such as instant payment systems, which enable domestic account-to-account payments credited in real time (or near-real time) on a 24/7 basis, and consider coexistence with CBDC. - Complement CBDC with digital and financial literacy programs to address inclusion goals. ### Payment system competition, efficiency, and resilience - Market structure concerns: - Payment systems exhibit economies of scale and network effects; a few PSPs could dominate, reducing contestability, increasing fees, and creating large social costs from service disruptions. - CBDC roles: - Serve as a “redundancy” system to complement non-CBDC payments and increase payment system resilience (a high degree of adoption is not required for this role). - Complement cash, reducing the need for cash distribution infrastructure during/after natural disasters, while shifting resilience dependence to cellular networks and internet services. - Act as a platform to open private sector PSP initiatives, stimulating innovation and competition to lower fees and improve efficiency—requires proper incentives and low barriers to entry. - Help achieve standardization and interoperability of private systems, balancing competition with risks of fragmentation from noninteroperable systems. - Serve as the ultimate settlement asset for tokenized finance, underpinning settlement finality and access to risk-free money, thus helping safeguard the singleness of money and convertibility of tokenized private money (applicable to both wholesale and retail CBDC). ### Monetary sovereignty and monetary and financial stability - Rationale: - CBDC could ensure central banks continue to fulfill and potentially improve their functions by leveraging new technology as cash usage declines. - Public, risk-free money provides a benchmark and backstop through convertibility, supporting monetary and financial stability. - Currency substitution and competitiveness: - Central banks explore ways to maintain demand for central bank money amid crypto assets and potentially foreign-issued CBDCs; lack of domestic transactions denominated in the official unit of account and settled through central bank money could render monetary policy ineffective (currency substitution problem). - A well-designed CBDC with attractive use features could improve domestic currency competitiveness versus foreign currencies or privately issued digital money, but maintaining credibility of the domestic currency’s value remains the overriding factor to avoid currency substitution. - Effects on monetary policy transmission: - If CBDC lowers barriers to financial inclusion it could strengthen monetary policy transmission by exposing users to interest-sensitive services through the banking sector. - CBDC competition with bank deposits (remunerated or not) could cause banks to track deposit rates more closely with policy rates, improving transmission but potentially undermining the deposit franchise, leading to consolidation and concentration—trade-offs that are often first order. - CBDC could enable targeted monetary policy via direct transfers in emergencies (helicopter monetary stimulus) if consistent with the central bank’s mandate. - Non–interest-bearing CBDC could preserve seigniorage as cash usage declines and help support central bank financial and operational independence in some countries. ### Macrofinancial risk and impact considerations - General approach: - Analyze potential impacts on monetary policy implementation, transmission, and financial stability throughout decision-making. - Mitigate risks with prudent design choices; risk analysis should be carried out before or in parallel with and inform the design process. - Impact on monetary policy transmission and central bank operations: - Implications depend on degree of adoption and CBDC design. - Several analyses conclude monetary policy transmission impact is unlikely to be significant with risk-mitigating design choices such as nonremuneration and limits on holdings. - Central banks can counteract effects on transmission using traditional operations. - Issuance of CBDC could result in a one-off tightening or loosening of the monetary policy stance; central banks need to monitor and respond to maintain the policy stance (for example, loosening policy if outflow of deposits to CBDC causes banks to decrease credit creation). - Additional effects include entrenching the zero lower bound in the case of unremunerated CBDC because digital money has no storage costs. - Impact on banking sector intermediation and financial stability: - CBDC as a store of value could undermine commercial bank intermediation; disintermediation potential depends on design, particularly remuneration via interest rates. - To date, none of the launched or piloted CBDC is interest bearing; interest rate on CBDC remains a policy choice. - If interest-bearing CBDC leads banks to raise deposit rates, magnitude of effects depends on banking system structure, concentration, and banks’ loan market power; effects might be small in some circumstances. - Potential unintended consequences: - Banks may invest in riskier projects if pressured by renumerated CBDC, increasing system risk. - Banks could shift to wholesale short-term money markets; wholesale funding volatility may force reduced lending and higher liquid asset holdings under current regulatory liquidity requirements. - Smaller banks may be disproportionately affected due to limited access to alternative funding, potentially leading to greater concentration. - Run risk: - CBDC may become an attractive safe haven during