Exploring CBDCs is a significant undertaking that involves complex decisions in a rapidly changing digital environment. This chapter presents a dynamic framework that is iterative, flexible, and responsive to new information as it arises. First, countries must clearly establish the policy objectives of CBDCs and relevant success measures. Second, risks must be identified, quantified as much as possible, and accompanied by a strategy to contain them. Third, domestic authorities should undertake a careful assessment of their capacity to experiment with, regulate, oversee, and eventually implement CBDCs. Fourth, communication about CBDCs is crucial and a strategy to guide engagement with stakeholders should be developed early on. Fifth, central banks should establish a set of feature requirements based on the earlier steps. Sixth, a sound legal basis and robust regulatory foundations should underpin the CBDC project from the start. These steps should not give the impression of a linear process. Given rapid developments in technology and the ongoing lessons that are—and will be—learned world-wide, CBDC exploration will need to continue even beyond the point of issuance.

This chapter introduces the '5P methodology' designed to guide central banks in exploring and developing CBDC, from research to potential launch. The methodology draws from experiences in various jurisdictions and incorporates best practices from different industries, and is intended to facilitate experimentation and support progressive decision-making while effectively managing risks. The 5P methodology comprises five distinct phases. The preparation phase focuses on researching trends, defining objectives, establishing success criteria, evaluating feasibility, assessing capacity, and analyzing risks. The proof-of-concept phase involves conducting small-scale empirical tests and validation activities to gain insights into CBDC designs, typically in a laboratory environment. The prototype phase concentrates on the development or acquisition of necessary technologies and the selection of relevant partners. The pilot phase represents the live testing of a quasi-final product, while the production phase marks the final issuance and operation of the CBDC.

CBDCs could affect the macroeconomic environment that underpins monetary policy transmission. A CBDC offers a safe store of value and efficient means of payment, which can increase competition for deposit funding, raise banks’ share of wholesale funding, and lower bank profits. A CBDC also could bolster financial inclusion and help reduce dollarization or cryptoization. These changes in the macroeconomic environment can potentially strengthen the channels of monetary policy transmission if CBDC is appropriately designed. For moderate levels of CBDC holdings, the effects on monetary policy transmission are expected to be relatively small in normal times. However, these effects can be more significant in an environment of low interest rates or financial market stress in which the relative value of a CBDC increases. A non-remunerated CBDC could harden the zero lower bound for interest rates. Finally, a CBDC could increase risks of flight to safety from retail bank deposits in periods of market stress.

This chapter explores the benefits, risks, and complexities of implementing capital flow management measures (CFMs) through CBDCs. It argues that CFMs, when warranted, can continue to be part of a country’s policy toolkit in the digital age. Moreover, the digitalization of information and programmability of transactions—leading to the automation of compliance checks—could bring efficiency gains compared to today’s implementation of CFMs, though raise operational risks. Importantly, the implementation of CFMs would leverage the programmability of CBDC transactions, not of CBDC itself, as money must remain fungible. Several questions need to be further analyzed, for instance the specification of the legal framework surrounding digital CFMs.

Financial inclusion is often a key policy objective for a retail CBDC, especially in emerging and lower-income countries. If properly designed to address barriers to financial inclusion, CBDCs could gain acceptance as a payment mechanism for financially excluded populations. CBDCs can be designed to replicate some of the desirable properties of cash, for instance, access to payments without a bank account, trust associated with central bank money, low or no fees, and less stringent identity requirements for low-risk populations who struggle to obtain formal identity documentation. However, full compliance with financial integrity requirements remains necessary. A CBDC could also offer benefits beyond those of cash, such as the development of financial history to help widen access to credit. A CBDC can thus serve as a valuable entry point to the formal financial system. As a public-sector led initiative without profit incentive, CBDCs could also stimulate competition by lowering the prices of payments and financial services. Moreover, CBDCs can address the needs of remote and low-income populations not well served by the private sector, through availability on a variety of hardware devices and in offline environments. However, a CBDC by itself is not a silver bullet to financial inclusion, as it can face barriers common for digital products such as gaps in digital and financial literacy, and access to electricity and digital networks. A CBDC may not be the best financial inclusion solution for every country, and policymakers should assess a wide range of policies and initiatives, including but not limited to CBDCs, to support financial inclusion.

