## ppea2024052

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---

### Executive summary — overview
- Informs the Executive Board of recent global developments in central bank digital currency (CBDC) and summarizes main takeaways from a new wave of CBDC virtual Handbook chapters to be released in November 2024.
- Countries’ interest in exploring both retail and wholesale CBDC remains strong; open questions include CBDC objectives, fundamental requirements, design considerations, and macro-financial implications.
- Second wave of chapters address key policy questions commonly raised by IMF member countries.

### Positioning CBDC vis-à-vis fast payment systems and e-money
- CBDC’s distinguishing value: property as public money in an increasingly digitalized economy.
- Retail CBDC could address medium-term issues: maintaining monetary sovereignty, bolstering trust in domestic money and payments, and ensuring interoperability of public and private money.
- Central banks should address existing payment system pain points while preserving capacity to adapt to a multi-instrument multi-infrastructure landscape where CBDC can coexist with fast payment systems (FPSs) and e-money networks.
- Transition path is country specific: some central banks lead CBDC exploration; others opt to observe due to constraints.

### Comparison of rCBDC, FPSs, and e-money (payments perspective)
- rCBDC: retail central bank digital currency—digital central bank money available to the general public; distinct because it is a form of central bank money and a public payment solution.
- All three (rCBDC, FPSs, e-money) provide instantaneous and efficient retail payments and can lower costs to broader populations.
- Core components: instrument, infrastructure, and scheme.
  - E-money: instrument typically issued by non-bank financial institutions, often backed by bank deposits; often closed-loop but can have interoperability schemes.
  - FPSs: focus on infrastructure and scheme to bridge transfers at speed between instruments of different private issuers.
  - CBDC systems: designed with instrument, infrastructure, and scheme in mind.
- Examples of private-sector improvements:
  - India and Brazil increased payment efficiency through FPSs.
  - China increased payment efficiency through e-money schemes such as Alipay and WeChat Pay.
- CBDC’s roles: ensure availability and choice of publicly issued money; complement other systems; bolster trust; preserve choice; foster interoperability; support market discipline and uniformity of money.

### Payments policy implications and strategic assessment
- Likely coexistence of CBDC, FPSs, and e-money in many jurisdictions.
- Strategic choices:
  - Pursue CBDC exploration alongside improvements to existing systems.
  - Prioritize a “flagship” project while monitoring other initiatives.
  - Adopt a holistic approach including card schemes and automated clearing houses.
- Jurisdiction-specific transition paths: assess current performance and potential of non-CBDC systems and private developments (including tokenized deposits and stablecoins).
- Two core considerations when existing systems underperform:
  - (i) potential to improve the current landscape through regulation or coordination of the private sector;
  - (ii) whether a new system or service by the central bank itself is needed.
- CBDC exploration can catalyze FPSs and e-money development by facilitating interoperability and incentivizing private sector coordination and innovation.
- Resource-constrained central banks: monitor and engage internationally; CBDC systems and publicly owned FPSs both require high public sector involvement and may have similar development costs.

### Cyber resilience of CBDC ecosystems
- Cyber resilience is fundamental to trust in CBDC; CBDC ecosystems will be high-value targets for nation states and cyber criminals.
- Three broad elements of the cyber risk perimeter:
  - (1) the currency itself throughout its lifecycle—creation, storage, dissemination, and destruction;
  - (2) transactions or movement and transfer of currency between individuals and merchants;
  - (3) sensitive information collected on users, merchants, and transactions (requires protection in transit and at rest).
- Unique exposures and trade-offs:
  - New functionalities (programmability, smart contracts, offline services) and technologies (DLT, AI) introduce complex cyber risks.
  - Traditional centralized ledgers present single points of failure.
- EMDE-specific challenges: legacy/out-of-date IT environments, limited modern technologies, layered controls creating conflicts, vulnerabilities at interfaces, paucity of skilled resources.
- Implementation guidance:
  - Build security into design from initial stages.
  - Clearly demarcate responsibilities for stakeholders.
  - Adopt holistic cyber risk management; consider technical solutions (quantum resistant cryptography, air-gapped data centers, mutable tokens).
- Four overarching principles for cybersecurity and resilience:
  - (i) resilience should meet the highest standards that apply to existing payment systems;
  - (ii) protection proportional to systemic risk posed, considering severe but plausible threats;
  - (iii) minimize attack surface through design and implementation;
  - (iv) resilience requirements should be comprehensive.
- Human element: project management, ongoing training, and risk awareness materially affect security outcomes.
- Frameworks: specific CBDC security frameworks still emerging; adapt existing critical infrastructure frameworks and leverage initiatives such as BIS-led projects Polaris and Sela.

