## ppea2023048 - EXECUTIVE SUMMARY

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### Key messages
- The landscape of CBDC exploration is diverse — some central banks are proceeding rapidly while others are moving more slowly or adopting a wait-and-see approach.
- If designed, implemented, and regulated appropriately, CBDC has the potential to modernize payment systems and support demand for central bank money even if alternative digital means of payment are rapidly adopted.
- The decision to explore and potentially even launch CBDC should remain jurisdiction specific, depending on policy objectives and domestic circumstances such as the degree of digitalization, the structure of the financial system, legal and regulatory frameworks, and the central bank’s own capacity.
- A dynamic decision-making framework can help guide central banks in their CBDC exploration. At least six elements should be considered: policy objectives, design choices, capacity assessment, stakeholder engagement, macro-financial risks and implications, and legal and regulatory issues.
- To build trust in CBDC, robust institutional, legal, and technological safeguards should be adopted to protect user privacy while ensuring compliance with anti-money laundering and counter-terrorism financing (AML/CFT) standards.
- CBDC development needs structure and flexibility. A phased and iterative approach over five steps — preparation, proof-of-concept, prototype, pilot, and production — could allow central banks to adjust the pace, scale, and scope of their CBDC projects.
- The impact of CBDC on monetary policy transmission and financial stability will depend on design features and characteristics of the economy; transmission could strengthen, though probably not by much.
- CBDC could facilitate cross-border payments and provide an alternative channel for capital flows. Capital flow management measures (CFMs) can be built into CBDC, allowing for automation and greater efficiency, though raising some operational risks.
- If designed to mimic the ease of use and trustworthiness of cash, and accompanied by policies facilitating adoption, CBDC could help promote financial inclusion.

### CBDC Handbook and Fintech Notes
- Executive summary draws from a wave of five IMF Fintech Notes on CBDC published in September 2023; the notes will be edited into initial chapters of a CBDC Handbook after incorporating comments by the international community.
- Planned virtual CBDC Handbook will address five priority areas:
  - (i) policy objectives and operational framework of CBDC;
  - (ii) foundational requirements and readiness to issue CBDC, such as legal considerations, cyber resilience, central bank governance, and regulation and supervision;
  - (iii) CBDC design processes, considerations, and choices;
  - (iv) project approaches and technology;
  - (v) potential macro-financial impacts of CBDC.
- Staff three-step approach:
  - (i) develop Fintech Notes on CBDC topics to seek comments inside and outside the IMF;
  - (ii) brief the IMF Executive Board on key themes extracted from the Fintech Notes;
  - (iii) subsequently publish Handbook chapters after the 2023 Annual Meetings.

### Definitions and potential benefits
- CBDC definition and types:
  - CBDC is digital money issued by central banks.
  - Retail CBDC is accessible to the general public through “digital wallets”.
  - Wholesale CBDC would be available just to financial institutions and held/exchanged using different technology such as digital ledgers optimized to be programmable, immutable, and widely shared.
- Potential contributions of CBDC:
  - Modernize payment systems and increase resilience of payments.
  - Help anchor the public’s trust in money in a digital future where cash may no longer be primary.
  - Foster financial inclusion, spur competition and innovation, improve speed and transparency of cross-border payments, facilitate access, and lower costs.
- No “one-size-fits-all”: benefits vary with country circumstances, design choices, implementation, and legal and regulatory frameworks. Exploration should be careful, iterative, and methodic.

### Current international landscape (selected facts)
- BIS most recent CBDC survey found that 93 percent of central banks engaged in some form of CBDC work (Kosse and Mattei 2023).
- The Atlantic Council indicates that 130 countries, representing 98 percent of global GDP, are exploring a CBDC.
- Three jurisdictions have officially launched CBDC: The Bahamas (launched December 2020), Nigeria (launched 2021), and Jamaica (launched 2022). Early experiences suggest adoption is gradual and projects are being continuously adjusted.
- Examples of active national efforts:
  - Euro System: proceeding with explorations around the digital euro and aiming to finalize the investigation phase by October 2023.
  - China: conducting a large-scale CBDC pilot in several regions, with hundreds of millions of wallets having been downloaded.
  - Brazil and India: actively piloting CBDC projects.
- Some central banks paused exploration: e.g., Central Bank of Uruguay scaled back after an early 2018 pilot; Central Bank of Kenya stated CBDC is not a compelling short- or medium-term priority but will monitor developments.
- International organizations and initiatives:
  - BIS Innovation Hub conducts multiple technical experimentations (e.g., Project Polaris on offline payments; Project Icebreaker on retail CBDC for cross-border payments).
  - IMF and World Bank run an active capacity development program on CBDC including bilateral missions, regional workshops, and training.
- Footnote: The 86 central banks responding to the BIS survey represent 82 percent of the world’s population and 94 percent of global economic output.