turmoil, drawing deposits and creating run risk even if not interest bearing. - Design features, deposit insurance, and discount window policies can—at least in principle—limit run risk. - Easy availability of foreign CBDC could prompt runs toward foreign CBDCs, complicating currency and liquidity crisis management, particularly in emerging market and developing economies; jurisdictions could consider capital flow management measures in CBDC design. - Recommended analytical steps: - Assess financial sector’s ability to adjust to CBDC issuance, covering initial issuance effects and longer-term structural effects on the financial system and economy. - Evaluate banking sector robustness, competitiveness, reserve levels, and funding structures. - Conduct thorough scenario analysis across a spectrum of CBDC adoption outcomes; use results to guide design choices (for example, hard caps on holdings or conversion limits to limit disintermediation risk). ### Foundational capacity assessment - Purpose: - Assess internal central bank capacity and the jurisdiction’s economic and infrastructure readiness to execute exploration and implementation of CBDC. - Infrastructure foundations: - Issuing CBDC requires adequately developed, available, and resilient nationwide technological infrastructure, including electricity grids, mobile networks, and internet coverage. - If technology infrastructure is lacking, central bank may pause CBDC project and work with government to fill gaps; achieving high level of digital infrastructure likely requires significant investment. - Institutional capacity: - Identify adequate human resources across central bank, competent authorities, and private sector collaborators. - Assess central bank staff know-how to design and run technological solutions; determine role of third-party technology service providers. - Required skills include technical expertise, law, communication, change and risk management, and policy capacity to assess financial stability and macroeconomic implications. - If capacity gaps exist, analyze options to enhance capacity (e.g., hire cybersecurity experts, improve cybersecurity processes). - Consider impacts on central bank internal operations: ongoing monitoring, rapid response to technology issues, redundant systems, business continuity, and a 24/7/365 security operations center. - Build internal expertise proactively to reduce overreliance on external vendors and reduce operational risks. - Cybersecurity readiness: - Strong cybersecurity posture is essential; cyberattacks can compromise end user data and funds, central bank reputation, trust in money, and payment system stability. - CBDC may be a high-value target due to affiliation with government institutions; perceptions of vulnerability would affect adoption and global perceptions of CBDC. - Countries should introduce security assurance activities such as architecture risk analysis and threat modeling and maintain capacity to constantly maintain or upgrade cybersecurity posture. ### Governance - Central banks differ in internal governance structures but must involve all relevant decision-making bodies in the CBDC process. - Assess and strengthen governance before embarking on a CBDC project. - Involve nonexecutive boards early and regularly update them; oversight boards need expertise to confirm integrity of financial controls and robustness of risk management systems. ### Stakeholder engagement and public communication - Stakeholder mapping and engagement strategy: - Identify and map stakeholders and adopt an engagement strategy tailored by stakeholder characteristics and intensity required across project stages. - Stakeholders include a wide range of public sector, financial/private sector, payment system, infrastructure providers, service access beneficiaries, and end users (banked, unbanked, merchants, consumers, unconnected or underconnected users, nonresidents, government entities). - Use targeted engagement methods (e.g., questionnaires, targeted surveys for low-income or specific areas) to obtain input from underrepresented segments. - Government coordination: - Coordinate carefully with ministries of finance and other authorities to ensure support and alignment with government needs (example: the Digital Pound project is a collaboration between the Bank of England and HM Treasury). - Political approval is often required for legal reforms enabling CBDC issuance; political decisions should be informed by accurate information. - Misunderstandings (e.g., about programmability and transaction monitoring) can generate backlash and block future issuance. - Communication and trust-building: - Adoption relies on understanding how to design a CBDC that is useful and sufficiently different from other payment means and communicating those traits efficiently and consistently to the public. - Maintain public confidence in the central bank and CBDC value by adopting trust-building measures and incorporating stakeholder concerns into design choices. - Examples: Bank of England and the European Central Bank have stated potential CBDCs will not be programmable by central bank or government—reflecting stakeholder concerns about restricting spending choices. - Engagement activities and channels: - Publish whitepapers or reports at milestones (after initial assessment, PoC, or pilot) for communication and stakeholder engagement. - Use digital social media channels (YouTube, Facebook) for public communication via infographics and short videos. - Arrange open or closed discussion forums with different actor