Central bank digital currency: the quest for minimally invasive technology

BIS Working Papers  |  No 948  | 
08 June 2021

Summary

Focus

Almost 50 central banks have already launched designs for central bank digital currencies (CBDCs) or prototypes. We ask what the rationale for issuing a CBDC is and how these objectives shape its economic design, as well as the architecture of the underlying technical systems.

Contribution

The paper discusses the range of proposed CBDC architectures, how they could complement existing payment options, and what they imply for the financial system and the central bank of the future. It sets out the requirements for a "minimally invasive" CBDC design – one that upgrades money to current needs without disrupting the proven two-tier architecture of the monetary system, which involves both the private and public sectors. We start by revisiting the unique role of cash in today's financial system and what it implies for the economic, operational and technological requirements that will underpin a retail CBDC.

Findings

We find that technological developments inspired by popular cryptocurrency systems – based on anonymity and lacking a central authority – do not meet the requirements for a retail CBDC.

Instead, digital banknotes that run on "intermediated" or "hybrid" CBDC architectures show promise. Supported with technology to facilitate record-keeping by private sector entities of direct claims on the central bank, their economic design should emphasise the use of the CBDC as medium of exchange. At the same time, it will need to limit its appeal as a savings vehicle.

A range of different operational arrangements is possible. In hybrid designs, the central bank hosts a database of retail balances (even if anonymised), whereas in intermediated designs, it would keep track only of wholesale balances. Within this design space, a novel trade-off emerges for central banks: they can operate either a complex technical infrastructure or a complex supervisory regime.


Abstract

CBDCs should let central banks provide a universal means of payment for the digital era. At the same time, such currencies must safeguard consumer privacy and maintain the two-tier financial system. We set out the economic and operational requirements for a "minimally invasive" design – one that preserves the private sector's primary role in retail payments and financial intermediation – for CBDCs and discuss the implications for the underlying technology. Developments inspired by popular cryptocurrency systems do not meet these requirements. Instead, cash is the model for CBDC design. Showing particular promise are digital banknotes that run on "intermediated" or "hybrid" CBDC architectures, supported with technology to facilitate record-keeping of direct claims on the central bank by private  sector entities. Their economic design should emphasise the use of the CBDC as medium of exchange but needs to limit its appeal as a savings vehicle. In the process, a novel trade-off for central banks emerges: they can operate either a complex technical infrastructure or a complex supervisory regime. There are many ways to proceed, but all require central banks to develop substantial technological expertise.

JEL classification: E42, E58, G21, G28

Keywords: central bank digital currency, CBDC, payments, cash, privacy, distributed systems