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The International Lawyer

The International Lawyer, Volume 55, Number 3, 2022

Digital Money & Central Bank Digital Currency (CBDC) - New Opportunity, New Challenge

George A Walker


  • Finance and technology have always had a close relationship. While technology has supported basic banking, finance, and market function, finance has been used to support continuing technological advance and innovation.
  • The power of new technology may, nevertheless, now lead to a fundamental restructuring of banking and financial markets themselves, particularly with the emergence of new private and public digital coins and digital market platforms.
  • Centrally controlled government, or central bank, markets can now enjoy the technological capability to replace more traditional legacy private markets and services.
Digital Money & Central Bank Digital Currency (CBDC) - New Opportunity, New Challenge
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Finance and technology have always had a close relationship. While technology has supported basic banking, finance, and market function, finance has been used to support continuing technological advance and innovation. The power of new technology may, nevertheless, now lead to a fundamental restructuring of banking and financial markets themselves, particularly with the emergence of new private and public digital coins and digital market platforms. Markets have been subject to massive continuing changes and advances, which have substantially reformed banking and financial services and products. Centrally controlled government and central bank markets can now enjoy the technological capability to replace more traditional legacy private markets and services.

The advent of digital systems has had a major impact on all aspects of banking and finance. “Digital” is a polymorphic, complex, combination, or contestable concept. It is generally concerned with the power of new binary microprocessing systems to carry out all of the core functions of markets, specifically in terms of savings, lending, payment, investment, and risk management. The scale of this digital use and application has grown enormously in recent years, especially with the over one billion account holders using Alibaba’s Alipay and Tencent’s WeChat in China and the 390 million global account users of PayPal. The extent of this change has been further dramatically stimulated with the emergence of new forms of distributed ledger technology (DLT) and blockchain. The widespread public use of blockchain began with the launch of Bitcoin by pseudonymous creator Satoshi Nakamoto in January 2009. Almost 30,000 private digital coins have since been created. The value of this market exceeded $1 trillion in the first quarter of 2021 and then grew to $2.06 trillion later in the year. Similarly, the valuation of large technology firms, such as BigTech leaders, including Apple and Microsoft, also rose to over $2 trillion. While the value of these coins has suffered from substantial variability and volatility, this suffering can be limited or managed through the use of stablecoins, which tie their value to another cryptocurrency, fiat currency, or commodity, with the most notable example being Facebook’s Libra coin (now known as Diem), which was launched in June 2019. New forms of digital payment systems have also emerged, with over three billion account holders now using different forms of payment applications and electronic wallets. Private “CoinTech” has then evolved in competition with PayTech and other forms of financial technology (FinTech) applications (AppTech), including decentralised finance (DeFi), decentralised exchanges (DEXs), and most recently non-fungible tokens (NFTs).

The most dramatic innovation within these markets may, nevertheless, be the adoption of new forms of official central bank digital currency (CBDC) or digital government coin (GovCoin or StateCoin). This has been referred to as the “new incarnation of money,” which could lead to a major switch in power from individuals to the state, geopolitical disruption, and adjustment of capital allocation. This has to be treated with a combination of “optimism[] and humility,” with central banks described as moving from being “the aristocrats of finance to its labourers.” This has resulted in massive change, with officials arguing that central banks must “act now” while “the current system is still in place.” Commentators claim that central banks should “introduce digital currencies of their own” and realise “the possibilities of the new technologies[] while preventing a chaotic free for all.” Money must adapt to an era of new technology, provided that it works for society as a whole. F.A. Hayek, nevertheless, earlier warned about the dangers of exclusive central money control. Others have argued that central banks must proceed with caution.

While central banks could promote the benefits of DLT and blockchain and embrace decentralisation, it would appear that many of the larger public bodies have decided to elect to use technology, rather than coin models, to create digital account value and to only open their balance sheets on a centralized, rather than decentralized, basis. Central banks had to support the financial system over a decade ago in the wreckage of the global financial crisis beginning in 2008-2009 and then following the coronavirus crisis in 2020-2021. This intervention could be taken further forward with central banks effectively nationalising private money and banking systems through a process of highly centralised technological transformation and metamorphosis. This could be partly driven by efficiency and stability arguments and accompanied by a decline in physical coin and banknote use, although probably more simply due to the potential perceived loss of control over markets and market function and stability either to private operators or other governments that could otherwise ensue. This could result in fundamental change and adjustment. Possible increased centralisation and official control may then have a substantially more significant and revolutionary impact on markets than open decentralisation and DLT, as coders and programmers predicted. Private FinTech must compete with official PublicTech. A new balance must be secured between decentralised private markets with freedom of action and centralised public markets with official oversight and control. Difficult and complex choices remain in each case.

The purpose of this paper is to examine the current state of policy development in CBDC, GovCoin, or StateCoin, including with reference to the various emerging policy and operational models under construction. Initial policy issues are outlined in relation to money and markets, cryptocurrencies, and CBDC. Principal use applications are reviewed. Basic design options and conditions are examined, with additional policy issues and the legal considerations that apply considered in further detail. A possible emerging CBDC model can be constructed. A provisional set of comments and conclusions are drawn with regard to the immediate and long-term operations and effects of CBDC and the associated benefits and challenges that may arise.

I. Money and Markets

Money has had a long and varied history. Debt economies date from around 20,000 BC, with commodity and representative money following around 8,000-5,000 BC, including with the use of oxen as a principal unit of account. Complex monetary systems were developed in Ancient Mesopotamia around 8,000-3,200 BC, including in Sumer (4,500-1,900 BC), Akkadia (2,334-2,154 BC), Assyria (2,500-609 BC), and Babylon (1,894-609 BC). Simple clay tokens date from around 8,000-7,500 BC, which represented natural goods, and complex clay tokens from around 3,500-3,000 BC, which were used to designate more sophisticated manufactured or manmade goods. Clay tablets were transformed into papyrus writing around 3,200 BC, with simple notching and notation creating accounting and arithmetic, and the more complex ideograms forming the beginning of writing and alphabet systems. Two of the most important social technologies in history, mathematics and writing, began with simple forms of finance function.

Complex monetary and valuation methods were used in ancient Mesopotamia, with the first unit of account possibly being the Shekel (Mina). Egypt would later develop the Deben (Kite). Deposit and custody creation dates from 1,000 BC, including in Mesopotamia and Egyptian grain banks. There was, nevertheless, no need for coinage in the early great civilisations, as their economies were centrally managed by the kings and temples. Metal coinage was introduced with the Lydian Stater around 650 BC, which was made from an alloy of gold and silver, with a large number of different types of metal coinage having been created subsequently, especially in new Greek city-states. The Persians would introduce gold Darics and silver Sigloi, with the Romans developing the gold Aureus, silver Denarius, and copper Sestertius. The Chinese created early forms of knife and tool coins around 1,122-221 BC during the Zhou dynasty, with later paper Feiqian (618-907), or “flying cash,” during the Tang dynasty, and Jiaozi notes (960-1279) during the Song Dynasty. The Carolingian Pound was introduced around 742-814 by Charlemagne or Charles the Great (748-814). The English silver penny and pound sterling date from around 757-796. The Florence Florin and the Venetian Ducal were introduced around 1252 and 1284. The Spanish Real and Peso date from 1350 and 1366. The Dutch Guilder and then Thaler, Mark, and Franc emerged between 1252 and 1360. The United States dollar was created between 1776 and 1792, with the European Euro between 1999 and 2002. The modern Chinese Renminbi dates from 1948.

Aristotle explained the functions of money in terms of acting as a unit of account, medium of exchange, and store of value, which has remained the principal formulation in economics over time. Aristotle, nevertheless, separately highlighted the importance of valuation in his Nicomachean Ethics. The two core functions of money, for the purposes of this text, are restated in terms of valuation and value, with care having to be exercised in considering the three economic functions of money in law. This division is also reflected in Joseph Schumpeter’s distinction between money acting as both a mensuratum (means of measurement) and mensura (the thing measured). Because money is a universal item of financial value, the principal uses or applications of money can be explained in terms of valuation, savings or deposit, lending or credit, payment or exchange, investment or return, and risk or loss management.

A massive edifice of writing has subsequently been erected to examine the subject of money over time. This body of knowledge can be summarised in terms of having created a series of great “Historical Debates,” with these involving various theories or sub-theories of money. These great debates can be summarised in terms of money form, money nature, money creation, money value, and money function. A number of separate, more specific and general theories on the nature and function of money can then be identified. These can be summarised in terms of a series of economics, legal, social, sociology, psychological, international private law (IPL) or payment, and public international law (PIL) or asset theories. All of these can be drawn together under a single consolidated social claim or reconciliation theory, with money being defined for the purposes of this paper as any item of value denominated in the form of an official reference asset issued and recognised by a government or state and, consequently, capable of supporting or discharging one or more money functions or use applications. In law, money is an official reference asset capable of securing the discharge of a payment obligation without the need for a separate agreement between the parties.

The history of money must also be considered concurrently with the history of banking and finance. Money in and of itself is essentially static or inert and is only animated through its use in banking and finance. Canadian-American economist J.K. Galbraith stated in 1975 that “[t]he process by which banks make money is so simple that the mind is repelled.” A core component within this has been the financial claim. This dates from the Roman obligatio, which refers to both the obligation to make a payment and the right to receive a payment. This has to be considered positively and progressively as a right or entitlement, rather than negatively and regressively as a debt. Such financial claim forms the basis for many legal rights and remedies and modern forms of assets or wealth. A payment obligation is discharged with money. The default remedy in almost all legal proceedings is compensation in the form of money. A restitutionary claim can be made in money. Criminal and administrative fines or penalties are, by default, quantified, expressed, and discharged in money. Money and finance are, to that extent, orthogonal and form the basis for many other areas of law. A number of specific types of financial claims can also be distinguished, including immediate, liquidated, contingent, convertible, and conditional obligations. Modern economies and societies are, to a significant extent, based on financial claims and claims management.

A parallel history can also be constructed regarding technology and FinTech. Taxation, counting, accounting (which consists of counting over time), and writing date from Sumer (7,000-3,200 BC). Printing was invented by the German publisher, Johannes Gutenberg, in Strasburg in 1440, and double-entry bookkeeping by the Italian Mathematician, Luca Pacioli, in 1494. The steam pump was created by an English engineer, Thomas Savery, in 1698, the steam engine was developed by a Scottish inventor, James Watt, in 1769, and the electric motor was created by an English scientist, Michael Faraday, in 1821. Communication was revolutionized with the telegraph in the 1830s, the typewriter in 1868, the stock ticker in 1867, the telephone in 1876, and the television in 1925. Mechanical computing was developed by Charles Babbage in 1833, analog computing by Lord Kelvin in 1872, electromagnetic computing in 1939, electronic circuit computing in 1947, modern digital computing with transistors in 1947, integrated circuits in 1952, multiple store programming in 1948, and supercomputing emerged in the 1970s.

Different phases or iterations of FinTech can be developed for the purposes of this paper. FinTech 1.0 involved mechanical counting and writing devices. FinTech 2.0 was concerned with digital computing and processing. FinTech 3.0 represented the introduction of DLT and blockchain, as well as the emergence of the Value Net. FinTech 4.0 corresponded with the development of the machine net and internet of things (IoT). FinTech 5.0 will emerge with the creation of the sensory or immersive internet, or web 5.0, where people are intimately connected through digital systems and, effectively, live inside the internet. While history is most commonly considered in terms of wars and kings and queens, it may be much more accurately and acutely understood in terms of money, banking, finance, technology, and new financial technology.

II. Digital Coins and Cryptocurrencies

Different sets of definitions and classifications, or taxonomies, of digital coins and tokens have been produced in the digital and FinTech area. A taxonomy can be understood to refer to any organisation or classification system structured in accordance with predetermined rules. A financial technology, or FinTech, taxonomy organises or structures FinTech-related business or activities, products, and services. These are generally referred to as “cyrptoassets,” to the extent that they use some form of access cyptography. This may not be a necessary condition in relation to all products or services and on all platforms, so the more inclusive term, “digital,” is used in this text, which will include all cryptotassets.

Various definition taxonomies have been produced with regard to digital coins and cryptocoins, or cryptoassets. The European Central Bank (ECB) considered the nature of virtual currency schemes and their impact on central banks in October 2012 and February 2015. A virtual currency was defined as any type of unregulated digital money that is issued and usually controlled by its developers and used and accepted among the members of a specific virtual community. This definition was later revised to consist of a “digital representation of value” not issued by a central bank, credit institution, or e-money institution. Cryptocurrency was later defined as “a virtual currency which is secured using cryptography,” with a virtual currency being “a digital representation of value that is neither issued by a central bank or a public authority.” Cryptoasset was then defined as “a generic term for cryptocurrencies, virtual currencies, virtual assets, and digital tokens.”

The Committee on Payments and Market Infrastructures (CPMI) issued a paper on digital currencies in November 2015. While references had been made to “virtual” and “cryptocurrencies,” the preferred term has become “digital currencies” over time. Three features of digital currencies were identified: assets having some monetary characteristics but not tied to a sovereign currency, assets that were transferable through distributed ledgers, and assets that were developed principally through non-bank institutions.

The CPMI constructed a Venn diagram for cryptocurrencies to distinguish among cash, commodity money, and bank deposits, with reference to electronic, peer-to-peer, and no-liability systems. Ole Bjerg later distinguished CBDC from cash, reserves, and bank account money, with reference to properties such as central bank issuance, universal accessibility, and electronic form. These were combined in a separate paper by Morten Bech and Rodney Garratt, which constructed a revised classification (“Money Flower”), using four properties with issuer (central bank or other), form (electronic or physical), access (universal or limited), and transfer (centralised or decentralised with peer-to-peer) characteristics. Cryptocurrencies are generally considered to be relatively inefficient at discharging the three traditional functions of money.

Further divisions, or taxonomies, have been adopted with regard to different types of digital coins and tokens. The HM Treasury, Financial Services Authority (FSA), and Bank of England Cryptoassets Taskforce in the United Kingdom (UK) have distinguished among exchange, security, and utility tokens. The Financial Conduct Authority (FCA) has followed the Cryptoassets Taskforce’s classification in this regard. Other more recent official papers generally adopt a three-part division based on payment, utility, and asset tokens, following the Swiss Financial Market Supervisory Authority (FINMA) guidelines. The European Securities and Markets Authority (ESMA) has adopted a general division of cryptoassets in terms of investment, utility, and payment, including hybrid types that reference six case studies. The Maltese Financial Services Authority (MFSA) distinguishes among electronic money, virtual financial assets (VFA), and virtual tokens.