groups, ensuring careful invitation mapping to avoid unfair advantages. - Engage political decision-making bodies early and regularly (example: regular briefing meetings between political finance committees and central bank executive boards). - Use surveys and random sampling to collect representative information without excessive resources; target specific household groups when needed. *Source: ftnea2023008 - Box 2. UK: Motivations for the Digital Pound* ### Box 3. The Bahamas and the Exuma Pre-pilot Research ### Box 3. The Bahamas and the Exuma Pre-pilot Research ### The Exuma pre-pilot survey and findings - In December 2019 the Central Bank of the Bahamas (CBOB) launched a CBDC pilot on the island of Exuma (CBOB 2019). - Nine months prior, the CBOB conducted a survey in the region to assess the level of digitalization, financial inclusion, and willingness of the population to adopt new digital means of payments. - Residents were randomly selected and invited to take part in the study, either by phone or in-person visits to their homes. - Key survey findings: - Affirmation of demand for increased use of digital payments that currently was not met. - Greater ease of access to financial services—through digital payments—could increase financial inclusion. - High rate of mobile phone ownership among residents. - Public awareness about security within the CBDC infrastructure was identified as key going forward. ### Design principles for CBDC - Primary aim: center CBDC design around promoting designated policy goals while taking into account user needs. - Obtain a comprehensive understanding of user expectations regarding usability, features, services, integration, security, and cost to support adoption. - Interoperability requirements: - CBDC should be designed to be interoperable with existing payment networks, including commercial bank and e-money networks and ATM machines. - Convertibility into public money is identified as a source of confidence in privately issued money. - Legal and regulatory compatibility: - Design features must be compatible with existing laws and regulations and be accompanied by necessary legal and regulatory changes when appropriate. - CBDC development should take into consideration existing data protection laws and regulations. - Jurisdictions must ensure compliance with Financial Action Task Force standards and mitigate money laundering and terrorist financing risks effectively. - Resiliency and operational standards: - All components in the CBDC system should meet or exceed established resiliency and security standards of financial market infrastructures. - Provide instant transaction settlement around the clock all year long and be able to recover quickly from operational disruption. - Design for scalability to handle increased volumes of transactions without operational difficulties. - Risk-mitigation and upgradability: - Design must be capable of incorporating risk-mitigating features (for example, holding and transaction size caps to reduce bank disintermediation risk). - CBDC should be technologically future-proofed and implemented to facilitate upgradability; continual updates will be necessary after launch. ### CBDC operating model and distribution of functions - Operating model is the highest-level CBDC design choice; CBDC is issued by the central bank but many functions must be carried out by various actors. - Two major categories of operating models: - One-tier model: the central bank carries out all functions in the CBDC system. - Two-tier model: the central bank issues the CBDC but delegates part of the operational work to a network of private sector intermediaries; the central bank remains responsible for ensuring intermediaries abide by relevant standards. - Practical considerations: - Central banks primarily focus on the two-tier system to limit operational burdens on the central bank. - Private sector intermediaries typically engage with end users, providing customer support, conducting customer due diligence, and other AML/CFT controls. - Functions such as storing user data or processing payment transactions can be either private or public. - The two-tier model relies on incentives of private sector actors to carry out their functions. ### Design features aimed at specific purposes - Account and transaction limits: - Holdings of CBDC could be capped to reduce risks of bank disintermediation. - CBDC wallets with different caps and varying identification requirements can provide flexibility. - If holding limits are reached, excess can automatically be transferred into the receiving user’s bank account (Bindseil 2020). - Consider limiting CBDC holdings by foreigners, with registration and low limits on holding and transaction sizes for visitors. - Low connectivity and offline use: - CBDC could be designed for transactions via short message service (SMS), for completely offline access, or both (BIS 2023a). - Example implementations: - SMS-based digital payment platforms such as M-PESA are popular in sub-Saharan Africa and other regions. - Nigeria’s eNaira CBDC uses SMS and other technologies, such as unstructured supplementary service data, to provide access to Nigerians who have only basic mobile phones or cannot access the internet (Clickatell 2022). - Ghana piloted a smart card-based E-Cedi CBDC that supports consecutive offline payments (Consultative Group to Assist the Poor 2023). - Context statistic: According to the Global System for Mobile Communications, "40 percent of the global population covered by a mobile broadband network is not using the