### Why central banks might explore CBDC (selected rationales)
- Address existing pain points or “future-proof” central bank money:
  - Solve high costs of domestic payments or interoperability issues.
  - Prepare for a future where cash is less prevalent and large private digital instruments (e.g., stablecoins) become prominent.
- Promote financial inclusion:
  - Replicate desirable properties of cash: use without a bank account for small amounts, low or no fees for small transactions, less stringent identification for low-risk populations, offline operation for patchy connectivity.
  - As a direct liability of the central bank, CBDC should be trusted and could serve as an entry point to the formal financial system.
- Promote competition and reduce payments costs:
  - CBDC could discipline markets dominated by few large firms, increase innovation, and serve as a backbone for interoperability; PSPs could settle claims in CBDC.
- Strengthen resilience and serve as a backup:
  - CBDC could act as an operationally independent alternative payment system in case of cyberattacks, power outages, or malfunctions; can be designed with offline technologies and high cybersecurity readiness.
- Safeguard monetary sovereignty and counter currency substitution and “cryptoization”:
  - CBDC could make domestic currency more attractive though effects are likely to be marginal.
- Bolster the role of central bank money as cash use diminishes:
  - If cash availability to the public weakens, CBDC may help ensure continued availability of and demand for central bank money.

### Dynamic decision-making framework for CBDC exploration
- Exploration requires an adaptable, iterative, and responsive "dynamic" approach differing from low-uncertainty initiatives.
- Two interconnected scopes of work:
  - Policy management team: evaluates CBDC and establishes strategic requirements.
  - Product development team: implements, tests, and validates requirements set by the policy management team.
- Two-way dialogue between policy and product teams ensures requirements are implementable and informed by technical feasibility.

### Six elements for the policy management team
- Elements to consider:
  1. Policy objectives;
  2. Assessment of risk and impact;
  3. Capacity for experimentation and implementation;
  4. Stakeholder engagement;
  5. Feature requirements;
  6. Legal and regulatory considerations.
- On policy objectives:
  - Must be clearly defined, prioritized, consistent with central bank mandates and domestic conditions, and accompanied by well-defined criteria of success (e.g., metrics on adoption rates, uninterrupted availability in stress scenarios).
- On macro-financial risks:
  - Key issues: potential bank disintermediation, increased risk of bank runs, dependence on banking sector structure and health, deposit insurance credibility, and CBDC features such as remuneration and caps on wallet holdings.
  - Recommendations: assess banking sector contestability and resilience; conduct stress-testing with different CBDC adoption scenarios; consider caps on holdings and non-remuneration to limit attractiveness as a store of value.
- On capacity:
  - Capacity includes digital infrastructure, financial resources, and in-house expertise (project management, engineering/IT, cybersecurity, design, communications, operations, legal, regulation, oversight).
  - If gaps exist: partner, hire, or grow capacity internally from existing teams.
- On stakeholder engagement:
  - Key stakeholders: public sector bodies, private sector (PSPs, merchants), and end users.
  - Engagement activities: bilateral meetings, consultation papers, town hall meetings, focus groups, surveys; clear communication strategy from the start is critical.
- On feature requirements:
  - Should derive from objectives, risk mitigation, capacity, and user needs; four categories:
    (i) mandatory principles (legal/regulatory compliance, basic security);
    (ii) high-level operating model (e.g., “two-tier” model);
    (iii) key functionality (e.g., offline payments);
    (iv) interconnection features (compatibility with third-party wallets, foreign CBDC).
  - Feature requirements should be high-level, flexible, and adaptable.
- On legal and regulatory considerations:
  - Start legal work early; involve lawyers from the beginning.
  - Key issues: legal basis to issue CBDC; supervisory and regulatory framework; legal certainty for transactions; data security laws; accountability and transparency.
  - Cross-border use entails additional legal challenges and requires strong rule of law and effective institutions.

### Financial integrity, privacy, and AML/CFT considerations
- Safeguarding financial integrity:
  - Assess existing ML/TF vulnerabilities and address them with customer due diligence, record-keeping, reporting of suspicious transactions, and targeted financial sanctions.
  - Weaknesses in AML/CFT regimes may be exacerbated by improperly designed CBDC; assess implications for supervisory and law enforcement capacities.
  - Thoughtful CBDC design can align with Financial Action Task Force standards.
- Privacy and data use:
  - Adopt robust institutional, legal, and technological safeguards to protect user privacy while ensuring AML/CFT compliance.
  - Payments generate transaction data; user privacy preferences vary and will affect adoption; transparency about privacy protection is key.
  - Data access may vary by authority needs; type and volume of data required should be risk-sensitive (less information for low-risk, small-amount users).
  - A full chapter on data use and privacy protection will be dedicated in later Handbook iterations.

### Interaction between policy management and product development; iterative methods
- Close collaboration and iteration are essential to revisit product requirements based on technological experimentation.
- For CBDC, steps should be iterative rather than strictly linear.
- The 5P product development phases (iterative and revisitable):
  a. Preparation: policy management team most active; establish the six elements.
  b. Proof-of-concept: small-scale empirical tests and validation in a lab environment.
  c. Prototype: development or acquisition of technologies and selection of partners.
  d. Pilot: live test of a product being considered for issuance; a pilot is a real-world assessment of readiness.
  e. Production: issuance and operation.
- Go/no go checkpoints between phases:
  - Options at phase intersections:
    (i) stay in the same phase and iterate;
    (ii) move forward to the next phase;
    (iii) move forward with some ready elements while staying in the same phase for unresolved questions;
    (iv) pause or stop the project.
  - Agree criteria for moving phases and decision participants early and update regularly; gather data throughout the process.
  - Decisions should revert to the policy management elements; continue only if objectives can be satisfied, risks minimized, and capacity leveraged.
- Decision timing and communication:
  - Postpone costly or final decisions until sufficient information is gathered.
  - Start with low-cost and rapid activities to validate or invalidate assumptions.
  - Clear information and decision criteria help avoid criticism if a project is halted; communicate decisions and rationales publicly.