The UK FCA has also separately distinguished among four activities with regard to its crowdfunding regime. This consists of loan-based and investment-based crowdfunding, which are regulated under the Financial Services and Markets Act 2000 (FSMA, as amended) and Regulated Activities Order (RAO 2001, as amended), as well as donation and pre-payment, or rewards-based, crowdfunding, which are unregulated. While this division has not generally been used for digital asset purposes, this four-part division can be considered to correspond with debt, security, donation, and reward-related tokens. Four other types of coins or tokens could then be distinguished, including monetary (or exchange), asset (or representative), utility (or use), and membership (or community) tokens. A full eight-part division of new digital coins and tokens can then be constructed, as distinct from non-CBDC digital assets, for the purposes of this paper.

III. Central Bank Digital Currency (CBDC)

The issuance of CBDC, or sovereign coin, denominated in the form of a national official currency unit has become an increasingly important area of current and future development. The CPMI has stated that CBDC is “a new form of central bank money,” which it defined as “a central bank liability, denominated in an existing unit of account, which serves both as a medium of exchange and a store of value.” CBDC is “a digital form of central bank money that is different from balances in traditional reserve or settlement accounts.”

There has been an increasing amount of substantial examination and experimentation in this area. Sixty-six percent of over sixty central banks were conducting experiments or proof-of-concept studies of CBDC in 2020. Eighty percent of world central banks have since been engaged in research or experimentation in the development of CBDC. Central banks have been focusing on retail and inter-bank, or wholesale, CBDC. Over eighty-eight percent of CBDC projects use blockchain, which has benefits like ease of ownership transfer, programmability, transparent audit trails, configurable confidentiality, and increased interoperability. Eighty-one countries representing over ninety percent of global GDP were subsequently reported to have been exploring with CBDC. Successful launches of the Bahamian Sand Dollar, Marshall Islands Sovereign (SOV), Lithuanian LBCoin, and Cambodian Bakong have already been conducted, with other countries at advanced stages of development, such as with the Chinese Digital Currency Electronic Payment (DCEP) model and the Swedish Riksbank’s e-krona. The Bank of England published a discussion paper on CBDC in March 2020, with proposals for a United States “digital dollar” being promoted by the coronavirus crisis.

CBDC could bring substantial benefits, especially in terms of cost, efficiency, and monetary control, and consequent economic growth, although significant challenges remain. The principal effect of creating a workable CBDC would be having an alternative, common, and generally acceptable monetary unit in digital form. Domestic paper banknotes could continue to be issued with CBDC, at least for the foreseeable future, due to the legal and political obstacles and objections that may otherwise arise in removing coinage or paper note circulation altogether. Constitutional and human rights arguments may be advanced against removing paper notes, and destroying all forms of the cash economy may be considered undesirable economically and objectionable socially and politically. A decline in cash has been used to support CBDC use, although it is unlikely that CBDC could replace existing physical coins and banknotes. This may also be considered wholly impractical in terms of continuity planning, particularly in the event of a possible collapse of internet communication and digital account and payment systems, causing the need to return to some form of default physical money system on a short- or long-term basis. Paper banknotes already provide an instantaneous form of decentralised peer-to-peer payment, which is created as a liability against the central bank, with it being unclear whether physical coins and banknotes could ever be fully removed and replaced.

A series of essential conflicts necessarily arise in this area. These include tensions between physical money systems and online money systems, money-based payment facilities and account-based payment facilities, and private control models and public control models. While CBDC could be set up to operate on an equivalent basis to cash, a series of further design issues arise. Different options can be considered, including whether CBDC should be issued in the form of an account, coin, or token, whether it should be direct or indirect, limited or unlimited in volume and time, rewarded or non-rewarded, anonymous or non-anonymous, inter-operable or not, with or without legal tender status, available or unavailable for security purposes, and localised and only operating in a particular territory or allowed to operate on a cross-border and global basis. A series of other policy issues, general capability conditions, coin requirements, and operation considerations will also have to be resolved. Further legal and regulatory issues also have to be considered.

Consequently, there can be several different potential types of CBDC. Reference could be made under this paper to state-issued sovereign coin (SovCoin) or government coin (GovCoin), although “central bank delegated CBDC” has emerged as the preferred term. A synthetic CBDC could be used, involving the issuance of liabilities by private-sector payment service providers matched by funds held at the central bank, which could be referred to as a “private token model.” A few other variations can be considered to exist. Some reports or papers refer to “central bank crypto currencies” (CBCC), which can be considered to constitute a specific form of CBDC using access cryptography, with CBDC strictly including non-cryptographic forms of code-based coinage. Other options may include “central bank digital accounts” (CBDA), as opposed to “central bank reserve accounts” (CBRA), or “central bank digital tokens” (CBDT), as opposed to “central bank digital coins” (CBDCn). CBDC may be issued on a direct or disintermediated (dCBDC) basis or an indirect or intermediated (iCBDC) basis. A distinction can also be drawn between wholesale (wCBDC) and retail (rCBDC) CBDC, anonymous (aCBDC) and non-anonymous (nCBDC) CBDC, and national or localised (lCBDC) and global or universal (gCBDC) CBDC. Reference may also be made to single-system (sCBDC) and multiple-option (mCBDC) models. All of these can generally be incorporated within any specific CBDC arrangement over time.

IV. CBDC Advantages and Disadavantages

CBDC could bring substantial advantages, especially in terms of providing a single, official, free, safe, stable, immediate, enforceable, and universal means of payment. This could be made convertible with specie, as necessary, and be subject to formal regulation and official support while operating on a free or low-cost cross-border basis. This could ensure a necessary degree of privacy and data protection. This could increase choice and promote innovation and competition while expanding account access, financial capability, and financial inclusion significantly. All of this can be summarised in terms of centralisation, convertibility, cost, certainty, continuity, confirmation, control, compliance, cover, confidentiality, cooperation, coordination, and cross-border effectiveness.

CBDC’s advantages can also be considered in terms of the more general advantages that arise from FinTech, including from a technology, business, user, market, regulatory, infrastructure, policy, and financial stability perspective. A full multi-part template can be constructed in this regard. Further technical benefits may specifically arise where some form of blockchain or DLT is used, including speed and capacity (low latency), cost, efficiency and flexibility, security and accessibility, durability and immutability, consistency and transparency, scalability and expansion, control and confidence, interoperability, innovation, and evolution and stability. Further related benefits could be restated again in terms of disintermediation, digitalisation, validation, authentication, automation, replication, reconciliation, modularisation, personalisation, interlinkage, codification, shared function, responsibility, and liability.

CBDC use would, nevertheless, be wholly dependent on technology, with a recurrent potential loss of availability and inability to always make payments or secure convertibility without appropriate systems access and telecommunications capability. There could be a loss of choice and data confidentiality, followed by an increase in public confusion and moral hazard. Massive levels of concentration could arise, with a possible lack of competition and potential abuse of dominance and market power. A sudden drop in confidence could lead to contagion and collapse in related or other markets or payment systems, and financial instability more generally. All of this could lead to wider financial market and social fragmentation, disruption, and crisis. This could generate domestic currency substitution, with a switch of deposits and savings to CBDC in pre-crisis and post-crisis situations, consequently placing additional pressure on inter-bank markets and possible central bank lender of last resort (LLR) support facilities. External currency substitution could also lead to a loss of domestic monetary policy and foreign exchange control. All of this can be restated in terms of capture, continuity disruption, conversion loss, choice, confidentiality defect, confusion, contagion, collapse, crisis, concentration, loss of competition, currency substitution, and loss of policy control.

The adoption of a direct and centralised CBDC model could also decimate the existing private banking industry, specifically with the loss of payment charges to CBDC. Deposit functions are increasingly being assumed by online account management services provided by other companies, including large BigTech companies. Bank credit assessment functions are being transferred to third-party service providers, while BigTech companies develop new forms of data and credit analysis. Banks could lose their lending function through the emergence of DeFi, digital microfinance, and digital capital market (SecTech) access more widely. Risk and loss management can increasingly be carried out by new forms of insurance provision (InsureTech), financial derivatives, and other digital applications.

This loss of private bank function could also result in the transfer of substantial administrative obligation, function, and risk onto the central banks, with it being unclear whether sufficient alternative lending could be provided within the new, highly more centralised economic models constructed. Central banks arguably do not have the systems and resources to conduct massive amounts of individual credit assessment decisions. New central CBDC facilities will also become an immediate source of attack for state-sponsored, and other nefarious, interest groups, with cybersecurity becoming a key operational condition and continuing vulnerability. Significant operational or reputational damage suffered by a central bank through the failure of its CBDC facilities could undermine the conduct or confidence of the central bank in other functions, particularly monetary policy, but also foreign exchange rate policy, infrastructure policy, and market stability policy, including contingent market support and LLR. This may be referred to as cross-function disruption or dislocation, with many central bank activities being “too big to separate, insulate or differentiate.” All of this could then lead to further massive disruption, fragmentation, and dislocation of markets and market function in the short, medium, and long term, with wider detrimental economic and social impacts.

These factors must be assessed with regard to the particular circumstances and conditions applicable in any country-specific situation. Many issues and considerations arise. Relevant advantages can generally be summarized again in terms of efficiency, innovation, financial capability, inclusion, growth, and overall welfare benefit. Disadvantages principally include loss of privacy, concentration, loss of continuing commercial bank viability, technological dependence, contingent inaccessibility, cyber vulnerability, lack of security and continuity, other consequential functional disruption, and collapse. All of these factors must be carefully considered, and appropriate corrective action taken, with a proper set of supporting policy and operational responses being adopted in each case.

A number of important policy documents have been produced to examine these issues, with significant initiatives brought forward to date by key organizations such as the Bank for International Settlements (BIS), Bank of England, ECB, Federal Reserve Board, and other national central banks. These key organizations have begun to create a substantial body of relevant understanding and emerging policy formulation and are reviewed in the following sections.

V. The Bank for Intenational Settlements (BIS)

The BIS has produced a number of research papers and conducted a number of surveys and other studies. Other more specialist international standard-setting bodies (SSBs) based at the BIS in Basel, Switzerland, and operational units, such as the new Innovation Hub, supports this work. The BIS published a particular paper in June 2022, which outlines how a future monetary system could be constructed using official CBDC, rather than private crypocurrencies, while realising all of the most significant benefits developed by the private crypto markets.

A. CBDC Core Features

In October 2020, the BIS published a joint paper on CBDC with the ECB, Federal Reserve Board, Bank of England, Bank of Canada, Bank of Japan, Swiss National Bank, and Swedish Central Bank. The objective was to identify certain foundational principles and core features for common CBDC development. The paper outlines common principles and key features for the establishment of a “general purpose” CBDC that complements other forms of central bank money provision, with the contributing central banks confirming their commitment to continue providing cash in the form of banknotes, so long as there was public demand.

1. CBDC Principles

Three general principles were developed regarding CBDC: not compromising monetary or financial stability, coexisting with and complementing existing forms of money, and promoting innovation and efficiency. While CBDC may assist in delivering central bank public policy objectives, an assessment must also be made as to the adverse impact of CBDC on bank funding and financial intermediation, as well as the potential creation of destabilizing switches or runs into central bank money. The purpose of the paper was to highlight common CBDC design and technology considerations, as part of an international collaboration, knowledge sharing, and experimentation process. This work would include individual and collective policy analysis and apply technical experimentation. This work may also specifically assist in improving cross-border payments following the G20 roadmap without damaging spillovers or unintended consequences.

2. General Purpose CBDC

CBDC is referred to as “a digital payment instrument, denominated in the national unit of account, that is a direct liability of the central bank.” One general purpose of the CBDC is to be used by the public for day-to-day payments, not just wholesale financial market payments. This is distinct from reserve or settlement account usage. This has to be a direct liability of the central bank, rather than of private-sector payment service providers, which would create a synthetic CBDC. Synthetic CBDC can be described as a form of narrow bank money. Synthetic CBDC also lacks the market neutrality, non-profit nature, and liquidity of central bank money. A new CBDC issuance system would require the involvement of the central banks, with participating payment service providers and banks, as well as data service companies that provide and maintain applications and point-of-sale agents who initiate and accept payments. Money is made available in the form of physical banknotes, central bank reserves, settlement balances, or accounts and through commercial bank deposit accounts. Central banks support commercial bank deposits, although these remain the liability of the commercial banks, rather than the central banks.

3. Advantages and Risks

A number of studies have been undertaken in relation to CBDC’s potential benefits and exposures. CBDC use is generally considered in terms of payment function, with specific advantages arising in terms of continued access to central bank money, resilience, increased payment diversity, more financial inclusion, improved cross-border payments, support for public privacy, and facilitation of fiscal transfers. If an interoperable CBDC model could be created, CBDC would also be able to assist with cross-border funds transfer. Other CBDC advantages may arise in relation to monetary policy and financial stability, which have to be balanced with relevant risks and exposures.

4. CBDC Design

The three common foundational principles can be restated in terms of “do no harm,” coexistence, and continued innovation and efficiency. Fourteen further core features are also identified, with four instrument features, (convertibility, convenience, acceptability and availability, and low cost), eight system features (security, instant finality, resilience, availability, throughput, scalability, interoperability and flexibility, and adaptability), and two institutional features (robust legal framework and regulatory standards compliance).

CBDC’s design has to be considered in terms of available instruments, ledger options, and incentives. CBDC may be based on either cash (“cash-like”) or deposits (“deposit-like”), with the latter possibly increasing substitution risk and disintermediation. Ledger design would have to be considered in terms of structure (centralized, decentralized, or combination), payment authentication (identity, token-based, or multifactor), functionality (simple or complex), access, and governance (CBDC rulebook). The allocation of establishment and running costs would impact systems efficiency, competition, innovation, inclusiveness, and public take-up. Appropriate charging or subsidization models would have to be developed and set out in the relevant participation rules.

The relevant technology would also have to be convenient, secure, resilient, fast, scalable, interoperable, flexible, and adaptable. Design choices would inevitably create multifaceted trade-offs, which may, to some extent, be matched by technological innovation. These include speed, security, and resilience. All relevant legal and regulatory compliance issues would also have to be considered.

5. Development

The collaborating group of central banks has attempted to develop common principles and approaches to create a convertible, convenient, accessible, and low-cost CBDC within a resilient, accessible, flexible, interoperable, private, and secure framework. This must also maintain private sector involvement and support continued innovation, competition, adoption, and use. Domestic differences, nevertheless, prevent the adoption of a one-size “off the shelf” model, with interoperability being an important feature to avoid unintended barriers and consequences. Spillover effects and local monetary or stability damage must also be avoided.

The paper stresses the need to adopt a cautious, incremental, and collaborative approach. The group would continue to work with each other and the BIS to develop domestic and cross-border options with continued information sharing and collaboration. The group would specifically work with the BIS Innovation Hub and support domestic input.

The BIS initiative is important in bringing together leading central banks to exchange ideas and viewpoints on policy and design options. The more significant potential area of cooperation is on securing interoperability and the parallel use of multiple CBDC systems without domestic conflict or damage. The overall effect of the contact and collaboration promoted may also inevitably be to create further pressure towards domestic CBDC adoption decision taking.