internet." - Cross-border functionality: - International organizations and central banks are collaborating to consider options to use CBDC to lower costs and increase speeds of cross-border payments (BIS 2021a and 2022b). - If improved cross-border functionality is an objective, central banks should reach out to foreign counterparts—particularly within the same region or with significant trade and financial linkages—to discuss interoperability and design. - Central banks should seek communication with international organizations, such as the BIS and IMF, as joint platforms for sharing information and creating frameworks to facilitate CBDC arrangements for cross-border payments. - Remuneration: - None of the CBDCs launched or piloted to date have been remunerated, but interest-bearing CBDC merits consideration (see Monetary Sovereignty and Monetary and Financial Stability subsection). - Remuneration could support monetary policy and be used to modulate CBDC demand (increase rates to ramp up demand; decrease rates to dampen demand). - Tiered remuneration (high interest rates for small holdings and low rates for high balances) can be used to discourage CBDC being used as a store of value and mitigate disintermediation risk. - Legal issues might arise from interest-bearing CBDC; capacity to remunerate could be incorporated even if not immediately used (Kiff and others 2020). - Sharia principles may prohibit interest payments in Islamic jurisdictions, making remunerated CBDCs potentially not an option (Lukonga 2023). - Privacy and anonymity: - Central banks must consider aspects and norms relating to privacy, especially rights and responsibilities surrounding collection and use of personal information. - Three plausible forms and degrees of data privacy in ascending order of privacy (ECB 2022): - Fully transparent to central bank, where all data related to transactions and customer due diligence are visible to the central bank. - Transparent to intermediary, where all transaction and customer due diligence data are visible to the intermediary. - Privacy threshold, with a high degree of privacy for low-value transactions and standard customer due diligence checks for large-value transactions. - Complete anonymity conflicts with AML/CFT procedures; most central banks are opting for the privacy threshold model as a compromise. - Central banks typically have access only to pseudonymous data but can de-anonymize it in some cases if probable cause is shown (for example, with a court order). - Technology solutions have been developed that could potentially increase privacy for select transaction types (Gross, Sedlmeir, and Seiter 2022; Chaum and Moser 2022; BIS Innovation Hub Project Tourbillon). - Programmability: - CBDC could be programmed for conditional payments using technologies such as smart contracts (Monetary Authority of Singapore 2023). - Potential uses include automatic point-of-sale tax payments (Bank of England 2020). - Smart contracts could restrict where or when funds could be spent (for example, in government household relief subsidies), raising concerns about impinging on the universality of currency. - Several central banks have stated they will not issue CBDC programmable by central banks or governments (HM Treasury Bank of England, 2023; ECB 2023). - Distinction: smart money versus smart payments—payment conditionality can be introduced within payment infrastructure without altering the nature of the digital currency itself (Gross 2020). - Choice of technology platform: - Platform selection should be guided by policy objectives, use cases, regulatory context, stakeholders’ readiness, risk assessment, and other considerations. - A key decision is whether to use a traditional centralized ledger or a distributed ledger technology (DLT) platform that decentralizes selected functions to multiple agents. - DLT can either be open (anyone can take part) or permissioned (restricted participants). *Source: ftnea2023008 - Box 3. The Bahamas and the Exuma Pre-pilot Research* ### part in validating transactions, or permissioned, which means that a few trusted counterparties take part ### ftnea2023008 - part in validating transactions, or permissioned, which means that a few trusted counterparties take part ### Technology choices: centralized databases versus permissioned DLT - All DLT-based approaches to CBDC are currently permissioned; non-permissioned systems are difficult to see as compatible with financial integrity. - Payment system design should be distinguished from technological options; payment system design could be achieved with a variety of technologies. - Potential benefits of permissioned DLT-based platforms (if designed properly) include: - enhanced resilience - the ability to implement alternative governance structures - compatibility with potential DLT-based financial asset platforms - Risks and trade-offs identified: - Decentralizing authority may raise risks related to adjusting claims on the central bank’s balance sheet. - Most central banks already have mature security postures to manage centralized databases. - Centralized platforms are generally more scalable than DLT-based platforms in terms of transaction throughput. - Centralized models will likely impose a stronger burden on the central bank as the administering authority. - If a DLT-based platform is chosen, the central bank must decide who will have access to the ledger and define respective roles. - Compatibility with domestic banking system technological infrastructure and legacy payment systems is an additional