Do central banks need a CBDC when already equipped with other well-established digital payments systems? Should central banks establish one system before the other? This chapter compares retail CBDC with fast payment systems and e-money, and explores how to prioritize development work if resources are constrained. If well designed, regulated, and complemented by an active developer community, all three systems could meet central bank objectives such as payments efficiency and financial inclusion. However, central banks may be constrained in satisfying some of these goals. And CBDC comes with its own unique benefits, such as its property as public money. In an increasingly digitalized economy, that feature may be important to underpin the fungibility of money and trust in the financial system. It is possible to envisage the coexistence of fast payment systems, e-money, and CBDC in many payment landscapes across the world.

If CBDC were susceptible to cyber risks, it could undermine consumer confidence and trust in the financial system. The intricately interconnected CBDC ecosystem—comprising central banks, commercial banks, payment service providers, and technology vendors—faces an array of cybersecurity challenges, exacerbated by human vulnerabilities and the use of novel technologies untested at scale. The chapter proposes an evaluation of technology and design choices to ensure the safety of CBDC. Although specific international guidance on securing a CBDC ecosystem does not exist, the chapter draws on insights from established frameworks. It proposes four overarching principles rooted in foundational requirements and best practices. It also emphasizes the importance of user training and stakeholder collaboration to mitigate cyber risks.

Among the jurisdictions that have launched CBDCs or are conducting large-scale pilots, adoption remains slow and limited. But that is not necessarily a sign that CBDC holds little value. It just means that central banks cannot take it for granted that CBDC, once launched, will be adopted and scaled up easily. CBDC adoption faces many hurdles, including the classic chicken-and-egg problem wherein adoption by consumers is dependent on the participation of merchants, and vice versa. This chapter encourages policymakers to think about adoption early in their CBDC journey, by emphasizing that successful CBDC implementation hinges not only on technical readiness and operational robustness, but also on strategic policy and design choices that encourage the involvement of end-users and intermediaries from the outset. To support this endeavor, this chapter introduces a novel framework comprising a comprehensive array of regulatory strategies, education and communication initiatives, design and deployment choices, and incentive mechanisms to help policymakers prepare for, and manage, CBDC adoption.

Can CBDC data be leveraged to create value to end-users while protecting their privacy? This chapter considers the economic value of CBDC data, outlines the risks that CBDC data use could pose to privacy, and explores how central banks can strike a balance between CBDC data use and privacy protection. CBDC allows for a “digital trail” of data to be accessed, collected, processed, and stored. This data may have economic value and could help central banks achieve policy objectives. At the same time, using that data could contravene privacy and undermine trust in CBDC. This trade-off differs by country depending on norms, legal and regulatory frameworks, and preferences. CBDC offers an opportunity to improve this trade-off in comparison to private digital payment systems, including through robust institutional arrangements and technological solutions.

CBDC is central bank money. So would issuing CBDC to meet user demand interfere with monetary policy operations? Could central banks have difficulty in maintaining a steady monetary policy stance? At first glance, yes. CBDC could crowd out other forms of money and change reserve balances in the banking system, which, in turn, may influence short-term interest rates. Moreover, volatility in CBDC demand could affect central banks’ ability to forecast liquidity, drawing market rates away from the policy target. However, central banks can mitigate these effects by adapting their monetary operations, such as engaging in fine-tuning operations and providing more liquidity to the banking sector. Central banks can also alter CBDC design, such as implementing access criteria and setting holding or transaction limits.