### Macro-financial implications: monetary policy transmission (overview)
- CBDC could affect monetary policy transmission and the macroeconomic environment via:
  - Increased competition for deposits, increasing banks’ share of wholesale funding and lowering bank profits.
  - Bolstered financial inclusion, increasing population share with access to interest-bearing instruments set by monetary policy.
  - Encouraging greater use of local currency instead of foreign digital money or crypto assets.
- Potential impacts on policy stance and channels:
  - Level changes in policy stance:
    - Increased competition and wholesale funding needs could tighten financial conditions.
    - Increased financial inclusion could loosen financial conditions.
    - De-dollarization/cryptoization effects ambiguous.
  - Transmission strengthening:
    - De-dollarization/de-cryptoization likely amplifies transmission channels.
    - Increased competition for deposits could strengthen interest rate and bank lending channels.
    - Increased wholesale funding strengthens bank lending channel because wholesale funding costs are more sensitive to policy rates.
    - Higher financial inclusion can strengthen interest rate, asset price, and lending channels if households gain access to interest-sensitive instruments.
- Design-dependent impacts:
  - Impacts depend on design features; precautionary features (non-remuneration, limits on holdings/transactions) limit bank disintermediation.
  - When policy rates are low and there is financial market stress, CBDC impact on transmission could be more significant.
  - An unremunerated CBDC could entrench the zero lower bound for interest rates as households and firms prefer holding CBDC rather than negatively yielding bank deposits (Jamet et al. 2022).
  - CBDC would not bear storage costs that apply to physical cash, raising the effective lower bound (Armelius et al., 2018).
- General expectation: unless holdings are very large, effects on monetary policy transmission expected to be relatively small in normal times.

### Monetary policy operations, balance sheet, yield curve, and seigniorage
- Monetary policy operations:
  - CBDC demand can move erratically in a mid-corridor system targeting a market rate, complicating forecasting of liquidity for open market operations.
  - Central banks would likely learn to forecast more accurately and have tools to smooth unexpected liquidity demand.
  - Otherwise, monetary policy operations would continue largely unchanged with CBDC.
  - Central banks should retain control of interest rates on reserves, to the extent that the retail CBDC is not available for interbank payments.
- Balance sheet, yield curve, seigniorage:
  - If CBDC replaces deposits extensively and central banks buy more government bonds to meet demand, price impacts could affect the yield curve; available evidence suggests these would be marginal (Williams 2011).
  - In countries with much smaller government bond markets, impacts on the yield curve could be greater.
  - On seigniorage revenue: Bindseil (2016) argues that a large balance sheet increases seigniorage; Hall and Reis (2015) point to risks (interest rate, foreign exchange, and default) from a larger balance sheet; losses could undermine central bank independence (Ishi and others 2011).
- Foreign CBDC and monetary policy autonomy:
  - Foreign CBDCs available domestically could significantly impact monetary policy autonomy by increasing the risk of currency substitution and amplifying international spillovers.
  - Large external holdings of domestic CBDC could subject the domestic central bank balance sheet to large fluctuations connected to changing external demand.
  - Such fluctuations may affect market liquidity and the availability (and price) of domestic safe assets and could undermine monetary policy.

### Capital Flow Management Measures (CFMs) in the digital age
- CFMs remain part of the broader policy toolkit; CBDC does not imply a need to revise IMF’s “Institutional View” on Liberalization and Management of Capital Flows.
- Authorities must consider how CFMs could be implemented with CBDC, whether a domestic CBDC is usable to buy foreign assets or a foreign CBDC is accessible domestically.
- Design choices should account for the need to relax or remove CFMs during liberalization in line with IMF’s revised Institutional View (IMF 2022).
- Implementing CFMs within a CBDC ecosystem:
  - CFMs can be implemented at different levels of CBDC architecture (wallets, underlying technology, connecting platforms) with trade-offs.
  - Programmable CBDC enables “smart CFMs” to automate monitoring, compliance, and disclosure and reduce leakages relative to manual processes, but raise operational risks.
  - Implementing CFMs on foreign CBDC requires central bank collaboration on practices and standards; absent collaboration, alternative policies (e.g., banning access) may have limited effectiveness.
  - CFMs on CBDC must operate alongside traditional CFMs; coordination is necessary to ensure consistency and avoid loopholes.
  - Privacy concerns: implementing CFMs may require extensive information stored in data repositories, creating a trade-off between privacy and risk management.
  - Operational risks from smart CFMs include software bugs, outages, cyber resilience, and contingency planning; legal frameworks must clearly assign powers, rights, and responsibilities.