B. Monetary and Market System

The BIS published a separate paper, which examined the opportunities for the monetary system with CBDC, in June 2021. The BIS examined CBDC in terms of the public interest, which can provide a competitive market structure and quality of governance, including privacy rights. CBDC is described as providing an opportunity to review and reaffirm the public interest argument for digital money, with the monetary system being a public good that permeates people’s lives and unpins the economy. CBDC can benefit from unique advantages in terms of settlement finality, liquidity, and integrity. CBDC can contribute to creating an open, safe, and competitive monetary system, supporting innovation and the public interest either with financial intermediary wholesale CBDC or wider economy retail CBDC. The digital economy, nevertheless, creates massive new volumes of data generation, with significant issues arising in terms of data governance, consumer protection, and the anticompetitive management of data silos. This could be replaced by a virtuous cycle of greater access, lower costs, and improved services.

1. CBDC Competition

CBDCs are similar to retail fast payment systems (FPSs), which can support private bank and non-bank payment service providers (PSPs). The market has, nevertheless, been compacted by separate developments, including with the rise of private digital currencies such as Bitcoin and stablecoins and the entry of BigTech into payment and financial services. Cryptocurrencies are dismissed as speculative assets, rather than money, with stablecoins acting as an appendage to the conventional monetary system and dependent upon their internal governance structures. BigTech may represent the most significant challenge based on data network activities (DNA), loops, and concentration, with the entrenchment of market power resulting in higher costs and decreased competition. Existing payment systems suffered from continuing high costs and a lack of universal access.

2. Public Good

CBDCs would have to act as central bank public goods. The monetary system was based on trust in the currency and the central bank. Central banks provided an ultimate means of payment through bank reserve accounts with physical banknotes and supported with the payment and infrastructure system. It ensured safety, integrity, efficiency, and access to the system. In doing so, they provided a unit of account to the monetary system, secured finality of wholesale payments, provided smooth systems operation, and oversaw the payment system’s integrity while ensuring a competitive level playing field. Wholesale and retail CBDCs would have to support these functions.

CBDCs could secure settlements, as with reserve accounts, but with additional functionality, including controlling conditionality of payment. The BIS Project Helvetia was referred to. Retail CBDC would represent a direct claim on the central bank, rather than a commercial bank, using either anonymous token-based or identified account-based access. Options would have to be considered in terms of data governance, competition, and the organization of the payments industry, including through the use of application programme interfaces (APIs). Model selection in many countries was dependent upon the relevant advantages and disadvantages that arise with regards to physical banknotes and coinage, retail CBDC, and retail FPS.

3. CBDC Architecture

Three different types of CBDC architecture are identified: (1) direct CBDCs, where all retail payments are processed by a central bank; (2) hybrid CBDCs, where an intermediary processes retail payments; and (3) intermediated CBDCs, where the central bank processes wholesale payments. The BIS prefers a two-tier system, using the private sector without direct CBDC access, due to the higher operational obligations costs, as well as the potential detrimental impact on promoting future innovation. The digital ledger, or the economy’s transaction record memory, may be held either by a trusted central authority or through a decentralized governance system potentially enabled by permissioned DLT.

4. Data Governance

The BIS would generally prefer use of an account-based CBDC model with digital identification that includes public sector involvement. Individual identification would form a key part of any CBDC design. This would generally require an account-based model that is linked to digital identities while also featuring additional appropriate data privacy security measures. Digital identification could be based on available national registries and other sources using either a private or public-private agency model. This could be linked to digital identity models that would allow access to a wide range of digital services. Nevertheless, such identification systems would require high standards of cybersecurity to prevent cyberattacks and infiltration. Additionally, a degree of anonymity may also have to be provided to protect individual privacy and safety.

5. Cross-Border CBDC [Multi-CBDC (mCBDC)]

CBDCs should ensure open payment platforms and a competitive level playing field that supports innovation. Currency substitution risks could be reduced, and cross-border payments could be improved, through the use of CBDCs and digital identification, which would also limit currency substitution risks. The BIS has considered such arrangements in terms of multi-CBDC, which could be established through shared digital identification on a cross-border basis and international cooperation. Extended use of CBDCs could substantially improve the international payment and remittance systems.


Difficulties may arise with the use of CBDCs, such as in relation to currency substitution, with foreign currencies displacing domestic currencies, thereby damaging both financial stability and monetary sovereignty. Other risks may arise with tax avoidance and increased exchange rate volatility. Cross-border effects may, nevertheless, be limited by use of account-based systems and digital identification, which would be domestically based. Currency substitution may also be limited through international monetary cooperation. A supranational digital identification scheme would not be necessary to maintain cross-border CBDC cooperation. This could be secured through, for example, the use of mCBDC arrangements operating on an enhanced compatibility, interlinking, or single-system integration model. Separate initiatives were being brought forward to promote international cooperation in relation to anti-money laundering and Know Your Customer (KYC), identity information sharing, data exchange, and an international CBDC design.

Central banks are working on bringing forward mCBDC initiatives, such as through the BIS Innovation Hub’s mCBDC Bridge project with China, Hong Kong SAR, Thailand, and the United Arab Emirates. The project uses DLT to support multi-currency, cross-border transfers (with payment-versus-payment (PvP) in multiple currencies and multiple jurisdictions) to exchange foreign currency, thereby strengthening the financial infrastructure. The BIS had launched the project to establish a “corridor network” called “Inthanon-LionRock” with the Hong Kong Monetary Authority and the Bank of Thailand. The project was later renamed the “mCBDC Bridge” (mBridge). Such a model could, over time, work with either domestic CBDCs alone or possibly a global central currency such as the digital International Monetary Fund (IMF) Special Drawing Right (SDR or e-SDR).

Central banks are key in the development of conventional payment systems, including with retail and wholesale CBDC programmes. Central banks were intended to safeguard the public’s trust in money payment systems during periods of substantial change. Threats to the public’s trust in money payment systems arise from “cryptocurrencies, stablecoins, and walled garden ecosystems of big tech,” but the outcome of such threats may be managed through technology, the underlying market structure, and data governance. CBDCs create a unique opportunity to design a technologically advanced representation of central bank money that secures the unique advantages of finality, liquidity, and integrity. Two-tier CBDCs could be used to create a highly efficient digital payment system that provides broad access, strong data governance, and privacy protection. The most substantial advantages offered by CBDCs may then be available through cross-border cooperation and coordination of central bank activity in this area.

VI. The Bank of England

The Bank of England has been considering the possible creation of CBDC in the form of a digital sterling since 2014. Measures have been taken to explore the potential introduction of CBDCs into the UK, but neither the government nor the bank have committed to any final decision or any specific form of technology or intermediate model to be used. A technology-neutral approach has generally been followed, which monitors the evolution of technological advances within the markets over time. The Bank is responsible for promoting the “public good” of the people of the UK and has to consider the impact of technology and continuing innovation on this function.

The Bank currently provides money in the form of physical banknotes and electronic money with central bank reserves account access and e-money functions. Reserves and e-money are, nevertheless, restricted to authorized banks and other select financial institutions. A sterling CBDC would essentially be a digital pound denominated in the form of pounds sterling. This has been referred to as “Britcoin.” This could be provided either through digital coin transfers via simple account value transfers or through blockchain and DLT, with either a centralised or decentralised ledger system. All of the major central banks have generally indicated that they would prefer an account-based centralized model, rather than a decentralised coin model, for management and control purposes.

The Bank of England issued a discussion paper on CBDC in March 2020 and a follow-up discussion paper in June 2021. CBDC has been considered by the CBDC Taskforce, with two separate external engagement groups consisting of the CBDC Engagement Forum, which meets with senior stakeholders, and the CBDC Technology Forum, which considers more technology-related issues. Additionally, the Bank of England monitors Fintech through a separate Fintech Hub.

The Bank published a number of papers on the economics of digital currencies, innovations in payment systems with the emergence of digital currencies, and monetary policy. The Financial Policy Committee (FPC) has considered the monetary and financial stability implications of cryptoassets and concluded that they do not create any significant risk at this time. But the FPC did warn that the value of cryptoassets could fluctuate and that purchasers could lose their investments.

The HM Treasury established a Cryptoasset Taskforce in 2018 with the FCA and Bank of England, through which they would consider the limited development and deliverable benefits of DLT markets. The HM Treasury consulted on whether cryptoassets should be brought within the scope of financial regulation to promote consumer protection in March 2020. The HM Treasury adopted an agile, risk-conscious approach to financial control. It also issued a separate consultation document on cryptoassets and stablecoins in January 2021. The HM Treasury followed the FCA’s classification of cryptoassets consisting of e-money tokens, security tokens, and unregulated tokens (which include both utility and exchange tokens). The government proposed creating a new category of stable tokens consisting of five distinct types of tokens. Certain objectives and principles were identified. The discussion paper sets out the Treasury’s approach to extending the regulatory perimeter and nature of controls to be applied to different stablecoins.

A. Opportunities, Challenges and Design

The Bank of England published a consultation paper on CBDC and its “Opportunities, Challenges and Design” in March 2020. The provision of a sterling CBDC was explained in terms of continued innovation in payment systems, with the move from paper to polymer notes and the rebuilding of the wholesale Real-Time Gross Settlement (RTGS) service. CBDC could be another safe and trusted form of money. The Bank had not decided whether to issue CBDC but wished to assess the “benefits, risks and practicalities of doing so.” The use of cash was declining, with alternative forms of money and payment being provided through new advances in technology. CBDC would allow households and businesses electronic reserve account access. This could assist the Bank in fulfilling its monetary and financial stability objectives through the provision of “fast, efficient, and reliable payments with an innovative, competitive and inclusive as well as resilient payment system.” This would support the digital economy and form part of the RTGS renewal process and other private sector payment initiatives. This would provide a safer payment option than stablecoins through the use of a risk-free form of central bank money and support future cross-border payment. This could, nevertheless, impact commercial banks and the Bank’s balance sheet, credit provision, and implementation of monetary policy and financial stability support.

The paper develops a form of illustrative platform model to complement the existing RTGS service and provide a minimum amount of necessary functionality operated through PIPs, which would offer CBDC customer interface services, with additional overlay services being provided over time. DLT may “enhance resilience and availability” and provide additional functionality through smart contract technology. This may create its own challenges, with a core CBDC function being available through the use of conventional centralized technology and without DLT. The paper outlines the Bank’s approach to CBDC, opportunities in supporting its objectives, objectives and design principles, proposed CBDC platform model monitoring, impact on financial stability from a technology design standpoint, and further work to be done with other UK payment improvement initiatives.

The Bank developed its emerging approach to new forms of digital money in a separate June 2021 paper. The Bank had to maintain public confidence in money as an essential part of its monetary and financial stability objectives. This is necessary to ensure stability in the prices of goods and services and security in the provision of financial services. Digital money may bring significant advantages in terms of cost and functionality and support market-based financing, which could enhance monetary policy transmission, although digital money must remain safe and stable. The FPC has already stated that stablecoins must provide the same security as commercial bank money. Uncertainty with regard to possible digital money demand requires a precautionary approach that allows for continuing assessment and review.

B. CBDC Approach

The March 2020 paper re-examined the importance and impact of retail CBDC following earlier wholesale CBDC studies. CBDC would provide an electronic form of central bank money as an alternative to a banknote. Central bank money in the form of Bank reserve accounts are only otherwise available to banks, building societies, broker-dealers supervised by the Prudential Regulation Authority (PRA), Central Counterparties (CCPs), some non-bank PSPs (including Electronic Money Institutions (EMIs)), and other financial market infrastructures with Bank settlement accounts. A stylized continuum of access to electronic central bank money is constructed, distinguishing institutions that have current access and those that do not.

The paper refers to the traditional functions of money in terms of store of value, medium of exchange, unit of account, and principal types of money in the form of banknotes, bank deposits, and central bank reserves. CBDC would provide an electronic form of risk-free money that is directly convertible into cash and deposits. Some substitution may arise between CBDC and other forms of money, although this can be managed through the functionality, remuneration, and design features selected. CBDC would require the construction of new infrastructure. A four-step approach was developed based on the identification of relevant opportunities, specification of relevant objectives, design (including functionality, economics, and provision), and technology design.

The paper distinguished between account and token-based models. Both systems can be configured to provide different identity solutions in terms of anonymity or pseudo-anonymity and other functionality. Neither would provide full cash-like transfers, with some ledger record having to be kept in each case. The paper only notes that the two models may support different use cases or overlay services, with separate legal implications arising.

The paper refers to the possible creation of a “synthetic CBDC.” This would involve intermediaries providing liabilities, supported by funds held with the central bank. This would provide security but not constitute a direct central bank claim. Such an arrangement would have to be subject to appropriate regulation and supervision.

C. Opportunities and Objectives

The Bank of England’s core objectives are to maintain monetary and financial stability. CBDC could support this in seven ways. CBDC would assist in developing a resilient payments landscape; avoid the risks of new forms of private money creation; support competition, efficiency and innovation; satisfy future digital economy payment needs; improve the availability and useability of central bank money; meet the decline in cash; and enable improved cross-border payment provision. Cash payments had specifically fallen in volume from sixty percent in 2008 to twenty-eight percent in 2018 and were projected to fall to nine percent by 2028. Notes in circulation (NIC) had, nevertheless, continued to rise. Alternative payment means are available through Faster Payments, BACS, Cheque Imaging, and credit and debit cards, with CBDC complementing other forms of payment.

CBDC would assist households and small and medium-sized enterprises (SMEs) make “fast, efficient and reliable payments through an inclusive, innovative, competitive and resilient payment system.” The paper focuses on domestic, retail, and sterling payments. Three core design principles were restated in terms of the system being reliable and resilient (resilient, secure, available, scalable, compliant, and private), fast and efficient (fast, user-friendly, efficient, transparent, and inclusive), and innovative and open to competition (benefiting from comparative advantage, open to competition, interoperable, and extensible). While a bank-centric model could be constructed, the Bank wished to involve the private sector in making available additional services, including customer interface and point-of-sale integrations, in addition to core account and transaction technology.

In its June 2021 paper, the Bank refers to the advantages that may arise with digital money through the provision of faster, cheaper, and more efficient payments with increased functionality, improved financial inclusion, and high levels of innovation more generally. Open competition must, nevertheless, be maintained, including through account interoperability without unnecessary barriers or friction, for firms not to become “too big to fail.”

D. Design

The Bank’s CBDC platform model was based on a core ledger that records and processes payments, with private sector payment interface providers (PIPs) managing end-user interaction and providing supporting functionality through overlay services. Payments could be made on a real-time gross basis on the RTGS model with immediate settlement finality. This would include basic one-off “push” payments through the PIPs, in-person point-of-sale (PoS) or remote (website) merchant payments, offline device-to-device (DtD) payments, multiple (bulk) business payments, micro payments (including Internet-of-Things (IoT) applications), as well as possible “programmable money” (with smart contracts and atomic transfers).