### Design considerations and CBDC adoption
- Adoption as a policy objective: hinge on attaining sufficient adoption and managing adoption over time—aim for levels commensurate with policy objectives, not necessarily maximization.
- Adoption definition: extent and manner in which CBDC is utilized by end-users and intermediaries within a jurisdiction.
- Adoption dynamics:
  - Adoption is not guaranteed or linear; often slow and limited in initial launches or large-scale pilots, consistent with an “S curve” pattern.
  - Hurdles: low public awareness, preference for existing instruments, privacy concerns, inadequate incentives for intermediaries, chicken-and-egg between consumers and merchants.
- Strategy: the “REDI Framework”
  - Regulatory strategies;
  - Education and communication initiatives;
  - Design and deployment choices;
  - Incentive mechanisms.
- Regulatory measures: rules for intermediary participation, govern user fees, establish minimum quality standards.
- Education and communications: focus on different end-user needs; counter misinformation; leverage industry partners and community leaders.
- Design priorities: universal access, ease of use, security; consider offline capabilities and programmable payments; ensure interoperability and integration with existing systems.

### Targeted deployment and onboarding strategies (paras 43–45)
- Use-case targeting to generate momentum: implement selected use cases such as P2P, G2P, B2P payments to target certain user groups.
- Intermediary onboarding approaches:
  - Provide both physical registration and eKYC to accommodate varying digital/financial literacy.
  - Utilize local intermediaries (for example, postal offices) for cash-in/cash-out in rural and remote areas.
- Pilot strategy: conduct iterative pilots to validate stakeholder and operational readiness before launch.
- Incentives for intermediaries:
  - Exclusivity agreements;
  - Subsidies for setup costs;
  - Allowing CBDC data monetization or charging for value-added services.
- Incentives for end-users:
  - Sign-up bonuses, airdrops, or lotteries upon onboarding;
  - Usage incentives after onboarding such as cash-back offers and discounts.
- Policy considerations and sustainability:
  - Ensure sustainability of the CBDC system while navigating cost recovery, system integrity, and balancing adoption with financial stability.
  - Pricing and cost recovery challenge: devise pricing models that recoup development and maintenance costs without deterring users.

### CBDC data use and privacy protection — risks, opportunities, and trade-offs (paras 46–56)
- Nature of CBDC data (para 46):
  - CBDC may allow a “digital trail”—data—to be accessed, collected, processed and stored, including transaction histories, user demographics, and behavioral patterns potentially linking identities and transactions.
- Potential economic value and policy uses (para 47):
  - Financial institutions could harvest CBDC data to develop data-driven businesses.
  - Possible benefits: reduce information asymmetries; support financial inclusion; facilitate payment system interoperability; promote innovation and market contestability; provide timelier macroeconomic information; enhance regulatory compliance.
  - Data use by central banks differs from law enforcement and other competent authorities under national legal/regulatory frameworks.
- Privacy risks (para 48–49):
  - Risks: data leakages, data abuses, cyber-attacks that could undermine trust and adoption.
  - Perception risk: CBDC could be perceived as an instrument for state surveillance; concerns amplified in countries with severe governance and corruption vulnerabilities.
  - Public attitudes vary: some societies trust commercial entities more than governments, and vice versa.
- Balancing data use and privacy (para 50–52):
  - Trade-off depends on cultural norms, societal preferences, legal requirements, traditions, and public trust.
  - Data granularity matters: aggregate/grouped data entail less trade-off; granular personal data increases trade-off.
  - Central bank advantages (para 51): convening power to articulate privacy principles, coordinate privacy-by-design, strengthen communication, offer diverse design choices, use transparency and PETs, and coordinate with other agencies.
  - Design options (para 52):
    - Offer a variety of CBDC designs.
    - For small-value, low-risk transactions: design CBDCs close to cash with higher privacy and less identity/transaction information.
    - Allow opt-in for better identification to enable credit scoring.
    - AML/CFT requirements mean some identity/transaction information may be necessary; consider whether privacy-by-design permits effective AML/CFT mitigation.
- Technology, institutional frameworks, and cross-border data flows (para 53–55):
  - Role of technology: modules and PETs can protect privacy and provide flexibility in legitimate data sharing; technology can enable user-facing transparency (e.g., “proofs of correct execution”).
  - Need for institutional and legal frameworks: rigorous arrangements and legal frameworks required to implement privacy principles, ensure compliance, and hold violators accountable; align CBDC data use with AML/CFT laws.
  - Cross-border data flows: face similar privacy risks as private digital cross-border payments; differing national standards expected; overly stringent data localization will likely impede cross-border CBDC data use; international efforts aim to harmonize standards to promote free cross-border data flow while ensuring privacy protection.
- Political and social dimension (para 56):
  - Appropriate degree of privacy is a political and social question.
  - Country variation: some prioritize high privacy and forego economic value of data; others use CBDC data for policy objectives such as financial inclusion and competition.
  - Manage trade-offs via laws, careful designs, privacy-by-design philosophy, and judicious use of PETs.

### Implications for monetary policy operations
- When issued and adopted, CBDC will substitute for other forms of money and change reserve balances in the banking system, which may influence short-term interest rates.
- Potential effects:
  - Affect central banks’ ability to forecast liquidity;
  - Draw market rates away from the policy target;
  - Complicate banks’ liquidity management.
- Mitigation:
  - Adapt monetary operations—engage in fine-tuning operations and provide more liquidity to the banking sector.
  - Alter CBDC design by imposing criteria on access, holding, or transaction sizes.