### Financial inclusion
- Motivations and scale:
  - About 60 percent of emerging and low-income countries see financial inclusion as one of the top three motivations for issuing CBDC (Kosse and Mattei 2023).
  - Globally, 1.4 billion people remain outside of the formal financial system.
- Potential channels through which CBDC can promote inclusion:
  - Low or no fees for small transactions and simplified customer due diligence where appropriate.
  - Offline operation capability.
  - As a direct liability of the central bank, CBDC would be as trusted and risk-free as physical cash.
  - CBDC can serve as an entry point to broader formal financial system, enabling transfers and access to savings, insurance, and credit.
  - CBDC-based transaction data could be used by credit providers in place of collateral or formal credit history when needed.
- Design recommendations to improve inclusion:
  - Very low or no cost with no minimum balance requirements.
  - Compatibility with a variety of hardware devices and potential offline functionality.
  - Simple and intuitive user interface.
  - Tiered wallets with lower limits on holdings and transactions to relax identification requirements for low-risk populations.
- Complementary policies to maximize CBDC’s potential:
  - (i) implementing digital literacy programs;
  - (ii) developing digital infrastructure;
  - (iii) increasing access to mobile phones;
  - (iv) establishing digital ID.
- Caveats:
  - CBDC alone is not a panacea; other barriers include low financial literacy, cultural factors, and low trust in formal institutions.
  - Other solutions (fast payment systems, e-money schemes) may complement CBDC.
- Unique CBDC properties relative to other solutions:
  - (i) more trustworthy as central bank money;
  - (ii) public sector-led initiative potentially provided at lower cost, improving efficiency, interoperability, and operational resilience;
  - (iii) can be open and widely accessible public infrastructure that is interoperable;
  - (iv) can hedge against operational risks from private service providers;
  - (v) may offer offline payments and programmability.
- Suitability must be assessed on a country-specific basis.

### Conclusion and next steps
- If appropriately designed, CBDC has the potential to improve payment systems and support a role for central bank money even as other digital payment solutions proliferate.
- Appropriateness of CBDC will vary with country circumstances; policymakers need to explore CBDC carefully and systematically.
- This paper briefs the Executive Board on staff’s initial considerations on CBDC stemming from five Fintech Notes.
- A second wave of Fintech Notes and CBDC Handbook chapters will be published in 2024. Possible future topics include financial stability; CBDC distribution, incentives, and adoption; the relationship between CBDC and other payment systems; cross-border payments; cyber security; and implications for data frameworks and privacy protection.

*Source: ppea2023048 - EXECUTIVE SUMMARY, September 29, 2023*

### EXECUTIVE SUMMARY

### ppea2023048 - EXECUTIVE SUMMARY

### Key messages
- The landscape of CBDC exploration is diverse — some central banks are proceeding rapidly while others are moving more slowly or adopting a wait-and-see approach.
- If designed, implemented, and regulated appropriately, CBDC has the potential to modernize payment systems and support demand for central bank money even if alternative digital means of payment are rapidly adopted.
- The decision to explore and potentially even launch CBDC should remain jurisdiction specific, depending on policy objectives and domestic circumstances such as the degree of digitalization, the structure of the financial system, legal and regulatory frameworks, and the central bank’s own capacity.
- A dynamic decision-making framework can help guide central banks in their CBDC exploration. At least six elements should be considered: policy objectives, design choices, capacity assessment, stakeholder engagement, macro-financial risks and implications, and legal and regulatory issues.
- To build trust in CBDC, robust institutional, legal, and technological safeguards should be adopted to protect user privacy while ensuring compliance with anti-money laundering and counter-terrorism financing (AML/CFT) standards.
- CBDC development needs structure and flexibility. A phased and iterative approach over five steps — preparation, proof-of-concept, prototype, pilot, and production — could allow central banks to adjust the pace, scale, and scope of their CBDC projects.
- The impact of CBDC on monetary policy transmission and financial stability will depend on design features and characteristics of the economy; transmission could strengthen, though probably not by much.
- CBDC could facilitate cross-border payments and provide an alternative channel for capital flows. Capital flow management measures (CFMs) can be built into CBDC, allowing for automation and greater efficiency, though raising some operational risks.
- If designed to mimic the ease of use and trustworthiness of cash, and accompanied by policies facilitating adoption, CBDC could help promote financial inclusion.

### CBDC Handbook and Fintech Notes
- The executive summary draws from a wave of five IMF Fintech Notes on CBDC published in September 2023; these notes will be edited into initial chapters of a CBDC Handbook after incorporating comments by the international community.
- The planned virtual CBDC Handbook will address five priority areas:
  - (i) policy objectives and operational framework of CBDC;
  - (ii) foundational requirements and readiness to issue CBDC, such as legal considerations, cyber resilience, central bank governance, and regulation and supervision;
  - (iii) CBDC design processes, considerations, and choices;
  - (iv) project approaches and technology;
  - (v) potential macro-financial impacts of CBDC.
- Staff follows a three-step approach: (i) develop Fintech Notes on CBDC topics to seek comments inside and outside the IMF; (ii) brief the IMF Executive Board on key themes extracted from the Fintech Notes; and (iii) subsequently publish Handbook chapters after the 2023 Annual Meetings.