consideration; commercial banks largely rely on centralized databases that do not feature newer technological benefits. - Supporting technological transition of the domestic banking and payment systems is a key consideration. - Table 2. Potential Advantages of Centralized Databases versus Permissioned DLT (as presented) - Advantages of Centralized Databases: - Competencies more readily available for technology, security, and vendor relationship - Better control of privacy - Easier to scale - Easier to upgrade - Large available product base built on top - Advantages of DLT (if implemented properly): - More resilient by design if no single point of failure is introduced - Offers new governance options - Central bank does not have to hold any private data - Could increase compatibility with DLT-based tokenized financial assets - Innovative domain, with new solutions emerging from decentralized finance ### Legal framework, regulation, and oversight — overarching points - CBDC issuance and distribution require a sound legal basis and robust regulatory foundations. - Legal experts in central banking and monetary law, payment systems law, and financial law should be involved in CBDC design. - The legal framework is critical to provide legal certainty, contribute to financial stability, and ensure appropriate accountability and transparency over the central bank’s role. - The AML/CFT regime may need to be updated to address risks to financial integrity resulting from CBDC issuance. - A strong rule of law environment with well-functioning institutions is required to protect rights and mitigate corruption and fraud risks related to CBDC issuance and conversion. - Central banks should ensure they have a legal basis to issue CBDC under the design chosen; this legal basis is a precondition for setting up supervisory and regulatory frameworks supporting CBDC safety. - Legal amendments are likely needed to give CBDC private transactions legal certainty and to strengthen supervisory and regulatory frameworks (for example, allowing CBDC service providers to be appropriately supervised and regulated). - CBDC design should facilitate compliance with national capital flows management measures for holding and using CBDCs by nonresidents and respect monetary sovereignty of foreign jurisdictions. - Technology-based data security, privacy protection, and confidentiality laws and regulations should be taken into account when designing CBDC. - The section presents preliminary considerations to be further developed in upcoming publications. ### Legal basis for CBDC issuance — specific legal elements and options - CBDC requires a legal underpinning in both public and private law (Bossu and others 2020). - Authorities should assess whether: 1. there is a legal basis for issuance, or 2. adjustments are needed. - Necessary legal reforms depend on design and use cases. - Key legal distinction: account-based versus token-based CBDC - Account-based CBDC: - If based on a current account contractual relationship, can be classified as account-based. - An account-based CBDC is a digital balance linked to specific users on the books of the central bank. - Deploys conventional banking techniques (contractual relationship; transfers via debits and credits of accounts). - Token-based CBDC: - Implies a sui generis claim on the central bank incorporated in an immaterial token. - Transfer of the token equals the transfer of the claim, raising novel legal issues. - Cross-border use of CBDC entails additional legal challenges. - Central bank law may need reform to allow CBDC issuance; potential inclusions: - An explicit function in central bank law “to issue currency” generally, without limiting issuance to physical currency such as banknotes and coins. - Associated powers to issue token-based CBDC (power to produce, acquire, distribute, withdraw, and destroy token-based CBDC in addition to similar powers related to banknotes and coins). - An explicit power to open accounts for all intended users of an account-based CBDC. - On timing of amendments: maintaining flexibility (not amending the law) during the pilot phase could be useful, particularly when CBDC is not yet issued as an actual liability of the central bank. ### Monetary law considerations - Monetary law regulates a jurisdiction’s official monetary unit and its official means of payment (the currency). - Authorities should assess whether mechanisms that sanction banknotes and coins can be established for CBDC as an official means of payment: - Monopoly of issuance for the state (legal provision granting exclusive right to issue currency/banknotes and coins; question whether it grants monopoly for digital currency). - Cours forcé: mandating acceptance in payment at face value. - Legal tender status: power granted by law to extinguish monetary obligations; jurisdictions implement this differently. - Privileges under private law: states may grant private law privileges to favor circulation of currency relative to other means of payment. - Protection under criminal law: sanctions on those who counterfeit, damage, or destroy instruments (so far focused on banknotes and coins). ### Private law and legal life of CBDC - Authorities must ensure CBDC benefits from legal certainty by reviewing every stage of the “legal life” of a CBDC to ensure consistency with existing legal mechanisms. - Reflect on legal nature of CBDC and conditions for considering a CBDC transfer as legally valid. - Ensure legal certainty in relationships between CBDC holders and private intermediaries in the ecosystem. - Decide