PIPs would be subject to adequate authorization and supervision through the FCA and payment systems regulator (PSR). This would include complying with the three additional payments regulation principles issued by the FPC as part of the HM Treasury’s review of the payment system. Relevant standards and requirements would be set, for example, with regard to PIP interoperability, overlay payment services, interfaces and applications, messaging standards, and liability (including fraud, failed transactions, cyber risk, and privacy).

The new infrastructure would have to comply with relevant anti-money laundering (AML), combating the financing of terrorism (CFT), and support sanctions conditions, which would specifically require individual identity and KYC verification. This could be achieved within different sections of the model, for example, through the PIPs, with core ledger transactions being carried out on a pseudonymous basis without personal data having to be held by the Bank. Other private sector options may be available to carry out identity and suspicious activity verification and reporting requirements. The system would also have to be compliant with relevant General Data Protection Regulation (GDPR) and Data Protection Act obligations. The paper notes that the Bank does not have a specific mandate to provide untraceable or anonymous payment services.

As a new form of central bank money, CBDC could impact the structure of the banking system and the ability of the Bank to deliver its primary objectives of monetary and financial stability. This could make monetary policy transmission more effective, although this may also result in substantial disintermediation within the banking sector from the switching of banknotes and bank accounts to CBDC. Switching from cash to CBDC would only affect the composition of household and central bank balance sheets, with no impact on the banking sector’s balance sheet. A shift of bank deposits to CBDC would reduce the assets and liabilities of commercial banks and shrink their balance sheets with a possibly significant disintermediation effect. This may reduce the volume and increase the cost of lending to the economy. Banks may also increase wholesale funding or central bank borrowing.

CBDC may improve Bank Rate transmission, although this may be offset by increased banking sector disintermediation, with the relative importance of different monetary policy transmission channels being impacted. A shift into CBDC may also reduce commercial bank reserves for collateral purposes, with market rates and policy rates becoming misaligned.

CBDC may increase financial stability through the removal of bank payment intermediation, which was already occurring. A switch from bank deposits to CBDC could, nevertheless, be destabilizing, with rapid substitution being possible in the event of a crisis. Banks may separately hoard reserves, which may impact money market functions, as occurred before the global financial crisis. The central bank may also have to extend the range of assets purchased or lent against as it expands its balance sheet to support any increased commercial bank funding following a collapse in sight deposits. Design options are available to manage monetary and stability risks through CBDC remuneration, tiering, and volume limits.

E. Technology and Response

The core ledger would have to be resilient, secure, available, scalable, fast, efficient, and extendable. These may be deliverable through the use of centralized, rather than distributed, ledger technology. Trade-offs may, nevertheless, arise, including transaction throughput against speed of settlement and simplicity against functionality. Centralisation suffered from limitations in terms of performance, data privacy, and security, for example, with resilience being possible through data duplication across multiple servers, rather than decentralisation. A smart contract functionality could be provided off the core ledger through separate modules or PIP management. High standards of user and infrastructure security would have to be ensured, including through the latest cryptographic advances.

F. Future Development

The Bank wished to determine whether any net benefit to payment users, the financial system, and society as a whole outweighed the challenges and threats created. The Bank would continue to investigate the impact of CBDC on payments, monetary and financial stability, provision, functionality, and technology. The Bank would only be able to make a final decision on the adoption of CBDC when all of this is confirmed. The paper referred to other initiatives in the payment area, including Cash Review, the revised Open Banking and Payment Services Directive (PSD2), RTGS renewal, Bank Balance Sheet Access Review following its Future of Finance report, Pay.UK’s New Payments Architecture (NPA), and the HM Treasury’s Payments Landscape Review.

The Bank of England paper provides a substantial and comprehensive examination of relevant CBDC issues under an intermediate account-based model with PIPs, and an attempt is made to realise as many of the benefits of decentralisation as possible with a more centralised model. As with other central banks, the Bank is aware of the potential damaging impact of CBDC on the commercial banking sector. While an intermediate model may assist with regard to payment, separate issues arise with regard to the potential movement of BigTech firms into banking and financial services, specifically with their Big Data and DataTech advantages. Reference is made to legal points, although these are not developed in any detail in the paper.

The Economic Affairs Committee of the House of Lords in the UK issued a separate comment report on CBDC in January 2022, which examines the potential value of a proposed retail sterling and wholesale CBDC. This report is much more cautious in terms of policy prescription and implementation. The report accepts the potential benefits but concludes that the creation of UK CBDC could have substantial consequences for households, businesses, and the monetary system as a whole, with specific concerns arising with regard to personal data protection and surveillance, currency substitution, financial stability (particularly in times of economic distress), central bank authority, potential foreign nation state attack, and criminal vulnerability, to name a few. UK CBDC may proceed, although only after all relevant policy and operational issues and concerns have been fully identified and resolved.

VII. Digital Euro

The European Central Bank (ECB) issued a consultation report on the creation of a digital euro in October 2020. The ECB Governing Council had established a High Level Task Force to examine Euro CBDC in January 2020, with the findings of the Task Force set out in the October 2020 report. The ECB Governing Council decided that it was appropriate to consider the creation of an electronic form of central bank money accessible to all citizens and firms, which would operate with cash rather than replace it. This would support innovative, competitive, and resilient payment and act as an emblem of ongoing European integration. This represented the beginning of a public consultation and dialogue with citizens and stakeholders within the Eurosystem.

The ECB had published an earlier paper on tiered CBDC in an attempt to deal with the difficulties of structural disintermediation within the banking markets, centralisation of credit allocation within the central bank, and facilitation of systemic bank runs in crisis situations. CBDC could be considered to constitute a third form of base money, along with overnight central bank deposits and banknotes and wholesale and general purpose CBDC. General purpose CBDC would ensure the efficient and secured availability of central bank money to all members of society, with the resilience, availability, and contestability of payments being strengthened. The ECB had considered the use of a semi-anonymous DLT-based CBDC separately. The ECB has also commented on privacy and other security issues, including money laundering and taxation with regard to the possible establishment of a digital euro.

A. Digital Euro Benefit

If created, a digital euro would offer a number of advantages. It would support Eurosystem objectives, innovation, and strategic autonomies through the provision of a fast and efficient European Union (EU) payments profile. This may be necessary if cash is to decline significantly, financial exclusion for the “unbanked” or vulnerable groups continues, electronic payment systems become unavailable due to an extreme event, or foreign digital money displaces EU options. It could increase choice, competition, accessibility, and innovation in payment systems. It may also support monetary policy, although this would be considered further over time, outside the October 2020 report.

B. Digital Euro Design

The ECB considered that CBDC may generally either be issued in the form of a digital coin or a digital reserve account entry on the central bank balance sheet. A digital coin would use a form of blockchain or other decentralised ledger technology, which could either operate on a permissionless basis (such as with Bitcoin) or be permissioned, which would generally be preferable for a state-issued CBDC. A digital reserve account entry would operate by creating a digital unit of worth, without any separate digital coin, which could be made available by extending access to the central bank’s balance sheet, by creating additional access accounts, or through the accounts of a selected (permissioned) group of commercial bank or payment system providers operating on an intermediated basis.

The ECB’s October 2020 paper refers to functional design possibilities and technical and organisational approaches, although these options are not clearly specified. The paper does refer to direct and indirect access with online and offline availability and centralised and decentralised access solutions. The ECB would appear to prefer an account-based intermediated access model. The requirement that the digital euro should always remain a claim on the Eurosystem excludes the use of intermediary models, with private entities acting as custodians of the digital euros. Back-end infrastructure would then operate on a either centralised or decentralised basis, with separate hardware and software solutions being available to secure end-user access. The paper refers to the creation of a bearer digital euro, with possible end-user access using DLT protocols (or local storage), although the full implications of this are unclear.

The digital euro would be created in the form of a central bank liability provided in a digital manner for use by citizens and businesses for retail payment purchases, which would complement existing cash and wholesale central bank deposits. This would be a risk-free form of central bank money or digital representation of cash, with its value or purchasing power being fixed over time. Maintaining price stability is the primary objective of the Eurosystem and the single monetary policy pursued by the ECB. This is distinct from commercial bank money (bank accounts) and electronic money, which are liabilities of supervised private entities supported by the ECB as LLR and deposit insurance protection. Cryptoassets lack intrinsic value and are traded as a speculative commodity. While the value of stablecoins is fixed to other assets, this is still not guaranteed. Digital central bank money was already made available through existing payment systems, including TARGET2 (T2), TARGET2 Securities (T2S), and TARGET Instant Payment Settlement (TIPS), with the project considering making this available for all wholesale transactions carried out through distributed infrastructures in addition to retail payments.

C. Digital Euro Characteristics

A number of characteristics of the digital euro were specified. This was based on five core principles, seven scenario-specific requirements, and seven general requirements. The digital euro would be convertible at par, would not constitute a parallel currency (P1), would constitute a liability of the Eurosystem (P2), would exist as a European solution (P3), would support market neutrality and not obstruct private solutions (P4), and would be trusted by end users (P5). Justifications or scenarios that would support the adoption of the digital euro are considered, with five relating to central bank functions and three supporting the wider objectives of the EU. Further scenario-specific requirements are identified. Additional general requirements are also noted.

The last four general requirements were intended to offset potential damaging effects, especially with regard to banking sector impact, monetary policy, financial stability, central bank profitability, reputational damage, retail payment safety and efficiency, non-EU use, and cyberthreats. The paper accepts that the introduction of a digital euro may impact monetary policy transmission and increase financial instability by damaging commercial bank intermediation functions and the availability of risk-free interest rates, especially if funds are transferred from commercial bank accounts as new central bank liabilities. Banks may deleverage and reduce credit supply, with costs being increased for banks, which may shift to activities with higher risk. Switching may also increase the possibility and severity of bank runs, with limits possibly being placed on digital euro access. The size of the ECB balance sheet may increase substantially, with it also being subject to retail payment system risk and other possible reputational damage. The digital euro should work with, rather than replace, existing payment systems, including under the Single Euro Payments Area (SEPA) initiative, with the ECB reluctant to damage existing systems options.

Cross-border impacts had to be considered, especially on capital flows and exchange rates, as well as monetary effects, with increased spillovers and spillbacks. The digital euro may be used for money laundering, terrorist financing, or other cross-border criminal activity. There is also a risk of currency substitution and “euroisation” effects as countries switch to the use of the digital euro, in addition to political risk and the need to establish a multilateral CBDC system. The integrity and confidentiality of the system would have to be protected against cyberattacks, particularly for fraud, extortion, and data exfiltration purposes.

D. Digital Euro Legal Issues

With regard to legal issues, the ECB had initially considered legal basis, legal tender, and outsourcing supervision. While the ECB would appear to prefer relying on banknote issuance powers, this only applies to banknotes, which implies paper notes in the absence of any other direction or discretionary power. This is highly questionable unless the digital euro is issued in the form of a digital note or certificate of some form, which is highly unlikely from the text provided.

Legal tender status is also justified on the basis of the Treaty on the Functioning of the European Union (TFEU) Article 128(1), although this is again dependent on the euro being issued in the form of a banknote. The October 2020 consultation document, nevertheless, provides that the legal tender status of the digital euro may be confirmed in secondary legislation adopted under TFEU Article 133, which may be used as a more general basis for the issuance of the digital euro as part of the European single-currency framework. ECB claims, in relation to legal tender status, that issuing euro banknotes can be understood to encompass the right to determine the format and medium of the banknotes, which would include the digital euro, although this is again doubtful. Legal tender statutes generally only apply to physical specie and coins or paper banknotes and not to central bank reserve account balances.

The ECB separately notes that features such as unit storage and payments can be outsourced to third-party intermediaries while core features such as remuneration, anonymity, infrastructure, and issuance model would be reserved to the ECB. Private bank account law or other property law may apply depending upon the nature of the design model selected.

E. Digital Euro Functional Design

Key features of the digital euro are considered in terms of functional design possibilities. These include either using a direct or indirect intermediated access model, different privacy requirements, investment limitations, access restrictions, transfer mechanisms, payment devices, offline availability and usability, remuneration, and parallel infrastructure. The report supports two principal options, with an anonymous fixed or non-negative interest rate offline option or a variable remuneration online facility, with additional services and functionalities being made available through the online tool.

F. Digital Euro Structural Design

Centralised and decentralised back-end infrastructure are distinguished, with intermediaries acting as either gatekeepers or settlement agents using centralised Eurosystem ledgers or decentralised access systems and the digital euro remaining a liability under the control of the Eurosystem. Gatekeepers would carry out authentication functions, with settlement agents providing additional services such as storage facilities. End users may hold centralised digital euro accounts directly or through a private commercial intermediary. A decentralised infrastructure could be created, providing for either direct access to a bearer digital euro or an account-based model and a hybrid bearer digital euro. End-user access would be dependent on the back-end infrastructure used, which would include authentication and authorisation compliance and could be hardware, software, or combination-based. The paper would also appear to allow for separate record systems to be made by intermediaries and the Eurosystem.

G. Digital Euro Development

The ECB would conduct a comprehensive and balanced assessment of the potential advantages and challenges, with design options being tested. The Eurosystem would consider commencing a digital euro project mid-2021 through the launch of an investigation phase to develop a minimum viable product. The ECB Governing Council would decide whether to begin the investigation phase in 2021. The October 2020 report would be used as the basis for commencement of the necessary public consultation to obtain input from all relevant parties. Input would be sought from all relevant European and international institutions, fora, and SSBs. The ECB announced that it would launch an investigation phase of a digital euro project on July 14, 2021. The investigation phase would last twenty-four months and consider design and distribution issues following the ECB’s 2020 report on CBDC. Possible design issues would be examined. Possible amendments to the EU legislative framework would be considered.

H. Digital Euro Evolution

The October 2020 ECB report on the digital euro represented an interesting commencement debate on the relative advantages and disadvantages, as well as technical capability, of creating a viable digital euro device. The report contains some interesting details, especially on possible scenarios, functions, and technical options. The key conditions are that the digital euro would remain the liability of the Eurosystem and be convertible at par across the Eurozone area with equal access.

The repeated core message was central control. Two centralised and two decentralised options were referred to, although only limited detail was provided at this stage. The ECB would appear to prefer adopting an intermediated access model, if possible, with the use of private financial institutions. The possibility of having direct end-user access to a decentralised bearer digital euro is referred to, although only limited information is provided. Further research and information would be required. Obvious advantages are referred to, including supporting innovation and financial inclusion, although separate systems failure was recognised and the danger of foreign digital money displacement mentioned, possibly through the creation of other more effective and dominant CBDCs.

Legal analysis was restricted to legal basis, legal tender status, and intermediary supervision, with a passing reference to domestic private law application. Much of this was undeveloped and not fully made out, particularly with regard to legal basis and legal tender status. The report confirmed the willingness and receptiveness of the ECB to consider the possible value of creating a digital euro and the willingness to respond to the challenges that arise. A substantial amount of further investigation, consultation, and testing is clearly required.