Many central banks are exploring retail CBDC issuance, hoping to also improve cross-border payments. CBDC is a safe, liquid asset that can decrease the reliance on financial intermediaries and reduce settlement risks. Additionally, CBDC is a clean slate on which cross-border payment processes can be redesigned and optimized. This chapter distills insights from ongoing research and experimentation, outlining design and policy considerations affecting all steps of a cross-border payment: access, communication, currency conversion, compliance, and settlement. It is vital to consider cross-border implications early in the development process to prevent unintended barriers, even if the CBDC is only intended for domestic use initially. As central banks navigate these complex issues, adopting international standards, evaluating access policies, and fostering international cooperation will be essential for achieving efficient and inclusive cross-border payment solutions.

How could practitioners assess the domestic financial stability implications of retail CBDC? This chapter identifies six key transmission channels through which CBDC can affect financial stability—either negatively or positively. These channels operate through bank funding and lending, fee income, run risk, information flows, and payment system resilience. This chapter synthetizes findings from existing studies that quantify some of these effects and explores how country-specific characteristics, CBDC adoption, and design features shape outcomes. It also provides practical guidance on analytical tools and models to evaluate financial stability risks and discusses how risks can be contained with appropriate CBDC design and safeguards.

How would CBDC affect competition in the payments market? If introduced, CBDC can serve as a payment instrument, expanding end users’ transaction choices, and as a platform infrastructure, broadening intermediaries’ opportunities to provide and innovate in payment and financial services. The competitive impact of CBDC depends significantly on the existing payments landscape, regulation, and CBDC design. CBDC may enhance competition in less competitive markets through four key channels: pricing discipline, quality improvements, increased contestability, and broader financial access. In more competitive markets, effects may be more muted and operated through broader access to payments. Policymakers should ensure that CBDC design features foster competition, especially through intermediary participation rules, fee structures, holding limits, and interoperability standards.

What are the selected legal considerations for retail CBDC (rCBDC) and wholesale CBDC (wCBDC)? First, with respect to rCBDC, this chapter discusses the mechanisms through which rCBDC is sanctioned as a currency; the legal basis for its issuance and provision of a payment platform; and the central bank’s mandate to regulate rCBDC service providers. It examines the nature and impact of legal relationships in the rCBDC landscape, among others, aiming to help central banks better assess potential legal risks. The analysis also considers specific rCBDC design features, including holding and transaction limits, fee caps, interest accrual, programmability, and offline capabilities. Subsequently, this chapter addresses wCBDC-specific legal considerations such as the legal nature of wCBDC; the central bank’s mandate to issue wCBDC and to operate its platform (whether directly or through third parties); the legal relationship between the central bank and users; and settlement finality of wCBDC transactions.

How should the international anti-money laundering and combating the financing of terrorism (AML/CFT) standards be applied in a retail CBDC (rCBDC) setting? This chapter identifies the main categories and characteristics of rCBDCs that may have financial integrity implications and analyzes the potential impact that various rCBDC features might have on effective implementation of an issuing jurisdiction’s AML/CFT regime. It provides guidance to policymakers and competent authorities by presenting important considerations that should precede an rCBDC launch and inform rCBDC designs, as well as through suggested good practices on the application of AML/CFT measures in an rCBDC context. Due to the novelty of rCBDCs and limited practice, this chapter highlights where current rCBDC designs pose challenges or raise questions with respect to specific aspects of prevailing international standards.

What lessons emerge from payment resilience in Fragile and Conflict-affected States (FCS) and how could they be applied to CBDC? This chapter explores how FCS can strengthen the resilience of their payment ecosystems to withstand disruptions arising from conflict, natural disasters, or infrastructure failures. It introduces a framework to assess vulnerabilities across key layers of the payment ecosystem including connectivity infrastructure, payment infrastructure, intermediaries, payment solutions, and user access. Drawing on experiences from Ukraine, West Bank and Gaza, Haiti, the CEMAC region, Tuvalu, Sudan, and Yemen, the Note highlights practical strategies to strengthen payment ecosystem resilience. It also examines how CBDC and other digital innovations could mimic some of these strategies, such as by offering offline functionality, redundancy, and interoperability. While grounded in fragile settings, the lessons have broader relevance for strengthening preparedness and ensuring payment continuity in a broader set of countries.