### CBDC design to improve cross-border payments
- Early incorporation of cross-border implications in domestic CBDC design reduces the need to redesign later.
- CBDC could help overcome frictions in cross-border payments if designed with five interrelated elements: access, communication, currency conversion, compliance, and settlement.
- If enabling cross-border use, international collaboration is critical to realize efficiency gains while containing potential risks.

### Role of central banks in cross-border CBDC payments
- CBDC faces similar cross-border payments challenges and opportunities as other payment systems, but central bank roles differ given CBDC is public money.
- In a CBDC setting, end-users directly hold a central bank liability and central banks likely have a large role in infrastructure and scheme operation.
- Early cross-border consideration diminishes post-design adjustment risks.

### Five interrelated elements for cross-border CBDC payments
- Access: whether non-residents receive access and rules/criteria for access; assess access policies for end-users and intermediaries.
- Communication: data and messaging standards and digital ID frameworks; adoption of international standards such as ISO20022 is helpful.
- Currency conversion: who provides foreign exchange liquidity and the central bank’s role in facilitating FX transactions and liquidity.
- Compliance: how laws and regulations are implemented through CBDC design choices and responsibilities for regulatory compliance; factor in international regulatory frameworks.
- Settlement: design choices affecting settlement risks, including programmability; instant settlement and 24/7 availability mitigate some risks; programmability can deliver settlement efficiency gains.

### Design considerations, technical approaches, and examples
- Flexible or modular technical designs that can “plug into” different arrangements adapt more easily to evolving cross-border CBDC landscapes.
- Example: Project Icebreaker (central banks of Israel, Norway, and Sweden with BIS Innovation Hub) demonstrated CBDCs can fit domestic priorities and interlink with other countries’ CBDCs for cross-border payments.

### International cooperation and policy recommendations
- Prioritized international collaboration helps factor cross-border implications into rCBDC design.
- Key cooperative measures:
  - Information sharing;
  - Consistent messaging standards and regulatory approaches;
  - Common infrastructure coordinated internationally to facilitate interoperability.
- Global-level cooperation is more impactful to avoid fragmentation and walled gardens.

### Current CBDC landscape — key statistics and developments
- BIS most recent CBDC survey: proportion of the 86 responding central banks exploring CBDC has risen to 94 percent.
- BIS survey indicates up to fifteen CBDCs will likely have been issued by 2030 (BIS 2024a).
- 2023 uptick in experiments and pilots with wholesale CBDC (wCBDC).
- European Central Bank moved into preparation phase for the digital euro in November 2023; a first draft of the rulebook and a first call for providers were presented in January 2024. Next phase involving actual development and rollout could start in November 2025 at the earliest.
- Chinese e-CNY circulating in seventeen Chinese provinces in pilot form for several years and used for payroll purposes; has integrated current QR code system.
- ECCB’s D-Cash pilot discontinued in January 2024; ECCB preparing D-Cash 2.0.
- India’s rCBDC pilot has a user base of around five million and has integrated the standard QR code system for interoperability; offline capacity options will be tested.
- No new rCBDCs officially launched since three central banks launched CBDC in 2023. The three officially issued CBDCs: the Sand Dollar in The Bahamas, the eNaira in Nigeria, and Jam-Dex in Jamaica; all used for payments with low adoption.
- Reasons for initial slow uptake: insufficient public education, lack of merchant participation, and lack of engagement with and incentives for intermediaries.
- BIS survey: advanced economies believe the likelihood of issuing a wCBDC is now higher than that of a rCBDC within the next six years.
- Tokenization notable: Project Helvetia III (Swiss National Bank issued tokenized Swiss franc wCBDC); active wCBDC exploration by Brazil, Hong Kong SAR, and Singapore.
- Kazakhstan issued a rCBDC; the Digital Tenge (DT) launched in “pilot mode” in November 2023.
- Nepal Rastra Bank envisions a phased pilot by 2026.
- Banco Central de Honduras published a report on CBDC exploration in 2023.
- Bangko Sentral ng Pilipinas conducting a wCBDC proof-of-concept, Project Agila.
- South African Reserve Bank embarking on wCBDC trials in Project Khoka2x.
- International collaboration and technical experimentation:
  - mBridge reached the minimum viable product stage and is broadening participation;
  - Project Rialto announced in July 2024;
  - Project Aurum 2.0, Project Hertha, Project Tourbillon demonstrate efforts to explore and scale privacy enhancing technologies (PETs) for privacy protection.