### Definitions and potential benefits (Introduction)
- CBDC is digital money issued by central banks. Retail CBDC is accessible to the general public through “digital wallets”; wholesale CBDC would be available just to financial institutions and held/exchanged using different technology such as digital ledgers optimized to be programmable, immutable, and widely shared.
- Potential contributions of CBDC:
  - Modernize payment systems and increase resilience of payments.
  - Help anchor the public’s trust in money in a digital future where cash may no longer be primary.
  - Foster financial inclusion, spur competition and innovation, improve speed and transparency of cross-border payments, facilitate access, and lower costs.
- There is no “one-size-fits-all” approach: benefits vary with country circumstances, design choices, implementation, and legal and regulatory frameworks. CBDC exploration should be careful, iterative, and methodic.

### Current international landscape (selected facts)
- The BIS most recent CBDC survey found that 93 percent of central banks engaged in some form of CBDC work (Kosse and Mattei 2023).
- The Atlantic Council indicates that 130 countries, representing 98 percent of global GDP, are exploring a CBDC.
- Three jurisdictions have officially launched CBDC: The Bahamas (launched December 2020), Nigeria (launched 2021), and Jamaica (launched 2022). Early experiences suggest adoption is gradual and projects are being continuously adjusted.
- Examples of active national efforts:
  - Euro System: proceeding with explorations around the digital euro and aiming to finalize the investigation phase by October 2023.
  - China: conducting a large-scale CBDC pilot in several regions, with hundreds of millions of wallets having been downloaded.
  - Brazil and India: actively piloting CBDC projects.
- Some central banks paused exploration: e.g., Central Bank of Uruguay scaled back after an early 2018 pilot; Central Bank of Kenya stated CBDC is not a compelling short- or medium-term priority but will monitor developments.
- International organizations and initiatives:
  - BIS Innovation Hub conducts multiple technical experimentations (e.g., Project Polaris on offline payments; Project Icebreaker on retail CBDC for cross-border payments).
  - IMF and World Bank run an active capacity development program on CBDC including bilateral missions, regional workshops, and training.
- Footnote detail: The 86 central banks responding to the BIS survey represent 82 percent of the world’s population and 94 percent of global economic output.

### Why might central banks explore CBDC? (selected rationales)
- Address existing pain points or “future-proof” central bank money:
  - Some jurisdictions seek to solve high costs of domestic payments or interoperability issues.
  - Others aim to prepare for a future where cash is less prevalent and large private digital instruments (e.g., stablecoins) become prominent, ensuring central bank money remains the unit of account and ultimate settlement asset.
- Promote financial inclusion:
  - CBDC can replicate desirable properties of cash: use without a bank account for small amounts, low or no fees for small transactions, less stringent identification for low-risk populations, offline operation for areas with patchy connectivity.
  - As a direct liability of the central bank, CBDC should be trusted and could serve as an entry point to the formal financial system for the financially excluded.
- Promote competition and reduce payments costs:
  - Where payment systems are dominated by few large firms, CBDC could discipline the market, increase innovation, and serve as a backbone for interoperability; PSPs could settle claims in CBDC.
- Strengthen resilience and serve as a backup:
  - CBDC could act as an operationally independent alternative payment system in case of cyberattacks, power outages, or malfunctions; can be designed with offline technologies and high cybersecurity readiness.
- Safeguard monetary sovereignty and counter currency substitution and “cryptoization”:
  - CBDC could make domestic currency more attractive though effects are likely to be marginal; could help counter use of crypto assets such as stablecoins used for payments.
- Bolster the role of central bank money as cash use diminishes:
  - Cash today is a risk-free store of value and the ultimate “bridge” between bank accounts. If cash availability to the public weakens, CBDC may help ensure continued availability of and demand for central bank money.

*Source: ppea2023048 - EXECUTIVE SUMMARY, September 29, 2023*

### 21. Exploring CBDC is a significant undertaking that involves complex decisions and

### 21. Exploring CBDC is a significant undertaking that involves complex decisions and considerations in a rapidly changing digital environment.

### Dynamic decision-making framework for CBDC exploration
- Exploring CBDC requires an approach that is adaptable, iterative, and responsive to the rapidly changing digital and policy landscape ("dynamic" approach).
- A dynamic approach differs from initiatives where experience is high and uncertainty is lower, and where a cost-benefit analysis can be established up front.
- The exploration involves two interconnected scopes of work:
  - Policy management team: evaluates CBDC and establishes strategic requirements.
  - Product development team: implements, tests, and validates requirements set by the policy management team.
- Two-way dialogue between policy management and product development is beneficial to ensure requirements are implemented and informed by technical feasibility.

### Six elements for the policy management team in the decision-making framework
- The policy management team is encouraged to consider at least six elements:
  1. Policy objectives;
  2. Assessment of risk and impact;
  3. Capacity for experimentation and implementation;
  4. Stakeholder engagement;
  5. Feature requirements;
  6. Legal and regulatory considerations.

- On policy objectives:
  - Objectives must be clearly defined and prioritized and consistent with central bank mandates and domestic conditions.
  - Objectives can evolve as countries learn; the process should be transparent and explicit.
  - Clearly specified objectives should be accompanied with well-defined criteria of success used to evaluate the CBDC project at regular intervals.
  - Example: objectives on financial inclusion call for metrics on adoption rates; objectives on payment system resilience call for uninterrupted availability in stressful scenarios.