VIII. United States

Less substantial early work was carried out in the development of a digital dollar, possibly in light of the historical status of the dollar as the primary international reserve currency. The Federal Reserve had published an early paper on DLT in 2016, which initiated an interest in more general DLT in payment and settlement. Commentators have noted that a digital dollar could replace private coins.

Federal Reserve Chairman Jay Powell announced on May 20, 2021, that the Federal Reserve would issue a consultation document on the possible adoption of a digital dollar. Chairman Powell referred to the technological revolution that was fundamentally changing the world and reshaping communication, information access, and the purchase of goods and services. The functioning of the United States economy required that people have faith and confidence in the dollar, as well as payment networks, banks, and other payment service providers. This included any form of telegraphic funds transfer, automated clearing house services later on, and the FedNow Service from 2019. Developments in DLT had specifically resulted in the emergence of stablecoins, which could enhance payments efficiency, speed up settlement flows, and reduce end-user costs, although they lacked the protections available to other means of payment.

Technological advances had allowed central banks to consider issuing CBDC as a central bank liability in digital form. The Federal Reserve had considered how this could improve the existing safe, effective, dynamic, and efficient payments system in the United States, with this acting as a complement to, rather than a replacement of, cash and commercial bank deposits. Related issues, nevertheless, arose in terms of monetary policy, financial stability, consumer protection, and legal and privacy considerations. The Federal Reserve issued a discussion document in summer 2021 on the possible development of a digital dollar. The Federal Reserve was anxious to obtain opinions and to consider the relevant risks and opportunities as part of a wider deliberative process. This would be considered a part of the review on the evolution of digital payments, with the Federal Reserve remaining committed to ensuring that the public had access to a safe, reliable, and secure payment system. The Federal Reserve subsequently appeared to confirm again that the principal incentive to launch a digital dollar would be to eliminate the use case for cryptocurrencies in the United States.

The Federal Reserve later issued an important policy paper on a possible digital dollar in January 2020. The purpose was to promote public dialogue about CBDCs and their potential benefits and risks within the United States. CBDC was defined as a digital liability of a central bank that is widely available to the general public. CBDC should provide benefits that exceed costs, surpass alternative delivery methods, complement rather than replace current forms of money and payment methods, protect consumer privacy, prevent against criminal activity, and enjoy broad support from all key stakeholders. The paper examines the nature of existing forms of money (including central bank money, commercial bank money, and digital non-bank money), the payment system¸ digital assets, CBDC, CBDC uses and functions, potential benefits, and wider potential risks and policy considerations. No formal conclusion was produced, with the Federal Reserve inviting comments on twenty-two specific questions (on benefits, risks, policy considerations, and design issues) to determine whether the advantages of CBDC exceed the downside risks and whether CBDC was superior to alternative methods. The Federal Reserve would advise further on the results of its considerations subsequently.

A. Federal Reserve Bank of Boston and MIT

The Federal Reserve Bank of Boston has been working separately with researchers at the Massachusetts Institute of Technology (MIT) to consider how a digital dollar could be constructed, specifically considering speed, security, and privacy issues. The project would construct a hypothetical digital currency to test operational features that could be scaled as necessary for operational application. The objective was to identify and assess relevant benefits and challenges, with MIT also setting up a separate digital currency initiative (DCI) within its MIT Media Lab. This brought relevant experts together within MIT and elsewhere to develop relevant digital currency and blockchain technology. Specific issues arose regarding autonomy, openness, and value-generating potential using digital currencies through open blockchain networks. A number of specific goals and values were identified.

B. Digital Dollar Project (DDP)

A separate Digital Dollar Project (DDP) was established as a non-profit partnership between Accenture and the Digital Dollar Foundation to develop a possible dollar CBDC. The DDP is chaired by J. Christopher Giancarlo, former chair of the Commodity Futures Trading Commission (CFTC), with four other directors and twenty-two members on its advisory board. The DDP published a White Paper in May 2020. The objective was to create a tokenised digital dollar with a “champion challenger” approach to provide significant social and economic benefits. This was intended to operate with existing currencies, use existing architecture, and operate through a new transactional infrastructure based on DLT. The digital coin would support the dollar as the world’s reserve currency, improve time and cost efficiencies, provide wider accessibility to central bank money and payments, and emulate features of physical cash in a digital world.

Eight principal characteristics or tenets were identified. This was stated to create a third form of money, with fiat currency and commercial bank money issued by the Federal Reserve and distributed through the commercial bank system. The Treasury would produce digital dollars, and these digital dollars would be issued through the Federal Reserve in parallel with physical banknotes. Financial institutions would be able to conduct wholesale transactions in digital dollars and businesses, and individuals could use them through digital wallets.

“Tokenisation” was used to refer to the conversion of an asset, good, right, or currency into a digital representation with properties that attest to and transfer its ownership. Tokenisation can provide portability, efficiency, programmability, and accessibility, with the digital dollar complementing existing types of currency while modernising the current payment and financial infrastructure. This could be used for retail, wholesale, and international payments and promote access and inclusion. Tokenisation allows transactions to be carried out directly between parties without the need for intermediaries or intermediate accounts. Other benefits were identified in terms of privacy, configurability, and programmability, with cybersecurity and other benefits. United States dollar liabilities were summarized, including with M0, M1, and M2.

Tokenisation would promote the increased use of the dollar as an international reserve currency and support payments and liquidity within the global financial system. Confidence would be promoted in the use of a dollar by CBDC, with this supporting the distribution of central bank money outside the United States and promoting further diversification. It was highlighted that the dollar would have to become a digital tokenised currency to continue to act as a primary reserve currency rather than as an “analog instrument and unit of account.” Further opportunities may be generated, with the private sector being able to offer new forms of privacy customisation, data ownership, transaction and treasury management efficiency, and financial accessibility. A number of potential use case applications were identified. The DDP was to launch at least five pilot programmes between 2021 and 2022 to test the project. This could also assist with developing relevant technical standards, with the project complementing other work such as that conducted by the Federal Reserve Bank of Boston and MIT.

IX. PBoC Digital Currency Electronic Payment (DCEP)

The People’s Bank of China (PBoC) examined the development of a Chinese digital currency or a CBDC scene between 2014 and 2019 and conducted test phases between 2019 and 2020 following early design and experimentation. The Institute on Digital Money, later the Digital Currency Research Institute, had been set up within the PBoC. The financial sector expected significant changes, especially in relation to remittance, with the PBoC cooperating with industry representatives to develop blockchain and other new future technologies, including those that tested and validated crypto tokens. The use of private tokens would be discouraged and speculation through initial coin offerings (ICOs) prohibited, with all crypto-related activities later becoming illegal.

A. Renminbi (RMB)

The Chinese currency is referred to as the Renminbi (RMB), with the official code symbol “CNY.” The new digital currency would be referred to as the “e-CNY.” RMB was created by the PBoC in 1948 and officially referred to as the “People’s Currency,” or Renminbi, in June 1949. The basic monetary unit is the Yuan, which is divided into ten jiao and made up of 10 fen. RMB is issued by the PBoC under the revised PBoC law. RMB was included within the basket of currencies maintained by the IMF and formed SDRs on October 1, 2016. RMB can be referred to as the “Redback,” in contrast to the “American Greenback.”

Earlier shell currencies date from the Shang Dynasty (1500-1046 BC), with metal coins being used in the Anyang prefecture in the Henan province around 900 BC. Standard copper coins were used in the Qin Dynasty by Zheng, King of Qin (259-210 BC). Promissory paper notes in the form of “flying money” (feiqian), or “easy exchange” (bianhuan), were used in the Sichuan province by Tang merchants during the ninth century AD. The first official banknotes, jiaozi, were first issued in 1024. The Yuan was created in 1889 and was made equal to one Mexican peso. Military currencies were issued after the abolition of the Qing Dynasty with the Xinhai Revolution in 1911 and 1912, with the silver dollar being adopted as the national currency in 1914. Fabi, or legal tender, was first issued in 1935. Gold yuan certificates were first issued in 1945, although these were replaced by silver yuan as legal tender until the establishment of the PRC in 1948 and the introduction of the RMB in 1949.

B. Digital Currency for Electronic Payment (DCEP)

The new Chinese CBDC scheme was referred to as the Digital Currency for Electronic Payment (DCEP) facility. The Governor and Deputy Governor Fan Yifei highlighted the importance of the programme at a press conference in March 2017 during the end of the fifth session of the Twelfth National People’s Congress. The PBoC completed trials on the use of digital currency supply algorithms in October 2017. Digital currency supply algorithms would be issued in the form of digital sovereign currencies supported by the central bank, ultimately having the same legal status as the yuan.

Changchun Mu, Director of the Digital Currency Research Institute, confirmed that the PBoC was ready to launch its CBDC in August 2019. The PBoC stated on August 2, 2019, that it had accelerated its cryptocurrency development project. The PBoC would bring forward research and development and consider other domestic and foreign cryptocurrency projects.

The impetus was the announced launch of Facebook’s Libra (Diem) coin earlier in the summer. The PBoC expressed concerns with regard to the development of Libra in July 2019. The State Council authorised the PBoC to work with other market participants on CBDC. Former PBoC Governor Zhou Xiaochuan warned that China had to take appropriate precautions against the development of the Libra. The United States Congress separately stated that the United States should lead in blockchain and cryptocurrency development following hearings in July 2019.

It was announced that DCEP may have been launched on November 11, 2019, or “Singles Day,” which was China’s busiest shopping day. The DCEP would be made available through a two-tier model, using seven of the largest Chinese banks and financial institutions. The currency would initially be issued through the Industrial and Commercial Bank of China (ICBC), Bank of China (BOC), Agricultural Bank of China (ABC), Alibaba, Tencent, and the UnionPay association of Chinese banks, and an eighth institution may be added. The banks and financial institutions would effectively purchase the new currency from the PBoC, which would limit immediate credit lists.

C. DCEP Benefit

A number of perceived advantages were identified with the use of the new CBDC regime. The system was considered to be appropriate for China, with the dual system promoting use of the new currency. The DCEP was stated to be able to manage 300,000 transactions per second, with the 2018 Singles Day requiring processing up to 92,771 transactions per second. The processing speed was possible because the DCEP would not adopt a “pure blockchain architecture” without the need for a separate block settlement. The system would be centrally managed, and supply would be controlled through the PBoC. The intention was to replace physical Renminbi with electronic account values. Electronic account values would support currency circulation and the international development of the RMB. It was less clear initially whether DCEP would be used outside China, although this was indicated subsequently.

The DCEP would be backed one-to-one by fiat currency. A dual system would be adopted, with the PBoC managing the issuance and cancellation of the new digital currency and the largest state commercial banks and other financial institutions being responsible for their distribution. The system would also be dual in maintaining both account services using existing infrastructure and adding a digital asset element. It would, in effect, digitalise banknotes and coins (M0), with bank accounts and other specialist savings accounts already having been digitalised (M1 and M2). The DCEP would create general purpose central bank account facilities and parallel general purpose digital token facilities. This model follows the BIS “money flower” model.

The DCEP would replace cash and M0 because replacement would improve portability and anonymity in retail payments, make inter-bank clearing more efficient, increase speeds, lower costs in cross-border payments, and support the internationalisation of the Renminbi. This would lower operating costs more generally, improve anti-money laundering, and limit criminal abuse of the financial system. The DCEP would act as a form of digitalised M0 with improved functionality and increased illicit activity control. The system was stated to operate on a full, rather than fractional, reserve basis, with participants providing full backing against all DCEP received. Existing monetary policy tools would not be undermined; instead, they would arguably improve, with the DCEP becoming a more substantial element within the financial system over time. The DCEP would not be interest bearing unless separately deposited. The DCEP would, therefore, not compete with central bank deposits.

D. DCEP Operation

The PBoC has described the design as being “loosely-coupled,” rather than “tight-coupled,” to allow transfers without the use of a bank account. This design may, for example, involve transferring funds between Alipay or WeChat accounts. The PBoC was looking to retain a turnover rate comparable with cash and “manageable anonymity” within second-tier level transactions. The DCEP has been described as being stored in digital wallets protected through cryptography and consensus algorithms, although the meaning of this is unclear. Wallets generally only hold private cryptographic keys, rather than digital coins directly, while consensus is used for reconciliation purposes, which is not necessary on a centralised model. Without a blockchain to hold the digital currency, it may be necessary for each of the commercial banks and payment services providers within Tier 2 to maintain separate ledgers and networks. Smart contract functionality may be provided, although the PBoC was concerned about ensuring that the DCEP provided “basic monetary requirements” without the risk of undermining its integrity and possibly turning the DCEP into some form of security “downgrade.” Yao Qian, the founder of the Digital Currency Research Institute, indicated that the currency would be programmable and extendable, with smart contracts increasing automation and reliable execution. Yao Qian has described the system as being based on “one coin, two repositories, and three centres.”

The PBoC has confirmed that any new digital fiat currency (DFC) had to be user-friendly and well-received by the public to promote vitality and allow it to replace traditional currency. The PBoC wished to build on the existing infrastructure based on a “central bank-commercial bank” model and incorporate the new DFC into existing applications to promote diversified use, increase competitiveness, and provide better services. CBDC was referred to as being either account or non-account based, where the non-account model presumably referred to a digital coin option. The Chinese system was intended to combine both bank accounts (electronic currency) and digital coins (digital currency) together into the same account. Existing bank account fields could be extended to include additional digital currency wallet ID fields on the Chinese model. The Chinese system would integrate DFC into the traditional central bank-commercial bank model by incorporating additional digital currency attributes into the commercial bank account system, which would allow participating institutions to enhance their service quality and competitiveness. Yao Qian noted that the new system would allow funds paid by the central government to companies or individuals to be tracked through multiple levels of intermediate public entity. The PBoC had considered issuing the digital currency itself or using authorised banks on a Hong Kong model.

E. DCEP Adoption

The DCEP was to come into full effect before the 2022 Winter Olympic Games in China. A number of test launches were carried out, including the provision of digital “red packets” through a public lottery during the 2021 Chinese New Year worth RMB 200 ($31). This allowed users to download “e-yuan” with legal tender status onto a smartphone. Merchants could otherwise refuse to accept payments, such as with Alipay and WeChat. The purpose of the trials was to allow the general public to become familiar with the new e-yuan and promote confidence in its use. In addition to supporting monetary transactions, the e-yuan could be used to limit the profitability of other private payment platforms such as Alipay and WeChat, protect China from foreign digital currencies such as Facebook’s Libra (Diem) coin, and compete with the United States dollar as an international reserve asset. This could also support state control of private payment companies such as Alipay and WeChat following the cancellation of the Ant Group initial public offering (IPO) in 2020 and restrictions on other financial operations such as peer-to-peer lending. The DCEP could be further used to support state surveillance under a central state data model. The government had referred to the establishment of a nationwide integrated big data centre in its FinTech plan in late 2019. The PBoC stated that the DCEP would allow “controllable anonymity,” with the central bank being able to monitor transaction data without identifying individual parties and, therefore, maintaining personal privacy. This could, nevertheless, substantially increase state surveillance capabilities. China had already erected a substantial surveillance infrastructure, particularly through its control over the internet and “Great Fire Wall” with new facial recognition capability. DCEP data collection could also support credit scoring through the national social credit system.