### Handbook process, usage, and capacity development
- IMF’s CBDC virtual Handbook intended as a living reference for policymakers and experts in both AEs and EMDEs; each chapter first published as a Fintech Note to solicit member country views.
- Staff briefed the Board in September 2023 on key findings of first wave of Handbook chapters published in November 2023.
- First wave of Handbook chapters received over 60,000 pageviews during November 2023 and September 2024.
- To date, over 50 countries have requested IMF assistance through CBDC capacity development.
- Second wave of Handbook chapters (to be published in November 2024) covers six topics: (i) positioning CBDC in the payments landscape; (ii) cyber resilience of the CBDC ecosystem; (iii) strategies for CBDC adoption; (iv) CBDC data use and privacy protection; (v) implications of CBDC for monetary operations; and (vi) cross-border payments with retail CBDC. The Government of Japan funded this second wave.
- Findings of the second wave are preliminary and may be updated as new knowledge and experience emerge.
- A third installment of Handbook chapters will be published in 2025; possible topics include implications for financial stability; CBDC and financial market structure and contestability; financial integrity considerations; differences and similarities between rCBDC and wCBDC; legal considerations; and wCBDC and cross-border platforms for payments and asset transfer.

*CENTRAL BANK DIGITAL CURRENCY: PROGRESS AND FURTHER CONSIDERATIONS — INTERNATIONAL MONETARY FUND*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Overview
- This paper informs the Executive Board of recent global developments in central bank digital currency (CBDC) and summarizes the main takeaways from a new wave of CBDC virtual Handbook chapters to be released in November 2024.
- Countries’ interest in exploring both retail and wholesale CBDC remains strong. Questions remain in the areas of CBDC objectives, fundamental requirements, design considerations, and macro-financial implications.
- The second wave of chapters address key policy questions commonly raised by IMF member countries in those areas.

### Positioning CBDC vis-à-vis fast payment systems and e-money networks
- CBDC’s distinguishing value lies in its property as public money in an increasingly digitalized economy.
- Retail CBDC could address medium-term issues such as maintaining monetary sovereignty, bolstering trust in domestic money and payments, and ensuring interoperability of public and private money in the digital age.
- Central banks should address existing pain points in payment systems while preserving capacity to adapt to a multi-instrument multi-infrastructure future landscape, where a CBDC system could coexist with fast payment systems and e-money networks.
- The transition path will be country specific: some central banks position themselves as leaders in exploring CBDC, others may opt to be observers for now due to various constraints.

### Cyber resilience of CBDC
- Cyber resilience is fundamental to trust in CBDC, which could face sophisticated cyber-attacks.
- CBDC could be susceptible to cyber risks that are not necessarily encountered by other digital payments.
- Delivering a cyber-resilient CBDC requires appropriate designs, foundational principles, and good practices that should be built into it at an early stage.

### Adoption prospects and strategy
- Realizing the policy objectives of CBDC hinges on attaining sufficient adoption and managing adoption over time, though not necessarily maximizing it.
- Central banks should not take it for granted that CBDC, once launched, will be adopted and scaled up rapidly.
- As country experiences indicate, CBDC adoption could face hurdles, including the classic chicken-and-egg problem wherein adoption by consumers is dependent on the participation of merchants and vice versa.
- CBDC adoption requires a strategic approach adapted to country circumstances based on four elements—regulation, education/communication, design, and incentives.

### CBDC data use and privacy protection
- CBDC may allow for a “digital trail” of data to be collected and stored.
- CBDC data may have economic value and could help central banks achieve policy objectives. However, CBDC data use could pose risks to privacy, which in turn can undermine trust in central bank money.
- Central banks need to strike a balance between CBDC data use and privacy protection depending on norms, legal and regulatory frameworks, and preferences.
- CBDC offers an opportunity to improve the trade-off between data use and privacy protection as compared to private digital payment systems, including through robust institutional arrangements and technological solutions.
- CBDC can be designed to cater to the privacy needs of different users.

### Implications for monetary policy operations
- When CBDC is issued and adopted, it will substitute for other forms of money and change reserve balances in the banking system, which in turn may influence short-term interest rates.
- CBDC may affect central banks’ ability to forecast liquidity, draw market rates away from the policy target, and complicate banks’ liquidity management.
- Effects can be attenuated by adapting monetary operations—engaging in fine-tuning operations and providing more liquidity to the banking sector.
- CBDC design can also be altered by imposing criteria on access, as well as holding or transaction sizes.

### CBDC design to improve cross-border payments
- When designing and implementing CBDC systems, it is beneficial to factor in cross-border implications from the start to diminish risks of having to redesign or adjust domestic CBDC systems later.
- CBDC could help overcome frictions in cross-border payments if designed bearing five interrelated elements in mind: access, communication, currency conversion, compliance, and settlement.
- Should a central bank decide to enable the cross-border use of its CBDC, international collaboration is critical to realize efficiency gains, while containing potential risks.