- On macro-financial risks:
  - Key issues include potential bank disintermediation and increased risk of bank runs as depositors convert deposits into central bank money.
  - Relevance depends on banking sector structure and health, existence of credible deposit insurance, and CBDC features such as remuneration and caps on wallet holdings.
  - Countries should assess contestability and resilience of the banking sector and conduct stress-testing exercises with different CBDC adoption scenarios.
  - Bank disintermediation and digital run risks could warrant caps on holdings; designing CBDC with no remuneration (e.g., zero interest rates) could limit its attraction as a store of value.

- On capacity to explore and issue CBDC:
  - Capacity covers digital infrastructure, financial resources, and in-house expertise including project management, engineering/IT, cybersecurity, design, communications, operations, legal services and regulation, and oversight.
  - If resource gaps exist, options include: partner, hire, or grow capacity internally from existing teams involved in payments operations and oversight, IT, and legal services.

- On stakeholder engagement:
  - Key stakeholders include public sector bodies (e.g., ministries of finance), the private sector (PSPs, merchants), and end users.
  - Engagement activities include bilateral meetings, consultation papers, town hall meetings, focus groups, and surveys, tailored to stakeholder needs and technical knowledge.
  - A clear and comprehensive communication strategy from the start is critical to build trust and address sensitivities and potential misunderstandings.

- On feature requirements:
  - Feature requirements should be based on objectives, risk mitigation, capacity, and user needs.
  - Four categories of feature requirements:
    (i) mandatory principles, including compliance with laws and regulations, and basic security features;
    (ii) high-level operating model including the role of the central bank and the private sector as in a “two-tier” model where the central bank issues and redeems CBDC and the private sector distributes it and provides payment services;
    (iii) key functionality to satisfy user needs and policy objectives, such as offline payments to bolster financial inclusion;
    (iv) interconnection features to ensure compatibility of CBDC with third party wallets, other financial and social services, foreign CBDC, and other external services.
  - Feature requirements should be high-level, flexible, and adaptable; they should not preclude nor assume a specific technology or user-interface and may change during exploration.

- On legal and regulatory considerations:
  - CBDC issuance and distribution require a sound legal basis and robust regulatory foundations and effective, independent institutions.
  - Start legal work early, possibly during the investigation phase, and involve lawyers from the beginning.
  - Key issues: legal basis to issue CBDC; supervisory and regulatory framework; legal amendments to give CBDC transactions legal certainty; laws and regulations related to technology-based data security; measures to ensure accountability and transparency over the central bank’s role.
  - Cross-border use entails additional legal challenges; strong rule of law and effective institutions are necessary to mitigate risks of corruption, fiscal domination, and subjugation of CBDC issuance.
  - Effective supervision is needed to ensure compliance.

### Financial integrity, privacy, and AML/CFT considerations
- Safeguarding financial integrity:
  - Assess existing money laundering and terrorist financing vulnerabilities and address them with mitigating measures such as customer due diligence, record-keeping, reporting of suspicious transactions, and implementation of targeted financial sanctions.
  - Weaknesses in a country’s AML/CFT regime may be exacerbated by an improperly designed CBDC.
  - Assess implications for supervisory and law enforcement authorities, including capacity and expertise.
  - Thoughtful CBDC design can align with Financial Action Task Force standards.

- Privacy and data use:
  - Adopt robust institutional, legal, and technological safeguards to protect user privacy while ensuring AML/CFT compliance.
  - Payments generate data on transaction parties, amounts, and purpose; user preferences on who collects, stores, and uses data will vary.
  - Privacy preferences differ by country and social groups and will affect adoption; transparency about privacy protection is key.
  - Data access may vary by authority needs (e.g., law enforcement during investigations).
  - The type and volume of data required should be risk-sensitive; less information may be required for those posing lower ML/TF risks (e.g., transacting and holding small amounts of CBDC) to foster financial inclusion.
  - Considerations related to data use and privacy protection are emerging; a full chapter will be dedicated to this topic in later iterations of the CBDC Handbook.

### Interaction between policy management and product development; iterative methods
- Close collaboration and iteration between policy management and product development teams are essential to revisit product requirements based on technological experimentation.
- Large projects often follow a sequence: establish requirements, then research, experiment, develop, test, and operate. For continuously evolving or unproven projects like CBDC, steps should be iterative.

- The 5P product development phases (iterative and revisitable):
  a. Preparation: policy management team is most active; establish the six elements of the framework.
  b. Proof-of-concept: small-scale empirical tests and validation, typically in a lab environment.
  c. Prototype: development or acquisition of technologies and selection of partners.
  d. Pilot: live test of a product being considered for issuance; a pilot is a real-world assessment of product readiness, not just research.
  e. Production: issuance and operation.