While the technological capabilities of the DCEP model could challenge the international reserve status of the United States dollar over time, commentators have questioned to what extent countries and governments would want to adopt it in light of the degree of domestic control and authority exercised. Commentators did not consider that the DCEP would displace the dollar, at least not in the short term, although the United States would need to monitor developments and respond appropriately.

X. CBDC Use and Application

Many other national central banks have announced that they were interested in considering issuing some form of CBDC over time. Some limited experimentation has occurred, although no substantial amounts of CBDC have been issued by a major country in one of the principal reserve currencies apart from China. Many central banks have been examining the monetary and technological issues involved to explore possible production uses and channels in the future. This represents intelligent and responsible planning in terms of both supporting innovative market developments and attempting to identify and protect against potential monetary and financial stability threats. Whether central banks adopt CBDC on any larger use scale basis will depend on many factors, including other central bank use, private digital coin market growth, potential technology and BigTech company competition, payment system innovation, other potential monetary shocks, and policy demands.

Some forms of CBDC have been adopted in countries such as the Bahamas and Lithuania, with advanced testing being carried out in China. CBDC adoption was also being considered in Tunisia, Senegal, the Marshall Islands, and Venezuela. Other countries experimenting with CBDC include Singapore, Uruguay, Dubai, and Iran, with other countries such as the UK, the United States, and others within the EU continuing to investigate the relative advantages and disadvantages of CBDC as well. Price Waterhouse Coopers (PwC) launched a Global CBDC Index in April 2021 to track central bank activity in developing digital currencies, including retail CBDC and inter-bank (or wholesale) CBDC.

The Swedish central bank confirmed in 2016 that it was investigating the issuance of an electronic krona (eKrona or the eCrown). The Bank of Canada has been working with Payments Canada and a number of major banks to develop an electronic Canadian dollar referred to as “Cad-Coin.” The Bank of Canada worked with the banking consortium R3 as part of a proof of concept exercise called “Project Jasper,” with the system operating by participants pledging cash collateral into a pool that would be converted into Cad-Coin and used for payment purposes. The Monetary Authority of Singapore (MAS) announced in November 2016 that it was also working with the banking consortium R3 and member banks to develop a digital representation of the Singapore dollar for inter-bank settlement use.

Other countries had initially rejected the use of CBDC, including Ecuador, Estonia, Switzerland, Hong Kong, Japan, and Germany. All of this is clearly subject to review as technology and markets develop and change.

XI. Digital SDR

Consideration has also been given to creating a form of international digital currency. Creation could most effectively be achieved through the digitalisation of the SDRs managed by the IMF. Former Bank of England Governor Mark Carney had discussed the advantages of creating a new form of international reserve currency designated as a “Synthetic Hegemonic Currency” (SHC), which might consist of several domestic public CBDCs, rather than private currencies. This role could arguably be carried out through a digital SDR.

SDRs constitute an international reserve asset that was created by the IMF in 1969 under the Bretton Woods fixed exchange rate system to supplement member countries’ official reserves. The value of the SDR is based on a basket of five currencies, including the United States Dollar, Euro, Japanese Yen, Pound Sterling, and the Chinese RMB. SDRs became less important as a global reserve asset following the collapse of the fixed rate system in 1973 and the switch to floating exchange rate regimes. SDRs are used as a unit of account by the IMF and other international organizations, although it does not constitute a currency or claim against the IMF. It is referred to as a potential claim on the freely usable currencies of IMF members and can be exchanged for these currencies. An additional SDR 204.2 billion ($293 billion) was allocated to members in 2009 following the global financial crisis.

Commentators have noted that strengthening the SDR could support the IMF’s role in providing a global financial safety net. The G7 Group of Industrial Nations proposed a substantial increase in SDR on March 19, 2021, which would triple SDR allocations by over $500 billion to assist low and middle-income countries following the Coronavirus crisis in 2020 and 2021. The IMF was asked to issue SDR 3 trillion. Former IMF Managing Director Christine Lagarde raised the possibility of creating a digital SDR and the SDR replacing international currencies. Lagarde has supported the development of FinTech and digital currencies more generally. The IMF has worked with an external advisory group to consider the design of a digital currency (or IMFcoin), to replace reserve currencies.

The World Economic Forum (WEF) has separately referred to the possibility of creating a new international reserve currency with a digital SDR (e-SDR) following proposals by People’s Bank of China Governor Zhou Xiaochuan and former Colombian Finance Minister José Antonio Ocampo to convert the SDR into the principal reserve asset, as provided for in the second amendment to the IMF’s Articles of Agreement. This could specifically assist with the Triffin dilemma, with the United States having to run a persistent current account deficit to cover global demand for the United States dollar as a reserve currency. A specific release of e-SDR could also be considered to support the necessary costs of investing in transition technology to assist with keeping the global temperature below 1.5 degrees Celsius as part of global climate crisis responses. The preferred name or designation for any single new global currency under this paper would be the “Globo.”

XII. CBDC Architecture

Many issues arise in determining the most appropriate structure or architecture for central bank digital account or coin production. Central banks could establish various mechanisms to provide electronic or digital value and currencies. Different direct or indirect and centralised or decentralised options can be distinguished based on different account, coin, or private token model options. A number of additional design considerations also apply. Specific policy and monetary concerns would have to be resolved subsequently. Many more general design issues have to be considered in light of the digital coin’s technological and operational conditions, to the extent relevant. Each of these is considered further in turn. Separate legal and regulatory issues also arise, which are examined in the following section.

A. CBDC Design Options

Central bank electronic or digital monetary value can be generated in various ways, with a series of initial considerations having to be determined. Specific models of monetary value creation can be distinguished based on accounts or coins and tokens. It is then necessary to confirm whether the system would be direct or indirect, wholesale or retail, centralised or decentralised, limited by volume or by transaction, open or timed, anonymous or non-anonymous, payment system compatibile or incompatible, available for collateral use or unavailable, subject to geolocational controls or not, and consisting of single or multiple CBDC in structure and operation.

1. Account, Coin, or Token

Digital value may principally be created through the provision of account access or digital coin production. Reference may also be made to the use of private tokens by commercial banks, which represent claims against the central bank, although this may create unnecessary complexity. A bank account is not money in law but a claim by the account holder against the bank for payment, with the payee being entitled to insist on settlement in banknotes, unless otherwise agreed.

An account system would operate as an extension of the existing central bank reserves framework, which can be used for settlement purposes. Access may be provided to the central bank’s balance sheet either directly or indirectly through the commercial banks. A variation of this would involve the creation of a separate central ledger with access managed through intermediate banks. This would correspond with the platform model adopted by the Bank of England in its March 2020 discussion document. This would parallel its RTGS system but with substantially extended access, including large and small companies and households. This would also reflect the Chinese model, with digital value created by the PBoC and then distributed through a small group of large participating financial institutions.

The central bank could separately issue digital coins on the model of private digital currency using DLT and blockchain. This would allow coin holders to transact with each other directly on a peer-to-peer basis. This corresponds with the two types of decentralised options referred to by the ECB operating on a either DLT or prepaid basis. A hybrid model may be considered, with the commercial banks managing the decentralised ledger under the ECB’s fourth variant. Smaller countries may prefer to adopt a decentralised coin-based DLT, with larger economies shifting to a proprietary model for control and security reasons.

2. Direct or Indirect

The related principal consideration is whether system users should have direct access to the central bank and the central bank’s balance sheet. The alternative is for participating parties to hold monetary assets through intermediate financial institutions, such as the largest commercial banks. These institutions could either be limited to the existing banks that participate in the central bank’s reserve asset or note circulation scheme or be extended to include other primary money market institutions or even all financial institutions that qualify for extended central bank reserve account access. The alternative to an account-based system would be for the central bank to manage the blockchain on coin model, or this could again be managed by the commercial banks or a separate appointed agent to the scheme. As this is CBDC, the central bank would be responsible for all liabilities in each case.

An account or coin model could also either operate on a restricted wholesale access basis or have access extended to all corporate and small and medium-size enterprises and retail personal users. The available options could be considered in terms of wholesale account access (WAA or wCBDC) or extended account access (EAA) and universal or direct account access (UAA or DAA) or possibly retail acess (rCBDC). As the largest banks already have reserve account access, limiting CBDC to a wholesale counterparty may add little larger benefit or value.

3. Centralised or Decentralised

Account or coin models could either be centralised or decentralised, which may operate on a centralised, decentralised, or distributed basis. Centralised systems consist of a single master set of accounts, ledger, or database controlled by one appointed agent. These would generally be closed and proprietary. Decentralised systems operate through a series of separate agents (nodes) that are partly autonomous, although connected to a single central point of control or include some form of sub-centralisation. Distributed models operate on a fully autonomous basis with no centralisation, hierarchy, or priority and with agents maintaining direct relations with all other agents on the system.

An account option would generally be centralized, although an intermediate model could be created using commercial bank accounts, which would still be reconciled with the central bank. If this was direct, the central bank would open its balance sheet more generally, although it could still maintain a separate designated account for CBDC on its balance sheet for this purpose.

Central bank registers may act as either record only or title ledgers. Most registers are record only, as they evidence the transfer of legal title carried out using other documents such as housing sale missives or dispositions. Digital ledgers such as blockchain, however, provide for the creation and transfer of title directly, which can only be carried out on the ledger and can accordingly be referred to as title registers or ledgers.

4. Volume and Transaction Limits

Appropriate volume limits may have to be set. Central banks will wish to retain full discretion to manage monetary policy and wider financial stability, although this may still be subject to specific CBDC production limits. The total amount of banknotes issued may be restricted under existing law, although this should not apply to CBDC created through either balance sheet account expansion or blockchain. Control limits may also be considered on the amount of value of CBDC that specific banks or other financial institutions can hold at any point in time, on individual transactions sizes, or on the amounts that companies and individuals can store or hold. This would have to be monitored over time.

Appropriate limits may then have to be set on value or coin production and distribution over time that are adjustable as necessary. One simple distribution model may be to create digital account values or issue digital coins in substitution for specific blocks of banknote production. This new digital value could then be issued in place of blocks of notes or on a supplemental basis. As the note circulation in the UK is around £70 billion, amounts of digital value or coins could, for example, be produced in £5 billion or £10 billion value blocks in substitution for note blocks. Specific issuances may then be referred to as “digital blocks,” or possibly “block coin,” for this purpose. As the Bank of England has a specific Note Circulation Scheme (NCS) to manage banknote production and distribution within the UK, this could be revised to create a parallel “Digital Liquidity Scheme” (DLS). All of this would then be subject to effective decision taking and governance arrangements, as set out in the scheme rules.

5. Timing and Netting

The scheme rules would be set to determine the availability of CBDC transaction use and settlement. The scheme could operate on a timed or continuous basis. Timed settlement would, for example, provide for completion during business hours. Settlement could then be carried out on a net or gross basis depending upon transaction volumes and costs. Continuing twenty-four hour CBDC use could still be made available at all times using appropriate technology and telecommunication devices, with clearing and settlement still being carried out within specific time periods subsequently.

6. Reward or Return

The scheme rules could be set to determine whether CBDC was interest bearing either generally or at specific times and whether this could be made adjustable. This could assist with monetary transmission and control, especially during times of difficult or unusual economic conditions. Interest-bearing CBDC could, nevertheless, increase the potential danger of money substitution at the domestic level and currency substitution at the international level. This may also raise competition law issues where this creates unfair or uneven results. It may be that CBDC is generally made available on a non-interest-bearing basis, with possible exceptional emergency reserve powers assumed for use during times of economic stress or disruption.

7. Anonymous or Non-anonymous

The central bank would have to determine whether the system would operate on an open and transparent or opaque basis, with party identity being either invisible (anonymous) or visible (non-anonymous). Different mixed, combination, or hybrid models may be made available. Parties may, for example, be given the option of carrying out transactions on an anonymous or non-anonymous basis, which may be of use with larger value purchases, such as land or cars. Consumer transactions or smaller denomination value transactions below certain thresholds could made fully anonymous through a system of exempt transactions. This may apply, for example, to transactions worth up to $25, £20, or 20 Euros.

While this may be considered in terms of relevant legal or regulatory requirements, such as in connection with anti-money laundering controls, central bank transactions are often exempt from such controls and do not apply. Existing paper banknote production provides an immediate and instant form of peer-to-peer money transfer without equivalent legal restrictions. Central banks may, nevertheless, still be anxious to ensure that new digital currencies are not used for anti-money laundering or terrorist financing purposes. This would clearly be justifiable on policy, political, social, moral, and reputational grounds.

Many digital coins only operate on pseudonyms, rather than a strictly anonymous basis, with police and intelligence authorities being able to identify parties using transaction details with, for example, IP address information and value transfers on the blockchain. Some coins have been specifically designed to increase anonymity, such as Monero, Zcash, Dash, Horizen, Verge, or Beam, which would clearly be inappropriate for central bank use. Central banks could then use either existing pseudonyms or partially anonymous models or design specific systems that would allow transaction record histories to be constructed for specific parties, as necessary, by police and intelligence authorities later on. This could be tied to existing information collection and surveillance powers without the need for any significant law reform. It is arguable that some form of combination or hybrid model may be the most acceptable from a policy perspective, having regard to local conditions and opinion. Awareness or knowledge of possible identification would act as a significant disincentive for criminal abuse in and of itself.

8. Payment Systems Integration

The decision would have to be made on whether to manage the CBDC on a separate systems basis or whether this could be transferred and settled through other existing and cross-border payment systems. Domestic integration would principally be dependent on the availability and technological sophistication of the other domestic systems in place. This may be considered desirable, as this would promote use and confidence, although the central bank may wish to control the system over time on a closed proprietary basis. Cross-border usage would be dependent upon compatibility with other international payment systems or alternative new mCBDC arrangements in place. Central banks may generally wish to retain as much control as possible over the CBDC system, with the preference being for a closed single-use structure, unless necessary control could be exercised over other more open extended national or international arrangements. This could still operate with other CBDCs to allow inter-exchangeability through mCBDC.