whether legal reform should be anchored in a broader framework for digital money in general or in a targeted framework specific to CBDC. ### Payments and financial supervisory law considerations - CBDC systems will have to be designed to observe Principles for Financial Market Infrastructures. - Holders of CBDC should have a clear legal relationship with the issuing central bank and with entities operating in the CBDC ecosystem to reduce risks. - In a two-tier operating model, the holder should have a direct legal claim toward the issuing central bank, regardless of which intermediaries provide wallet and account services. - CBDC systems need to manage risks from critical third-party service providers (for example, cloud services and specialized software vendors). - Central bank procurement officers must assess agreements with those providers to avoid lock-in situations in case of termination of agreement. ### Financial integrity implications and AML/CFT - Jurisdictions should assess and understand risks to financial integrity posed by a CBDC arrangement, taking into account desired design features. - CBDCs could be used for illicit activities; measures must be implemented to mitigate those risks. - An effective AML/CFT regime must be understood and implemented by all relevant stakeholders, public and private (reporting entities). - Assessment of money laundering and terrorist financing risks should inform design decisions and mitigating measures. - Review existing legal framework prior to launch to identify legal and regulatory changes needed to avoid AML/CFT gaps. - Major shortcomings in a jurisdiction’s AML/CFT regime should be addressed prior to pursuing CBDC. - Design and technological choices may affect financial integrity; risks increase with wider user base and more varied use cases. - Number and type of intermediaries involved in issuance, distribution, and use cases will have regulatory and supervisory implications. - Mitigating requirements: - Sound AML/CFT preventive framework including customer due diligence, record-keeping, suspicious transaction reporting, and implementation of targeted financial sanctions. - Such measures implemented effectively by all reporting entities designated in the Financial Action Task Force standard. - User identification and transaction tracking may not be inherent in all CBDC models (for example, non-account-based or “cash-like” features). In such cases, due diligence could be built in as a precondition to obtaining a CBDC wallet. - Clear and appropriate measures need to be set in law and regulation prior to CBDC issuance to enable proper AML/CFT preventive measures. - Supervisory implications: - CBDC arrangements may require adaptation of existing supervisory models. - Supervisors need adequate capacity and expertise to monitor compliance by both new and existing reporting entities and to sanction breaches. - New supervisory expertise may need development. - Conflicts of interest from dual functions (for example, central bank acting as AML/CFT supervisor in a one-tiered model) must be addressed. - Cross-border usage introduces extra supervisory challenges related to foreign service providers and users abroad; interagency and international coordination will be important. - Law enforcement and prosecutorial considerations: - Law enforcement agencies need solid legal basis and requisite capacity and expertise to pursue criminal cases involving CBDC. - Amendments to criminal law may be needed to allow investigations involving CBDCs and to freeze or seize criminal proceeds or instrumentalities in CBDC. - Prosecutorial agencies and the judiciary will need capacity and expertise to prosecute and judge complex CBDC cases and to cooperate with foreign counterparts. - Capacity and independence of law enforcement and judicial institutions are critical to detect, investigate, and prosecute illegal transactions. ### Technology and AML/CFT - New technology could help make implementation of AML/CFT measures more efficient. ### Experimentation and development - If the central bank decides to proceed, preparations are followed by experimentation (technological and social/economic aspects) and development of an actual CBDC product through proof of concepts, prototypes, and pilots. - Experimentation is crucial to guide decisions and evaluate the viability of different approaches. - The overarching theme is to ensure the CBDC system is designed and can be operated to meet specified policy objectives. - The preparation phase sets requirements and guidelines for experimentation and development; results from experimentation might lead to revisions of initial designs. *Source: IMF (excerpt provided in content unit).* ### conclusions. As depicted in the CBDC roadmap in Figure 1, the workstreams initiated and planned in the ### conclusions. As depicted in the CBDC roadmap in Figure 1, the workstreams initiated and planned in the ### A. Specification of Key Success Measures - Clear definition of success and accompanying metrics is essential and must be conducted in each subsequent phase to determine required data collection for CBDC evaluation. - Stakeholders can be partners in setting and providing feedback on proposed KPIs. - Metrics should be specified and derived directly from policy objectives, risk mitigation initiatives, or other considerations important for CBDC functioning. - Example of linking objectives to metrics: - If the policy objective is to digitalize payments, a quantitative metric could be a certain percentage of the targeted population within a specific