### Current CBDC landscape — key statistics and developments
- The Bank for International Settlements’ (BIS) most recent CBDC survey shows that the proportion of the 86 responding central banks that are exploring CBDC has risen to 94 percent.
- The BIS survey indicates that up to fifteen CBDCs will likely have been issued by 2030 (BIS 2024a).
- Over the course of 2023, there was an uptick in experiments and pilots with wholesale CBDC (wCBDC).
- The European Central Bank moved from the initial phase into the preparation phase for the digital euro in November 2023; a first draft of the rulebook and a first call for providers were presented in January 2024. The next phase involving an actual development and rollout of the digital euro could start in November 2025 at the earliest.
- The Chinese e-CNY has been circulating in seventeen Chinese provinces in pilot form for several years and has been used for payroll purposes; it has integrated the current QR code system.
- The D-Cash pilot by the Eastern Caribbean Central Bank (ECCB) was discontinued in January 2024; ECCB is preparing D-Cash 2.0.
- India’s rCBDC pilot currently has a user base of around five million and has integrated the standard QR code system for interoperability; offline capacity options will be tested.
- No new rCBDCs have been officially launched since three central banks launched CBDC in 2023. The three CBDCs that are currently officially issued are the Sand Dollar in The Bahamas, the eNaira in Nigeria, and Jam-Dex in Jamaica; all are used for payments in their respective economies, albeit with a low level of adoption.
- Reasons contributing to the initial slow uptake include insufficient public education, lack of merchant participation, and lack of engagement with and incentives for intermediaries.
- The BIS survey shows that advanced economies believe the likelihood of issuing a wCBDC is now higher than that of a rCBDC within the next six years.
- Tokenization of money and assets has become a notable development; examples include Project Helvetia III where the Swiss National Bank issued tokenized Swiss franc wholesale CBDC, and active wCBDC exploration by Brazil, Hong Kong SAR, and Singapore.
- Kazakhstan decided to issue a rCBDC; the Digital Tenge (DT) was launched in “pilot mode” in November 2023.
- The Nepal Rastra Bank envisions a phased pilot by 2026.
- The Banco Central de Honduras published a report on CBDC exploration in 2023.
- The Bangko Sentral ng Pilipinas is conducting a proof-of-concept on a wCBDC, Project Agila.
- The South African Reserve Bank is embarking on trials on wCBDC in Project Khoka2x.
- International collaboration and technical experimentation examples: mBridge has reached the minimum viable product stage and is broadening participation; Project Rialto was announced in July 2024; Project Aurum 2.0, Project Hertha and Project Tourbillon demonstrate efforts to explore and scale up privacy enhancing technologies (PETs) for privacy protection.

### Handbook process, usage, and capacity development
- The IMF’s CBDC virtual Handbook is intended as a living reference for policymakers and experts in both AEs and EMDEs; each Handbook chapter is first published as a Fintech Note to solicit and incorporate views of IMF member countries.
- Staff briefed the Board in September 2023 on key findings of the first wave of Handbook chapters published in November 2023.
- The first wave of Handbook chapters received over 60,000 pageviews during November 2023 and September 2024.
- To date, over 50 countries have approached the IMF to request assistance through CBDC capacity development.
- The second wave of Handbook chapters (to be published in November 2024) covers: (i) positioning CBDC in the payments landscape; (ii) cyber resilience of the CBDC ecosystem; (iii) strategies for CBDC adoption; (iv) CBDC data use and privacy protection; (v) implications of CBDC for monetary operations; and (vi) cross-border payments with retail CBDC. The Government of Japan is a major partner and donor and has funded this second wave of Handbook chapters.
- Findings of the second wave are preliminary and may be updated in the future as new knowledge and experience emerge.

*Prepared by Tao Sun (lead), Gabriel Soderberg, Tayo Koonprasert, Tansaya Kunaratskul, Kieran Murphy, Manisha Patel, André Reslow (MCM), and Arvinder Bharath (ITD). General guidance was provided by Dong He and Tommaso Mancini-Griffoli (MCM). Approved By Tobias Adrian, Shirin Hamid, and Yan Liu.*

### 15.       Country authorities often raise the question of how a rCBDC compares to fast payment

### 15.       Country authorities often raise the question of how a rCBDC compares to fast payment systems (FPSs) and e-money, and which to prioritize in the context of constrained resources.

### Comparison of rCBDC, FPSs, and e-money (payments perspective)
- rCBDC is retail central bank digital currency—digital central bank money available to the general public—distinct from FPSs and e-money primarily because it is a form of central bank money and a public payment solution.
- All three (rCBDC, FPSs, e-money) are meant for retail payment and can provide instantaneous and efficient payments and potentially lower cost payments to broader populations.
- Core components of any payment system: instrument, infrastructure, and scheme.
  - E-money systems: instrument = e-money issued typically by non-bank financial institutions (an e-money institution), often backed by bank deposits; often closed-loop but can have interoperability schemes.
  - FPSs: focus more on infrastructure and scheme to bridge transfers (at speed) between instruments of different private issuers.
  - CBDC systems: being designed with all three components—instrument, infrastructure, and scheme—in mind.
- Examples of non-CBDC innovations improving payment efficiency:
  - India and Brazil increased payment efficiency through FPSs.
  - China increased payment efficiency through e-money schemes such as Alipay and WeChat Pay.
- CBDC’s distinguishing value:
  - Ensures availability and choice of publicly issued money in a retail payments landscape that may trend toward reliance on private money.
  - Acts as a complement to other systems, bolstering trust in money and payments, preserving choice, and fostering interoperability of public and private money and payment systems.
  - Supports market discipline and the uniformity—or singleness—of money, important for monetary and financial stability.