9. Legal Tender Status

The local legislature should determine whether the CBDC should have legal tender status or not. Legal tender designation would mean that CBDC would have to be accepted by a creditor or payee in the discharge of payment obligations. El Salvador was the first country to confer legal tender status on Bitcoin in September 2021, despite its volatility and technical difficulties with the Chivo (“cool” in slang) wallet used. Legal tender status will not be conferred automatically and only by statute in the absence of continuous merchant use and market recognition and acceptance. Legal tender allocation is generally restricted in practice to apply to physical coin transactions and banknotes, with many forms of payment, including commercial bank money and central bank reserve balances, not attracting legal tender attribution. Conferring legal tender authority on CBDC would promote confidence and use and arguably support the stability of the payment and financial system more generally. Nevertheless, this may not be considered necessary due to the high credit standing of the central bank, although it may be desirable for clarification purposes.

10. Collateral Use

Scheme arrangements could specifically incorporate some form of security or collateral function to allow the CBDC to be used to support other lending or credit relations. National and international financial transactions and finance arrangements are significantly carried out on a secured basis, which is dependent on the availability of securities and other assets for collateral purposes. This could, for example, specifically be used to support central bank repurchase (repo) transactions, as well as all over-the-counter (OTC) financial derivative transactions, such as those executed under International Swaps and Derivatives Association (ISDA) 1992 or 2002 Master Agreements. Difficulties have arisen in taking security over bank accounts in law following notable judicial decisions in this area, with a number of parallel devices often being used in practice. Some form of simple collateral function could be incorporated into relevant CBDC terms and conditions of use.

11. Localisation or Globalisation

Central banks may wish to either place some locational limits on the use of new digital value options or allow them to operate on an open or cross-border market basis. Localisation may be considered appropriate, specifically to avoid loss of digital currency, to limit criminal use, and to avoid foreign exchange substitution or balance of payments issues. This could be used to avoid destabilising other country currencies or to try to avoid other central bank digital coins from destabilising a home currency. It may be possible to incorporate appropriate technological geo-locational tools to apply some form of territorial limits or use, such as using only local network nodes or prohibiting overseas movements through code. Coding restrictions may, nevertheless, reduce operational efficiency and effectiveness. This may also undermine cross-border payment use and effectiveness and wider market confidence. This may also have limited effect in practice, and the relevant technological and policy issues would have to be considered in further detail. Many central banks may decide that the relative advantages and disadvantages do not justify attempting to impose any form of domestic territorial localisation controls in practice.

12. Single and Multiple CBDC

CBDC models may also be designed to operate on either a single and isolated or multiple and connected basis. Operational systems may only allow CBDC transfer within a closed proprietary system, which would limit use and application within the system set. The alternative would be to enable national CBDC exchange or interoperability with other CBDC systems. This would specifically permit transfers in relation to cross-border payments. This may support inter-exchangeability, which may stabilise individual CBDC and CBDC usage more generally. Different types of mCBDC are being examined and tested by the BIS through its Innovation Hub.

B. CBDC Monetary Policy

A series of additional issues arise concerning monetary and financial policy impact. Central banks conduct substantial economic and financial analyses to identify specific concerns that may arise. Authorities and commentators generally conclude that no specific difficulty should arise in this regard, with CBDC possibly making policy transmission and control more effective. This would, nevertheless, be dependent on the particular design option selected and local market conditions.

The use and operation of CBDC would have to be examined regarding a number of particular policy perspectives, including:

(i) Monetary policy;
(ii) Inter-bank markets;
(iii) Infrastructure;
(iv) Competition;
(v) Narrow banking;
(vi) Free banking;
(vii) Sovereign coin;
(viii) Direct or full banking;
(ix) Loan or credit banking;
(x) Foreign exchange and free movement of payment;
(xi) Overseas coin loss; and
(xii) Financial stability.

C. CBDC Technological Conditions

If a central bank wished to establish an effective form of digital value or digital coin system, several common technological conditions must be satisfied. These may be relevant in connection with more general private coin models, although specific considerations may apply in connection with official central bank use. The system would generally have to secure a proper level of accessibility, efficiency, resilience, durability, scalability, transparency, certainty, security, compliance, confidence, continuity, interoperability, and supportability.

Central banks may wish to use open-source software models rather than construct original proprietary systems for cost and efficiency reasons. Closed proprietary models would, nevertheless, support control, security, and possibly stability and prevent replication or attack. Closed systems may also be considered more appropriate where the CBDC operates or is linked with other payment or account facilities. Open-source models may still have to be adjusted to secure the full range of central bank technological and operational objectives considered desirable and necessary in practice.

D. CBDC Special Coin Conditions

A range of additional special characteristics or operational conditions would also have to be secured if a digital coin option is to be followed. A core twelve-part architecture can be constructed to identify all the key elements that apply within a private digital coin or cryptocurrency system. This creates various conditions, which would have to be reviewed to ensure that the most appropriate set of choices were made in respect of any particular CBDC system that wished to use a coin option. These may include centralisation or decentralisation, limited functionality, identity and anonymity, authentication, value and title transfer, transaction hashing, reconciliation (consensus), block structure, scalability and resilience, a wallet provision, interoperability, code control, and a governance model. These would have to be reviewed and resolved.

E. CBDC Operational Conditions

The scheme rules may have to consider and resolve several more specific operational conditions concerning the structure and usage of the particular model selected. A number of other more general operational conditions would arise in relation to most types of schemes. These could include unit or value creation, unit or value purchase, convertibility, unit or value transfer, systems access, commercial bank distribution, balance sheet access or separate ledger access, account management and reconciliation, replacement and substitution, cancellation and dormant re-use, linkages and interoperability, dispute resolution, and review and revision. Each of these would have to be examined and resolved, having regard to the particular circumstances and other design choices made. Appropriate provisions regarding each of these could be incorporated into relevant terms and conditions of use with any specific CBDC scheme. This will have to be supported by an appropriate legal and remedy system.

F. Emerging CBDC Model

The full range of issues that arise regarding CBDC design are beginning to become clearer over time. Two principal forms are emerging, with larger central banks appearing to prefer a centralised account model and smaller central banks appearing to prefer a decentralised coin option using blockchain. One creates a claim in law, and the other creates a transferable asset.

Clear terms and conditions and operational rules must be agreed to in each case. This would include access, purchase, and parity requirements with timing and settlement provisions. Different anonymity levels can be provided, including exempt smaller value transactions (such as below $25, £20, or 20 Euros) with full optional identification for important or higher value transactions (such as vehicle, ship, aeroplane, house, or land purchases), although all transfers (apart from exempt transactions) should be verifiable, possibly using hash functions. A form of controlled anonymity can be created, which would allow public authorities, such as police and other enforcement agencies, to carry out post-transaction identification verifications where this is provided for under local laws. Other regulatory or compliance matters can be dealt with on an indirect or delegated basis, such as client identification, anti-money laundering and anti-terrorist financing requirements, data protection, and other reporting obligations. Regulated institutions would be subject to applicable outsourcing conditions. Appropriate continuity planning safeguards would have to be in place, including parallel ledger replication and reconciliation provisions in the event of an attack or closure of the principal ledger.

The principal characteristics of the main national systems adopted can be drawn together to create a form of recommended emergent CBDC model, although this can be amended for application in any particular country situation, as necessary. This can be summarised as follows:

(i) Centralised ledger or decentralised permissioned blockchain;

(ii) “Indirect or Intermediate Systems Access” (ISA) with “Wallet Account Providers” (WAPs) or “Transaction Account Managers” (TAMs);
(iii) Conversion parity and convertibility with twenty-four hour cryptographic (dual public-private key) access with RTGS;
(iv) Variable currency volume and monetary supply control (with possible “Emergency (or Exceptional) Account Remuneration” (EAR));
(v) Transparent and published “Terms and Conditions of Use” (TCUs) with possible “Distribution (or Digital) Circulation Scheme” (DCS) rules (depending upon the number of core intermediaries involved);
(vi) Structured pseudonymity (with low value “Exempt Transaction Anonymity” (ETA), “Optional Transaction Anonymity” (OTA), and other “Controlled Transaction Anonymity” (CTA) allowing restricted approved access to police or other authorities under relevant laws and regulations);
(vii) “Delegated Customer Identification” (DCI) and Digital Onboarding (DOB) (including anti-money laundering and anti-terrorist financing control compliance);
(viii) “Delegated Data Management” (DDM) (including the EU and UK GDPR and Data Protection Act 2018 (DPA));
(ix) “Central Account Control” (CAC), including in relation to “Dormant Account Cancellation” (DAC) (with possible digital value re-use in agreed circumstances);
(x) Appropriate intervention and support arrangements (including through the use of “Correction Transaction Payments” (CTPs), where transaction immutability otherwise applies).
(xi) Full continuity safeguards through the maintenance of either possible “Parallel Account Ledgers” (PALs) in a centralised system or multiple blockchain in a decentralised system (subject to possible multiple point of attack (SPA) and multiple point of failure (SPF) safeguards).

XIII. CBDC Legal Issues and the Bank of England

A number of specific legal and regulatory issues would arise in issuing CBDC. Necessary statutory and other operational amendments would have to be adopted, as necessary. These would principally relate to the following, which can be considered from the perspective of the Bank of England to illustrate the issues and considerations that arise. These apply with regard to the operating central bank itself, the account or coin model used, and other more general rights and remedies:

A. Central Bank

A series of specific issues would apply with regard to the issuing central bank as follows.

1. Power and Authority

The central bank would have to have the necessary legal power and authority to act. The Bank of England was originally created under the Bank of England Act 1694, which established it as a public corporation. The Bank was given the title of The Governor and Company of the Bank of England, with incorporation being conditional upon it not borrowing more than the sum of £1,200,000, which was lent to the government. This was subject to government redemption. Further sums were ordered by the government between 1709 and 1796, and the Bank was given unlimited power to borrow and grant security under the Bank of England Act 1716. The Bank was declared under an act of 1763 to be a body corporate and politic forever, with all immunities and privileges granted under the 1694 Act, although this was still conditional upon redemption of all amounts due before 1786. As no notice of redemption was served, the Bank became a body politic in perpetuity from 1786.

The Bank would accordingly have all necessary legal powers and capacities to act. The Bank is a body corporate incorporated by royal charter, with the charter setting out its capital stock and authorising it to hold land and property, sue and be sued, and hold its common seal. All other central banks would have to ensure that they have the necessary legal power and authority to act. Difficulties may be avoided where the specific form of CBDC may be considered to constitute an extension of the central bank’s reserve account management function, as no legal restrictions are generally imposed on balance sheet size and composition directly. Where the central bank must rely on more specific banknote issuance powers, significant difficulties may arise, such as with regard to the ECB.

2. Mission, Mandate, and Objectives

The original mission statement of the Bank was set out in its charter, signed in the Peacock Room at 66 Lincoln’s Inn Fields in 1694. This provides, inter alia, that, “Now know ye, that we being desirous to promote the public Good and Benefit of our People . . . .” While this may not constitute a legal impediment as such, providing an alternative mode of payment in the form of a digital currency can clearly be considered to be in the public good, provided that no counterbalancing disadvantages arise. The Bank is also subject to other voluntary standards, such as in relation to its code, which embodies the principles of integrity and leadership and gives effect to its conflicts-of-interest policies.

Further statutory objectives, which are legally binding, are imposed on the Bank, such as the Bank being required to protect and enhance the stability of the financial system of the UK (the Financial Stability Objective), although the Court determines its strategy with regard to financial stability. The Bank has two statutory objectives in relation to monetary policy, which consist of maintaining price stability and, subject to that, supporting the economic policy of the government, including with respect to growth and employment.

The PRA was initially created as a subsidiary of the Bank, although these were later merged and the Bank was appointed PRA under the Bank of England and Financial Services Act 2016, with a separate Prudential Regulation Committee (PRC) being set up within the Bank to carry out the equivalent functions. The general objective of the PRA is to promote the safety and soundness of PRA authorized persons, with the PRA having a separate insurance objective and with an additional competition objective being imposed with regard to ring-fenced bodies under the Financial Services (Banking Reform) Act 2013.

Issuing CBDC would arguably support all these objectives, provided that this is managed effectively and all relevant technical specifications are complied with. Issuing digital coins would arguably not conflict with any of these objectives if it does not undermine monetary policy, financial stability, the soundness of PRA firms, or the competitive position of ring-fenced bodies within PRA firms.

3. Monetary Framework

Digital coins should not interfere with the operation of the Sterling Monetary Framework, as set out in the Bank’s Red Book, as amended, to allow for quantitative easing measures following the global financial crisis. This is not a legal requirement as such, which provides for how the Bank carries out its related operations. This could be amended to include the provision of set amounts of official digital currency, to the extent necessary. Debate remains as to whether CBDC should be remunerated and attract interest. Any new digital currency should arguably not be remunerated on a day-to-day basis, to the extent that this may compete with commercial bank accounts, cause monetary distortion, or have other distributed effects, although a reserve power to do so may be exercised for use in exceptional or emergency situations.

4. Note Issuance and Note Cover

The Bank was required to maintain separate banking and issuance departments under the original Bank Charter Act 1844. Any digital coin may have to be issued through the Issue Department. The Bank is subject to a fiduciary note issue limit, which was set at £83.5 billion as of July 11, 2013, although this applies to banknotes and may not restrict other extensions of its balance sheet, especially where a CBDC account, rather than coin model, is used. Any new digital issuance may otherwise have to be covered by government securities. Relevant disclosures would have to be made in the Bank’s Weekly Return.

Scottish and North Ireland banks are required to cover their physical banknote issues, protected under the Treaties of Union, with Bank of England notes. Revised provision was included within the Banking Act 2009 following the global and UK financial crises. These arrangements may have to be amended to provide for cover if Scottish and Northern Ireland are going to be allowed to issue local digital currency in place of physical banknotes, although it is more likely that only the Bank of England would issue digital sterling, as no such reserve power would otherwise have been provided for under the acts of the devolved administrations.

5. Competition

Authorities should monitor the effects of new coin production on dominance and competition in the markets. This could apply to the monopoly position of the central bank and to relations between the central bank and commercial banks, between the banks themselves, and between the banks and other financial institutions. Competition considerations have become a significant component of modern regulatory policy and, specifically in the UK, under the revised terms of the FSMA 2000, as amended by the FSA 2012. The PRA and FCA have new competition responsibilities in discharging their regulatory functions. Central banks should also consider their responsibilities in this regard, with specific reference to their own statutory objectives and mandates.

EU and UK monopoly and competition laws apply to undertakings that carry out economic activities, subject to fact assessment. The term “undertaking” is not separately defined and will include public bodies with economic activity consisting of the offering and supply of any goods or services of a commercial, and not exclusively of a social, nature. This does not apply to the exercise of “public powers” consisting of state prerogatives or essential functions of the state. Specific exemptions are also provided for “services of general economic interest,” to “revenue-producing monopolies,” or where the conduct is carried out under a separate “legal requirement.” Substantial penalties are imposed in the event of a breach. When a central bank provides supplemental CBDC on a delegated basis, this is generally not considered a state prerogative, nor of an exclusively social nature, especially where other forms of money and payment are already available. This is still arguably in the general economic interest because it is possible to include a specific legal obligation to avoid any uncertainty. Even if there is a dominant position through market concentration, there must also be an abuse or breach to create an infraction. The central bank and relevant authorities will still try to ensure that any damaging effect on competition and market conduct are limited. This will help ensure that the new regime enjoys maximum benefits and protect choice and competition in public markets.