- Go/no go checkpoints between phases:
  - At phase intersections, the central bank has four options:
    (i) stay in the same phase and iterate;
    (ii) move forward to the next phase;
    (iii) move forward with some elements that are ready while staying in the same phase for unresolved questions;
    (iv) pause or stop the project.
  - Criteria for moving phases and decision participants should be agreed early and updated regularly as new findings emerge.
  - Data relevant to go/no go decisions should be gathered throughout the process.
  - Decisions should generally hark back to the elements established by the policy management team; projects should continue only if objectives can be satisfied, risks minimized, and capacity leveraged.

- Decision timing and communication:
  - Postpone costly or final decisions until sufficient information is gathered.
  - Exploration can occur without deciding to issue CBDC; decision to issue should not be hasty or based on incomplete information.
  - Start with low-cost and rapid activities to validate or invalidate assumptions.
  - As projects progress, capacity to develop and test or discard CBDC will be built.
  - Clear information and decision criteria help avoid criticism if a project is halted; central banks should clearly communicate decisions and rationales to the public.

### Macro-financial implications: overview and monetary policy transmission
- Three Fintech Notes summarized cover: monetary policy transmission, capital flow management measures, and financial inclusion. The following focuses on monetary policy transmission.

- Ways CBDC could affect monetary policy transmission and the macroeconomic environment:
  - CBDCs can increase competition for deposit funding, increasing banks’ share of wholesale funding and lowering bank profits.
  - CBDC could bolster financial inclusion, increasing the share of the population with access to interest-bearing instruments set by monetary policy.
  - CBDC could encourage greater use of local currency rather than foreign denominated digital money or crypto assets.
  - Depending on country circumstances, these effects could be large.

- Potential impacts on the monetary policy stance and channels:
  - Changes induced by CBDC issuance could lead to level changes in policy stance:
    - Increased competition for deposits, increased wholesale funding, and lower bank profits would tighten financial conditions.
    - Increased financial inclusion could loosen financial conditions.
    - Decreasing dollarization/cryptoization has ambiguous impact.
  - Central banks should monitor these effects and adjust policy instruments to keep the stance unchanged.

  - CBDC can strengthen monetary policy transmission:
    - De-dollarization/de-cryptoization likely amplifies transmission channels.
    - Increased competition for deposits could strengthen interest rate and bank lending channels.
    - Increased wholesale funding would strengthen the bank lending channel because wholesale funding costs are more sensitive to policy rates.
    - Higher financial inclusion can strengthen interest rate, asset price, and lending channels if households have greater access to interest-sensitive instruments.

- Design-dependent impacts:
  - Impact on monetary transmission depends on design features; precautionary design features like non-remuneration and limits on CBDC holdings/transactions would limit bank disintermediation.
  - When policy rates are low and there is financial market stress, CBDC impact on transmission could be more significant.
  - An unremunerated CBDC could entrench the zero lower bound for interest rates as households and firms prefer holding CBDC rather than negatively yielding bank deposits (Jamet et al. 2022).
  - CBDC would not bear storage costs that apply to physical cash, raising the effective lower bound (Armelius et al., 2018).

*Source: ppea2023048 - 21. Exploring CBDC is a significant undertaking that involves complex decisions and considerations in a rapidly changing digital environment.*

### 47. CBDC may also have implications for monetary policy operations. In a mid-corridor

### ppea2023048 - 47. CBDC may also have implications for monetary policy operations. In a mid-corridor

### Monetary policy operations and CBDC demand
- CBDC demand can move erratically in a mid-corridor system targeting a market rate, complicating forecasting of liquidity necessary to optimize open market operations.
- Central banks would likely learn to forecast more accurately over time and have tools to smooth unexpected liquidity demand.
- Otherwise, monetary policy operations would continue largely unchanged with CBDC.
- Central banks should be able to affect term spreads through communication as before, such as by releasing and discussing their interest rate projections.
- Central banks should be able to retain control of interest rates on reserves, to the extent that the retail CBDC is not available for interbank payments.

### Central bank balance sheet, yield curve, and seigniorage
- If CBDC replaces deposits to a large extent and central banks’ demand for government bonds increases to meet high CBDC demand, there could be price impacts which can affect the yield curve.
- Available evidence from similar shifts suggests these would be marginal (Williams 2011).
- In countries with much smaller government bond markets, the impact of CBDC on the yield curve could be greater.
- Implications for seigniorage revenue:
  - Bindseil (2016) argues that a large balance sheet increases seigniorage.
  - Hall and Reis (2015) point to risks (interest rate, foreign exchange, and default) from a larger balance sheet which boil down to higher leverage.
  - Losses could undermine the central bank’s independence (Ishi and others 2011).

### Foreign CBDC and monetary policy autonomy
- Foreign CBDCs available domestically could significantly impact monetary policy autonomy by increasing the risk of currency substitution.
- CBDC can amplify international spillovers of shocks and increase international linkages.
- If a domestic CBDC could be held in large quantities abroad, the domestic central bank balance sheet could be subject to large fluctuations connected to changing external demand (possibly related to currency and/or bank runs).
- Such fluctuations may affect market liquidity and the availability (and price) of domestic safe assets which could undermine monetary policy.
- Further complications to financial stability and central bank operations could follow (He and McCauley 2010).