### Payments policy implications and strategic assessment
- Central banks should address existing pain points while preserving capacity to adapt to a multi-instrument multi-infrastructure future.
- Likely coexistence: CBDC, FPSs, and e-money could coexist in many jurisdictions.
- Strategic choices:
  - Some central banks pursue CBDC explorations alongside improvements to existing systems.
  - A “flagship” project can be prioritized while retaining monitoring roles in other initiatives.
  - A holistic approach to payments development should include the role of card schemes and automated clearing houses.
- Jurisdiction-specific transition paths:
  - The relative importance of payment rails will differ across countries.
  - Central banks should assess current performance and future potential of non-CBDC systems and private sector developments (including tokenized deposits and stablecoins).
  - Two core considerations when existing systems underperform:
    - (i) potential to improve current landscape through better regulation or coordination of the private sector; and/or
    - (ii) whether a new system or service by the central bank itself is needed.
- CBDC exploration effects:
  - Can catalyze further development of FPSs and e-money by facilitating interoperability and incentivizing private sector coordination and innovation.
- Resource and capacity constraints:
  - Some central banks may be leaders in CBDC exploration; others may opt to be observers due to constraints.
  - Trade-off between policy desirability and practical feasibility.
  - CBDC systems and publicly owned FPSs both require high levels of public sector involvement and may have similar development costs.
  - Minimum essential activity for resource-constrained central banks: monitoring and engaging internationally on payment system innovation.

### Cyber resilience of CBDC ecosystems
- Cyber resilience is fundamental to trust in CBDC.
  - Digital money is susceptible to digital risks throughout its lifecycle; issuance and operations create a vast complex ecosystem amplifying risks and surfacing new ones.
- Three broad elements of the cyber risk perimeter:
  - (1) the currency itself throughout its lifecycle—creation, storage, dissemination, and destruction;
  - (2) transactions or movement and transfer of currency between individuals and merchants;
  - (3) sensitive information collected on users, merchants, and transactions (requires protection in transit and at rest).
- Threat landscape:
  - CBDC ecosystems will be high-value targets for nation states and cyber criminals.
  - Operational failure (service outage, data breach, fraud) can erode public trust with systemic implications.
- Unique cyber exposures and design trade-offs:
  - New functionalities (programmability, smart contracts, offline services) and technologies (DLT, AI) introduce complex cyber risks.
  - Traditional centralized ledgers present single points of failure and attractive hacker targets, where a successful attack can disable the entire system and lead to data breaches affecting many users.
- EMDE-specific challenges:
  - EMDEs may face more pronounced challenges due to legacy/out-of-date IT environments, limited modern technologies (smart devices, cloud), layered controls creating conflicts, vulnerabilities at interfaces, and a paucity of skilled resources.
- Implementation guidance:
  - Build security into design from the initial stages to avoid expensive roll-backs and bolt-ons.
  - Clearly demarcate responsibilities for all stakeholders, noting some stakeholders are supervised by authorities other than the central bank.
  - Adopt a holistic approach to cyber risk management across the ecosystem; consider technical solutions (quantum resistant cryptography, air-gapped data centers, mutable tokens) alongside broader safeguards.
- Four overarching principles for cybersecurity and resilience:
  - (i) resilience of the CBDC ecosystem should be at least to the highest standards that apply to existing payment systems;
  - (ii) protection afforded should be proportional to the systemic risk posed, considering severe but plausible threats;
  - (iii) minimize the attack surface through proper design and implementation;
  - (iv) resilience requirements should be comprehensive.
- Human element:
  - Users, designers, developers, operators, custodians, and auditors materially affect security outcomes.
  - Emphasize project management, ongoing training, and risk awareness.
- Framework status:
  - Specific frameworks for CBDC security are still emerging; existing frameworks for similar critical infrastructures can be adapted.
  - Initiatives such as BIS-led projects Polaris and Sela and outputs from active experiments could be leveraged.

### Design considerations and CBDC adoption
- Adoption as a policy objective:
  - Realizing CBDC policy objectives hinges on attaining sufficient levels of adoption and managing adoption over time; this does not necessarily mean maximizing adoption but achieving adoption commensurate with policy objectives.
  - CBDC adoption definition: extent and manner in which CBDC is utilized by end-users and intermediaries within a jurisdiction.
  - Use cases and intensity of use will be jurisdiction-specific (e.g., financial inclusion vs. payment efficiency).
  - Central banks should set realistic key performance indicators (KPIs) and success metrics tied to policy objectives.
- Adoption dynamics and challenges:
  - Adoption is not guaranteed or linear; initial adoption among launched or large-scale pilot CBDCs has often been slow and limited, which can be expected as part of the “S curve” adoption pattern.
  - Hurdles include low public awareness, preference for existing instruments, privacy concerns, inadequate incentives for intermediaries, and the chicken-and-egg problem between consumer and merchant participation.
- Strategies to encourage adoption:
  - Adoption requires technical functionality plus strategic policy and design choices that engage end-users and intermediaries from the outset.
  - Consider the “REDI Framework”:
    - Regulatory strategies;
    - Education and communication initiatives;
    - Design and deployment choices;
    - Incentive mechanisms.
  - These strategies are more effective when implemented together; not every tool fits every country.
- Regulatory and legislative measures:
  - Set rules for intermediary participation, govern user fees, and establish minimum quality standards for services—dependent on jurisdictional legal and regulatory frameworks.
- Education and communications:
  - Focus on needs, preferences, and concerns of different end-users; counter misinformation via official portals, traditional and social media.
  - Example: The Bahamas introduced “Sand Dollar Ambassadors” to promote usage and knowledge.
  - Leverage industry partners, local organizations, and community leaders for outreach.
- Design priorities to encourage uptake:
  - Prioritize universal access, ease of use, and security.
  - Consider enhanced functionalities such as offline capabilities and programmable payments.
  - Ensure interoperability and integration with existing systems without costly upgrades to encourage intermediaries and merchants to embrace CBDC.