region using CBDC instead of cash at least once a day within the first year. - A qualitative metric could be feedback from a percentage of these individuals reporting they feel safer carrying CBDC compared with cash. - Table 3: Examples of Key Performance Indicators Relevant to Measuring CBDC Experimentation and Development Success (selected entries preserved exactly as in source): - Goal: Define and measure adoption over time (BIS 2021b) - Number of CBDC Accounts: Total number of accounts opened for the CBDC by individuals or entities - By [date] the central bank aims to have [number] opened accounts. - Number of Active CBDC Accounts: Total number of accounts that are actively used to make day-to-day payments - By [date] the central bank aims to have [number] active accounts - Transaction Volume: Total number of transactions conducted using CBDC - On average, [number] transactions will be processed in the first [number] months. Thereafter, we expect the growth to be [percent] per month for the subsequent year. - Average Transaction Value: Average value of CBDC transactions - It is expected that [percentage] of transactions will be below [amount in currency] - Adoption Rate among Target Population: Intended user base or specific demographic groups that are utilizing the CBDC. This may include specific requirements for people with disabilities and those with literacy constraints - In [number] months, [percentage] of the targeted population will be using their CBDC wallet at least [number] times per week - Geographic Reach: Number of regions or locations where CBDC transactions occur - In average, [percentage] of small transactions that will occur in rural areas located in [name of a region] - Merchants Accepting CBDC: Number of businesses or merchants that accept CBDC payments - By [date 1], [percentage] of business-to-business transactions will use CBDC, leading to [percentage] of merchants to accept CBDC payment by [date 2] - Goal: Define and monitor satisfying response time - System Availability: Percentage of uptime for the CBDC system - The system should be available [percentage] of the time in average, per year - System Resilience: Recovery time in the event of system failures or disruptions - In case of cyberattack, services should be fully restored in less than [number] hours - Response Time: Average response time for transactions - Under the worst conditions, users should not wait more than [number] seconds to know the status of their transaction ### B. Testing Multiple Aspects of CBDC: Proof of Concepts (PoC) - Definition: PoC is an empirical investigation in a simulated environment to answer how a potential aspect of CBDC could work, often assessing promotion of policy objectives or risk mitigation. - Characteristics of PoC: - Limited scope, cost, time, and setting to enable exploration at low risk. - Functions like a funnel: starts broad, narrows down options, and informs go/no go for the prototype phase. - Can be conducted in subsequent phases (prototype, pilot) for focused testing. - PoC design considerations: - Questions should be drawn from policy objectives, identified risks, and design features specified in the preparations phase. - There should be a concrete list of desiderata (wanted or necessary features). - Primary focus is on design features and technological experiments to satisfy requirements identified earlier. - PoCs should also test economic, sociological, and user-oriented aspects, leveraging stakeholder analysis and continuous communication. ### C. Narrowing Down the Options: The Prototype - Definition: The prototype is the first functional model of the CBDC incorporating a technology solution and design features aligned with specified desiderata. - Purpose and process: - Preliminary selection of technology platform and design features. - Continuous experiments within a more defined setting; iterative progression to a functional product ready for low-risk testing. - Representative stakeholders, including a panel of users, should be involved. - Results guide decision to pause, continue R&D, or proceed to pilot. - Prototype does not equal readiness to issue CBDC; it strengthens understanding of impacts, alignment with policy goals, and risk management. - Elements to be in place after several iterations: - Final solution acquired or developed and tested with live data and stakeholders, including financial institutions and PSPs (Table 1 referenced). - Interoperability issues tested, including with existing payment solutions and different wallet providers. - Committed personnel, adequate funding, capacity, and third-party operational relationships established to support a pilot. - KPIs and metrics identified and implemented for monitoring performance, adoption, and progress toward policy goals; KPIs could include social impact metrics (e.g., reach among marginalized users). - Procurement and legal questions addressed: roles, responsibilities, service level agreements, vendor performance expectations, intellectual property, confidentiality, and exit strategies documented. - Resilience scenarios identified with plans to strengthen each case (to be tested during the pilot). - A decision committee to analyze prototype results, validate alignment with policy goals, and accept risks. - Communication and marketing strategies in place. ### D. Real Life Testing: The Pilot - Definition: The pilot is real-life testing of the CBDC prototype using real-value CBDC circulated at limited scale for real economic transactions. - Key aims: - Test operational factors: scalability, maintenance, and