### Expected magnitude of transmission effects
- In general, unless holdings of CBDC are very large, effects on monetary policy transmission are expected to be relatively small in normal times.
- Strengthening of transmission channels via increased competition and wholesale funding relies on significant substitution of bank deposits for CBDC which may not materialize.
- Impact of financial inclusion is uncertain and constrained by the relatively small share in overall savings and lending of the financially excluded populations, particularly in more advanced economies.
- Impact of de-dollarization/de-cryptoization may also be small if CBDC does not effectively increase the attractiveness of local currency.

### Capital Flow Management Measures (CFMs) in the digital age
- CFMs remain part of the broader policy toolkit; CBDC does not imply a need to revise the IMF’s “Institutional View” on Liberalization and Management of Capital Flows.
- Authorities must consider how CFMs could be implemented with CBDC, whether issuing a domestic CBDC usable to buy foreign assets or if a foreign CBDC is accessible domestically.
- Design choices should account for the need for CFMs to be relaxed or removed during liberalization in line with IMF’s revised Institutional View (IMF 2022).
- Issuance of CBDC does not necessarily require implementation of CFMs.

### Implementing CFMs within a CBDC ecosystem
- CFMs can be implemented at different levels of the CBDC architecture (wallets, underlying technology, platforms connecting CBDC with foreign currencies), with costs and benefits depending on the characteristics of desired CFMs.
- Programmable CBDC payments enable “smart CFMs” that can automate monitoring, compliance, disclosure, and reduce leakages relative to manual processes.
- Smart CFMs could lower costs but raise operational risks due to novel technologies.
- Implementing CFMs on foreign CBDC requires central banks to collaborate on practices and standards; absent collaboration, domestic central banks may need alternative policies (e.g., banning access to foreign CBDC wallets) with potentially limited effectiveness.
- CFMs on CBDC must operate alongside traditional CFMs (e.g., correspondent bank channels); coordination is necessary to ensure consistency, avoid loopholes, and preserve effectiveness.
- Privacy concerns arise: implementing CFMs may require extensive information, potentially stored in data repositories owned by central banks or intermediaries, creating a trade-off between privacy protection and risk management.
- Operational risks from smart CFMs include software bugs, outages, cyber resilience, and contingency planning; experimentation must balance efficiency gains and risk management.
- Legal framework issues: smart CFMs require careful legal and regulatory analysis, and for self-execution need clear assignment of powers, rights, and responsibilities; smart CFMs do not replace FX legislation related to CBDC cross-border use.

### Financial inclusion
- About 60 percent of emerging and low-income countries see financial inclusion as one of the top three motivations for issuing CBDC (Kosse and Mattei 2023).
- Globally, 1.4 billion people remain outside of the formal financial system.
- Potential channels through which CBDC can promote inclusion:
  - Low or no fees for small transactions and application of simplified customer due diligence where appropriate.
  - Offline operation capability.
  - As a direct liability of the central bank, CBDC would be as trusted and risk-free as physical cash.
  - CBDC can serve as an entry point to the broader formal financial system, enabling more efficient transfers and access to savings, insurance, and credit.
  - CBDC-based transaction data could be used by credit providers in place of collateral or formal credit history when needed.
- Design recommendations to improve inclusion:
  - Very low or no cost with no minimum balance requirements.
  - Compatibility with a variety of hardware devices and potential offline functionality.
  - Simple and intuitive user interface.
  - Tiered wallets with lower limits on holdings and transactions to relax identification requirements for low-risk, financially excluded populations.
- Complementary policies to maximize CBDC’s potential:
  - (i) implementing digital literacy programs;
  - (ii) developing digital infrastructure;
  - (iii) increasing access to mobile phones;
  - (iv) establishing digital ID.
- CBDC alone is not a panacea: other barriers include low financial literacy, cultural factors (e.g., gender norms), and low trust in formal financial institutions.
- Other solutions (fast payment systems, e-money schemes) may complement CBDC rather than strictly substitute it.
- Unique CBDC properties relative to other solutions:
  - (i) more trustworthy as central bank money;
  - (ii) public sector-led initiative potentially provided at lower cost, improving efficiency, interoperability, and operational resilience;
  - (iii) can be open and widely accessible public infrastructure that is interoperable;
  - (iv) can hedge against operational risks from private service providers;
  - (v) may offer offline payments and programmability.
- Suitability of CBDC for improving financial inclusion must be assessed on a country-specific basis, understanding local conditions and drivers of exclusion and the role of complementary policies.

### Conclusion and next steps
- If appropriately designed, CBDC has the potential to improve payment systems and support a role for central bank money even as other digital payment solutions proliferate.
- Appropriateness of CBDC will vary with country circumstances; policymakers need to explore CBDC carefully and systematically.
- This paper briefs the Executive Board on staff’s initial considerations on CBDC stemming from five Fintech Notes.
- A second wave of Fintech Notes and CBDC Handbook chapters will be published in 2024. Possible future topics include financial stability; CBDC distribution, incentives, and adoption; the relationship between CBDC and other payment systems; cross-border payments; cyber security; and implications for data frameworks and privacy protection.

*Source: CENTRAL BANK DIGITAL CURRENCY—INITIAL CONSIDERATIONS, INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/files/publications/pp/2023/english/ppea2023048.pdf_