*International Monetary Fund — CENTRAL BANK DIGITAL CURRENCY: PROGRESS AND FURTHER CONSIDERATIONS (excerpt).*

### 43.      Targeted deployment and onboarding strategies can help generate initial momentum.

### 43.      Targeted deployment and onboarding strategies can help generate initial momentum.

### Targeted deployment and onboarding
- Implement selected use cases (examples): P2P, G2P, B2P payments to target certain user groups. (para 43)
- Intermediary onboarding approaches:
  - Provide both physical registration and eKYC to accommodate users with varying digital/financial literacy. (para 43)
  - Utilize local intermediaries (for example, postal offices) to provide cash-in/cash-out points to expand the CBDC network in rural and remote areas. (para 43)
- Pilot strategy:
  - Conduct iterative pilots to validate stakeholder and operational readiness before launch. (para 43)

### Incentives to encourage participation
- For intermediaries (para 44):
  - Exclusivity agreements.
  - Subsidies for setup costs.
  - Allowing for CBDC data monetization or charging for value-added services.
- For end-users (para 44):
  - Sign-up bonuses, airdrops, or lotteries upon onboarding.
  - Usage incentives after onboarding such as cash-back offers and discounts on CBDC transactions.

### Policy considerations and sustainability
- Key considerations (para 45):
  - Ensuring sustainability of the CBDC system while navigating cost recovery.
  - Ensuring integrity of the system.
  - Balancing adoption with financial stability.
- Pricing and cost recovery challenge (para 45):
  - Need to devise pricing model that recoups substantial development and maintenance costs without deterring potential users.
  - Cost recovery decisions directly influence pricing strategies fundamental to facilitating adoption.

### Data use and privacy protection — risks and opportunities
- Nature of CBDC data (para 46):
  - CBDC may allow a “digital trail”—data—to be accessed, collected, processed and stored.
  - CBDC could include transaction histories, user demographics, and behavioral patterns, potentially linking counterparty identities and transactions.
- Potential economic value and policy uses (para 47):
  - CBDC data could be harvested by financial institutions to develop data-driven businesses.
  - Possible benefits: reduce information asymmetries, support financial inclusion, facilitate payment system interoperability, promote innovation and market contestability, provide timelier macroeconomic information, and enhance regulatory compliance.
  - Distinction: data use by central banks differs from law enforcement and other competent authorities under national legal/regulatory frameworks. (para 47)
- Privacy risks (para 48–49):
  - Risks: data leakages, data abuses, cyber-attacks that could undermine trust and adoption. (para 48)
  - CBDC could be perceived as an instrument for state surveillance; concerns greater in countries with severe governance and corruption vulnerabilities. (para 49)
  - Public attitudes differ: some societies may trust commercial entities more than government institutions, and vice versa. (para 49)

### Balancing data use and privacy; design choices
- Trade-off considerations (para 50):
  - Balance depends on cultural norms, societal preferences, legal requirements, traditions, and public trust.
  - Degree of trade-off depends on data granularity: aggregate/grouped data may entail little trade-off; granular personal data increases the trade-off. (para 50)
- Central bank advantages (para 51):
  - Strong convening powers to articulate privacy principles and coordinate privacy-by-design adoption.
  - Can strengthen communication and consumer education to reduce privacy concerns.
  - Can offer diverse CBDC design choices and use transparency, accountability arrangements, and privacy-enhancing technologies (PETs).
  - Better positioned to coordinate with other competent agencies for legal/regulatory consistency. (para 51)
- Design options to cater to privacy preferences (para 52):
  - Offer a variety of CBDC designs.
  - For small value, low-risk transactions: design CBDCs as close substitutes for cash, providing higher degree of privacy and requiring less identity/transaction information.
  - Variant: allow users to request better identification of personal information (e.g., to enable credit scoring) if they opt in.
  - Note: AML/CFT requirements mean some degree of identity/transaction information may be required; countries must consider whether privacy-by-design choices permit effective AML/CFT mitigation. (para 52)

