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.

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.

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.

How should central banks explore tokenized reserves? Central banks are increasingly exploring how to make their reserves available to selected banks using distributed ledger technology, referred to as tokenized reserves. This chapter covers policy objectives for tokenized reserves, operating models and roles of central banks, implications for monetary policy implementation, alternative solutions, and implementation strategies. Ultimately, central banks’ strategic decisions and policy options will vary across jurisdictions, reflecting differences in available resources, legal systems, and policy priorities.