general risk management. - Assess promotion of policy objectives and plausibility of reaching appropriate levels of adoption. - Allow iterative additions of use cases, scenarios, or participants. - Pilot design principles: - Decide scale and duration carefully: keep scale small to limit risk but large enough to draw conclusions. - Gradual expansion is a method to manage risk while increasing learnings. - Example approaches: - Eastern Caribbean Central Bank: staggered country-by-country introduction leveraging island partitioning. - e-CNY pilot: initially launched in four cities around the 2022 Beijing Winter Olympics and expanded to cover 17 provinces in total. - Expansion permits incorporation of new PoCs to test additional features. - Stakeholder inclusion and communications: - Develop communication and marketing strategy to onboard intermediaries, wallet providers, merchants, and individuals. - Use stakeholder analysis from earlier phases and maintain continuous communication to evaluate pilot performance and build support. - Decision rule: - If pilot demonstrates feasibility, readiness, and value, jurisdiction can consider progressing into production. ### 5. Launching the CBDC: The Production Phase - Definition: The production phase begins with formal launch and covers ongoing management and improvement; open ended until cancellation decision. - Practical experience: - To date only three jurisdictions in the world have entered the production phase (The Bahamas, Jamaica, and Nigeria). - Less practical experience exists compared with earlier phases; central banks can draw on operating payment systems experience and prior phase knowledge. - Ongoing requirements: - Continual evaluation, iteration, and improvement drawing on actual experience (see Box 5). - Decision to start production depends on jurisdiction circumstances; careful testing and deliberate phase progression minimize risk. - Adoption considerations: - Adequate adoption is key but level depends on policy objectives; some objectives (e.g., convertibility into central bank money) may not require extensive daily usage. - Central banks must define adequate adoption relative to policy objectives and incorporate analysis into KPIs. - Network effects create entry barriers; realistic adoption goals and additional measures to establish network effects may be necessary. - Understanding user and PSP needs (identified in preparations and maintained via stakeholder engagement) is crucial; PSPs can promote CBDC if incentives are aligned. - Continued principles and evolution: - CBDC is never “finished”; continued innovation, new PoCs, and iterative tweaks are expected. - Post-launch experiences should be evaluated and may prompt changes to the system. - Workstreams continue in production at varying intensity, notably risk management and stakeholder relations. - Areas of special importance for ongoing evaluation: - Operational resilience: system scalability, cyber resilience, robust recovery plans per payment system standards. - Appropriate design: ensure design promotes policy objectives and mitigates risks; introduce improvements gradually and explore tweaks via new PoCs. - Adequate reception: frequent communication and stakeholder analysis to ensure suitable adoption levels and to learn reasons for non-use; adjust design and communication accordingly. Box 5. The Production Phase as the Beginning of a Journey: The Bahamas Sand Dollar Experience - Timeline and context: - The Bahamas Sand Dollar was officially launched in October 2020 after a 10-month pilot. - Uptake has been slow, expected due to low e-money penetration (Hall 2022). - Postlaunch efforts by CBOB (CBOB 2023) include: - Merchant training and working with PSPs to improve point-of-sale signage and more seamless use of QR code displays to process payments - Promoting the Sand Dollar experience at civic and cultural events, particularly events organized by nonprofit organizations, and giving away Sand Dollars to early adopters - Recruiting and training people to serve as “Sand Dollar Ambassadors” to provide support to wallet users and merchants and be at all public promotional events - Integrating the Sand Dollar platform with the commercial banks’ automated clearing House so that Sand Dollars can be transferred to and from any local commercial bank deposit account - Communications and upgrades: - CBOB publishes monthly updates to keep the public informed on initiatives to promote digital currency adoption (CBOB 2023). - Future upgrades: public-facing Sand Dollar wallet and backend infrastructure will be upgraded to allow PSPs to customize the app’s appearance to display their individual brand identities, including logos and branding color preferences. *Source: IMF staff conclusions (ftnea2023008 - conclusions).* ### References ### References ### References (alphabetical listing) - Agur, Itai , Anil Ari, and Giovanni Dell’Ariccia. 2019. “Designing Central Bank Digital Currencies.” IMF Working Paper 19/252, International Monetary Fund, Washington, DC. - Alliance for Financial Inclusion. 2022. “Central Bank Digital Currency—An Opportunity for Financial Inclusion in Developing and Emerging Economies?” https://www.afi-global.org/publications/central-bank-digital-currency-special-report/. - Armas, Adrian, and Manmohan Singh. 2022. “Digital Money and Central Banks Balance Sheet.” IMF Working Paper 2022/206, International Monetary Fund, Washington, DC. - Armelius, Hanna, Paola Boel, Carl Andreas Claussen, and Marianne Nessén. 2018. 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