### Technology, institutional frameworks, and cross-border data flows
- Role of technology (para 53):
  - Leverage different technologies/modules to protect privacy and provide flexibility in legitimate data sharing.
  - Technology can allow a range of privacy options and help users understand what data can be accessed for regulatory or law enforcement purposes (for example, through “proofs of correct execution” that can be audited and communicated to users). (para 53)
- Need for institutional and legal frameworks (para 54):
  - Complement technology with rigorous institutional arrangements and legal frameworks to implement privacy principles, ensure compliance, and hold violators accountable.
  - Ensure CBDC data use aligns with other regulatory regimes, such as AML/CFT laws and regulations. (para 54)
- Cross-border data flows (para 55):
  - CBDC cross-border data flows face similar privacy risks as other private digital cross-border payments.
  - Differing national data use and privacy standards are expected, but overly stringent data localization regulations will likely impede cross-border CBDC data use.
  - International community efforts aim for harmonization of standards to promote free cross-border data flow while ensuring privacy protection. (para 55)

### Political and social dimension of privacy (para 56)
- The appropriate degree of privacy in a CBDC system is a political and social question.
- Country variation:
  - Some countries may opt for a high degree of privacy and not prioritize economic value of CBDC data.
  - Other countries may use CBDC data for policy objectives such as fostering financial inclusion and promoting competition in payment systems.
- Trade-off management:
  - Laws and regulations reflecting adequate privacy principles and policies, careful CBDC designs, privacy-by-design philosophy, and judicious use of PETs can manage the trade-off. (para 56)

*Source: CENTRAL BANK DIGITAL CURRENCY: PROGRESS AND FURTHER CONSIDERATIONS — excerpts from paras 43–66.*

### 67.      Central banks can play a pivotal role in designing CBDC systems for cross-border

### Central banks can play a pivotal role in designing CBDC systems for cross-border payments

### Role of central banks in cross-border CBDC
- CBDC systems face many of the same challenges, opportunities, and implications as other payment systems in cross-border payments, but roles and responsibilities might be slightly different given CBDC’s nature as public money as opposed to commercial bank money.
- In a CBDC setting, end-users would directly hold a central bank liability, just as when they hold cash, and the central bank is likely to have a large role in establishing and operating the infrastructure and scheme.
- Early incorporation of cross-border considerations can diminish the risk of having to redesign or adjust domestic CBDC systems at a later stage.

### Five interrelated elements to consider for cross-border CBDC payments
- Access
  - Access policy relates to whether non-residents should be given access to the CBDC, and what the rules and criteria are for that access.
  - Assessing access policies for end-users and intermediaries is paramount.
- Communication
  - Communication relates to data and messaging standards and digital ID framework that the system adopts.
  - Adoption of international standards such as ISO20022 for payment initiation, data, and messaging helps.
- Currency conversion
  - Currency conversion policy considers who provides foreign exchange liquidity and the role of the central bank in facilitating foreign exchange transactions and liquidity.
- Compliance
  - Compliance relates to decisions on how laws and regulations should be incorporated or implemented through different CBDC design choices and who would be responsible for various aspects of regulatory compliance.
  - Compliance with international regulatory frameworks should be factored in.
- Settlement
  - Settlement relates to design choices that will affect settlement risks, including the use of programmability functions.
  - Having instant settlement and 24/7 availability helps mitigate some risks.
  - Programmability can deliver efficiency gains in the settlement process.

### Design considerations, technical approaches, and examples
- Flexible or modular technical designs that can “plug into” different arrangements can more easily adapt to the continuous evolution of the future cross-border CBDC payments landscape.
- Example: The central banks of Israel, Norway, and Sweden in collaboration with the BIS Innovation Hub demonstrated in Project Icebreaker that it is possible to design CBDCs to fit domestic priorities and still interlink them with the CBDCs of other countries for cross-border payments.

### International cooperation and policy recommendations
- Prioritized international collaboration would help factor in cross-border implications when designing rCBDC systems.
- Key cooperative measures:
  - Information sharing.
  - Consistent messaging standards and regulatory approaches.
  - Common infrastructure coordinated internationally to facilitate interoperability.
- International cooperation is more impactful if achieved at a global level to avoid fragmentation and walled gardens.

### Conclusion and next steps (from the document)
- The paper informs the Executive Board about staff’s further considerations on six frequently asked questions by countries exploring CBDC, covering:
  - the role of CBDC versus other digital payments,
  - cyber resilience of the CBDC ecosystem,
  - CBDC adoption,
  - CBDC data use and privacy protection,
  - issues related to monetary policy operations,
  - potential use of CBDC for cross-border payments.
- A third installment of Handbook chapters will be published in 2025. Possible topics include implications for financial stability; CBDC and financial market structure and contestability; financial integrity considerations; differences and similarities between rCBDC and wCBDC; legal considerations; and wCBDC and cross-border platforms for payments and the transfer of assets.

*CENTRAL BANK DIGITAL CURRENCY: PROGRESS AND FURTHER CONSIDERATIONS — INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/files/publications/pp/2024/english/ppea2024052.pdf_