Care should be taken to ensure that no unfair access advantage is conferred on specific banks or other financial institutions and that the central bank is not competing unfairly with major commercial banks or ring-fenced bodies. It may be preferable to allow all regulated deposit-taking institutions to be eligible to provide currency account access. A decision may be taken to limit this on objective operational or stability grounds, as with the Bank’s NCS. The existing NCS could then be revised to include provision for the creation of new digital currency in place of blocks of banknotes. Otherwise, a parallel “Digital Circulation Scheme” (DCS) could brought be into effect with equivalent, but necessarily adjusted, provisions.

6. Legal Status

The conferral of legal tender status means that a payee cannot refuse to accept an offer or tender in the currency concerned, which discharges the legal obligation to make payment. Legal tender was originally introduced under the Bank of England Act in 1833 to promote confidence in the use of Bank of England banknotes. Legal tender in the UK is set out in the Coinage Act of 1971, as amended by the Currency Act of 1983. These provisions would have to be amended if CBDC received legal tender status. As the objective would be to create an identical currency convertible at par, this would be considered desirable to promote use and confidence in the new currency instrument. This may, nevertheless, only be considered necessary if a digital coin is provided, such as on a blockchain. This may not be relevant where the account system used effectively operates as an extension of the Bank’s reserve account facilities, although this may still be considered desirable for clarification purposes.

7. Counterfeiting

It is an offence under the Forgery and Counterfeiting Act of 1981 to make a counterfeit of a currency note or protected coin without lawful authority or excuse and to pass or tender it as genuine. Additional offences are imposed in relation to the passing, custody, and control of materials, including with importation and exportation. Separate offences may be committed by reproducing currency notes or imitating coins. Offences attract up to ten years imprisonment on indictment.

A “coin” is defined as any coin that is legal tender in any part of the UK, which may include a digital coin if legal tender status is conferred. A “protected coin,” in relation to the offences under Sections 14 and 15, means any coin that is customarily used as money in any country (or specified by Treasury order), which could again include a digital coin. These provisions could be further clarified to ensure that they apply equally to digital currency, as necessary. An equivalent regime could be created for the false creation or presentation of CBDC or manipulation of the CBDC system.

8. Anti-Money Laundering and Terrorist Financing

Anti-money laundering regulations traditionally apply to commercial banks, with central banks being exempt. The European Money Laundering Directives generally only apply to credit institutions and financial institutions. This includes professional parties under the Fourth Money Laundering Directive, as well as trust or company service providers, estate agents, goods merchants (receiving cash over €10,000), and gambling service providers. A credit institution generally excludes central banks. The government may, nevertheless, wish to consider extending the 2017 Regulations to include wallet service providers or other institutions providing specialist digital currency accounts. Central banks will still need to ensure that any new CBDC is not used for criminal or terrorist purposes, for policy or reputational purposes, or for sanctions or taxation avoidance reasons.

CBDC systems are generally set up to operate some form of initial KYC identification system, although this may be most conveniently delegated to commercial banks or another specialist agencies appointed. Many central banks may wish to outsource such activities, including data management functions. While this may require compliance with any relevant regulatory provisions, such as a regulated institution’s FCA outsourcing measures, central banks will again generally be exempt from such provisions. They may, nevertheless, wish to adhere to equivalent standards on a policy and reputational basis where they are not subject to strict legal coverage and application.

9. Data Protection

It remains unclear whether data protection laws apply to many private digital currencies. “Personal data” is broadly defined under the EU and UK GDPR as any information relating to an identified or identifiable natural person, with “identification” including direct or indirect sources. Parties processing personal data are subject to the general requirements imposed under the GDPR, including the six principles. UK transactions are subject to the equivalent measures applied following the UK’s withdrawal from the EU and additional provisions set out in the Data Protection Act 2018, which includes other specific measures on enforcement of actions and official surveillance. Several more specific issues may arise in connection with distributed ledger and blockchain technology. Any new single centralised ledger or decentralised blockchain will generally be subject to the provisions set out in the GDPR. These functions could most effectively be carried out in practice on a delegated or outsourced basis through regulated institutions.

10. Information Request

As a public body, the Bank of England must comply with legitimate requests for information under the Freedom of Information Act 2000. Persons making a request are entitled to be informed, in writing, by public authorities whether they hold information of a specified description and to have the information communicated to them. An economy exemption is provided, although this only applies to disclosures prejudicial to the economic interests of the UK (or any part of the UK) or the financial interests of any administration in the UK. The Bank of England, or its delegated agent, would otherwise generally have to comply with the terms of the Act and the code published under the Act.

11. Financial Capability and Financial Inclusion

Issuing official digital currency could support financial capability and financial inclusion. Improving financial capability was one of the original statutory objectives of the FSA under the FMSA before these objectives were revised. FSA functions were transferred to the FCA and PRA under the Financial Services Act 2021. Financial capability in the UK is now managed by the Money and Pensions Service.

Financial inclusion in the UK is overseen by the Financial Inclusion Commission. Financial inclusion refers to belonging to a modern mainstream financial system, which is fit for everyone regardless of income and allows anyone to participate fairly and fully in everyday life without exclusion and without damage to education, employment, health, housing, and well-being. Specific objectives are specified in connection with banking and financial services. Concerns may arise where people do not have a mobile telephone or technological access to a wallet to allow them to use digital coin. Financial inclusion, however, does not require that everyone have equal facilities—only that everyone have access to core facilities. People already use different types of sophisticated and unsophisticated financial products in various ways.

The Equality Act of 2010 imposes on the public sector a duty to reduce socioeconomic inequalities, although this may not apply to the Bank of England. The Equality Act of 2010 prohibits direct and indirect discrimination in relation to protected characteristics, which consist of age, disability, gender reassignment, marriage and civil partnership, race, religion or belief, sex, and sexual orientation. Public service providers are subject to a separate duty not to discriminate against any person requiring the service. While the Bank of England may be considered to provide a service in the form of CBDC, there is arguably no discrimination on the basis of any of the protected characteristics covered. The only relevant provision may be disability, which covers physical or mental impairment and may include learning difficulties. It is unlikely that the issuance of a digital coin could breach these requirements. This should, however, be confirmed.

B. Digital Asset

Separate legal and regulatory issues arise depending on the digital asset involved and whether it is account-based or coin-based. Several complex legal issues are generated, particularly regarding the nature of digital information and digital data and digital property, including whether digital coins and cryptoassets constitute property in law today. Many significant questions have still not been resolved, and legislatures would be advised to clarify these issues at the time of establishment of any new CBDC framework or wider digital asset or digital society or economy regime. These would, for example, include such factors as:

(i) Legal nature of digital claim created (account or asset);
(ii) Legal nature of digital information and data;
(iii) Legal definition of digital property in law;
(iv) Individual digital identity;
(v) Digital contracts;
(vi) Digital implied terms and protections;
(vii) Digital signatures and contract execution;
(viii) Digital assets as deposits and securities for regulatory purposes under FSMA;
(ix) Collective investment scheme application under FSMA;
(x) Online dispute resolution;
(xi) Digital international private law; and
(xii) Digital public international law.

All of these would have to be considered and fully dealt with in supporting law or legislative provision or in any relevant CBDC TCUs or operational manual.

C. Digital Remedy

A series of further considerations arise with ensuring that an appropriate remedy system is in place to protect all relevant rights and entitlements. All applicable data protection laws would have to be complied, and all data protection rights would have to be respected. Separate fundamental human rights or related social or political rights would have to be considered and given effect to, as well as any other constitutional protections where the country has a formal written constitution. This may, for example, apply to arguments concerning issues such as the move towards a cashless society, extending financial inclusion, limiting the “digitally unbanked,” and promoting digital literacy.

Appropriate protections would specifically have to be incorporated into any relevant TCUs. This would include, for example, remedies in the event of payment instruction refusal, denial of account access, cancellation of account access, forfeiture of account balance, restitution, compensation loss, and damages, including for possible reputation damage. Effective continuity planning arrangements must be in place to always protect access to the ledger and data integrity. This may be supported by an adjusted form of deposit protection, deposit insurance, or other recovery, as necessary.

A full range of private law remedies and rights of action would have to be provided, including under contract, restitution, and tort. This is a complex area of law with a number of different underlying legal causes of action and separate rights of action. Additional complications arise in technology-related private international law and public international law. All relevant public institutions, including the central bank itself, would separately be subject to full judicial review and specifically to potential liability for misfeasance in public office. This occurred when an action was commenced against the Bank of England by the former depositors with the Bank for Credit and Commerce International (BCCI), although the Bank was appropriately cleared of any liability. All of this will have to be reviewed.

XIV. CBDC Comment and Challenge

While issuance numbers for the creation of private digital currencies (CoinTech) have exploded in recent years to over 14,000, large-scale official digital currency use has generally remained limited and more experimental to date, apart from in China. Central banks are naturally cautious, wishing to examine all of the relevant monetary and financial implications of sovereign currency and coin production, confirm and test the efficiency and efficacy of the technology available, and research wider market and social impacts. Assuming that all relevant aspects of technology continue to advance as expected, it is only a matter of time before CBDCs are more generally issued in smaller, then larger, currencies and in increased volume currency amounts. The following comments may be made regarding the current state of law and technology in this area.

A. Model Options

The possible issuance of CBDC has attracted a considerable amount of attention over time. Many papers have been issued, with some more significant recent official documents produced. A substantial amount of confusion and misunderstanding may have arisen, although much of this has increasingly been cleared with choices settled and resolved. One of the purposes of this paper has been to attempt to clarify some of the underlying options, conditions, benefits, concerns, and possible solutions that arise.

Central bank electronic or digital value can essentially be created in the form of either an account or a coin, with some more limited private token options available. While both the account and the coin option may involve a digital ledger or register, an account model operates by way of keeping a record of entitlement to a claim for payment against the bank while a coin model operates by way of transferring a digital asset created on the ledger. An account is only a claim in law against the account provider while a coin is an asset, although it is still unclear whether this will be recognized as property in all jurisdictions.

Several specific choices and options arise with regard to core CBDC design. These include whether this system is direct or indirect, centralised or decentralised, blockchain or non-blockchain based, wholesale or retail, volume or time constrained, net or gross settled, rewarded or non-rewarded, legal tender or not legal tender, compatible with other payment systems or incompatible, usable as collateral or unusable, localized or unrestricted, and single (unconnected to other CBDC) or multiple (connected to other CBDC).

A range of new options may be created in practice in relation to CBDC more generally. These may include more specific types of sovereign coin (SovCoin) or government coin (GovCoin), with separate “central bank digital accounts” (CBDA), as opposed to “central bank reserve accounts” (CBRA), being available. “Central bank crypto currencies” (CBCC) or “central bank digital coins” (CBDCn) may be created, or “central bank digital tokens” (CBDT) used with synthetic CBDC. CBDC may be issued on a direct or disintermediated (dCBDC) or indirect or intermediated (iCBDC) basis with wholesale (wCBDC) or retail (rCBDC), anonymous (aCBDC) or non-anonymous (nCBDC), localised (lCBDC) or global (gCBDC), and single (sCBDC) or multiple (mCBDC) models. One or more of these can be incorporated within CBDC over time, depending upon the specific model selected.

B. Model Design and Correction

Central banks and other policymakers must monitor the effects of any design choice made. There may be no simple or absolute model choice because a particular selection will create a corresponding series of relative advantages and disadvantages. Thus, the overall effectiveness of the system is dependent upon subsequent corrective action and adjustment, rather than initial model selection. Similar issues, for example, arose regarding whether countries should adopt a single or multiple agency model, as part of a wider “single regulator debate” that took place. The most appropriate choice depends upon a range of relevant local factors and conditions, with no single model being appropriate in all cases. Each selection generates its own mix of relative advantages and disadvantages, with the key not being initial model choice but later corrective operational adjustment. Central banks must monitor and review the effectiveness of any original model and design choice made and ensure that any consequent disadvantages or limitations are dealt with in an appropriate and effective manner.

CBDC may generate substantial advantages and disadvantages. Against this, a series of relevant design conditions must be considered in relation to CBDC in each country application. These are essentially concerned with market and monetary policy factors, general systems capability prerequisites, possibly more specific digital coin conditions and other operational characteristics, and relevant legal and regulatory compliance.

C. CBDC Benefits

A large number of possible benefits have been identified for private and official digital currency usage and for wider financial technology advances. These would be dependent upon the specific CBDC model selected and associated corrective measures adopted to ensure that any consequential disadvantages have only a limited effect. A series of substantial benefits may accrue, which have been summarized in terms of centralisation, convertibility, cost, certainty, continuity, confirmation, control, compliance, cover, confidentiality, cooperation, coordination, compatibility, and cross-border effectiveness.

Other advantages may arise from the operational conditions imposed, including capability, performance, efficiency, resilience, security benefits, increased choice and quality of service, financial inclusion, increased growth, infrastructure integrity, monetary and financial policy control, and overall financial stability. Additional points have been structured in terms of technology, service provision, users and stakeholders, markets, governance and regulation, infrastructure, monetary policy, and financial stability.

D. CBDC Challenges

A series of associated challenges will also necessarily arise. These should not be used to limit financial technological advances but rather to identify possible areas of concern and necessary responses. Challenges can be summarized in terms of capture, continuity disruption, conversion loss, choice and confidentiality defects, confusion, contagion, collapse and crisis, concentration, loss of competition, currency substitution, and loss of policy control. A number of separate issues have also been identified in terms of technology, service provision, users and stakeholders, markets, regulation and control, infrastructure, central banking and monetary policy, and wider financial stability. Assuming that all of the necessary policy, technology, monetary, and legal objectives referred to above have been satisfied, the potential advantages may manifestly outweigh the potential disadvantages. Wider concerns arise in the financial technology area regarding issues such as loss of privacy, concentration, commercial bank viability, technological dependence, and cyber disruption, with possibly wider policy damages.

Technology has become a dominant element of almost all forms of government, financial, business, commercial, corporate, and individual activity. The focus must accordingly be on managing technology risk, rather than limiting innovation outright. It is necessary to ensure that all associated risks and exposures are properly identified within all new technologies and innovation systems and processes. This includes all forms of more general financial, legal, and operational risks, as well as conduct-related risks and wider management or environmental risks. Operational risk may be considered specifically to include technology, information, and data risk, as well as knowledge and archive risk. Technology risks can specifically be examined in terms of technology operational risk, technology impact risk, information processing risk, information content risk, and record risk. Separate exposures also arise with regard to cybersecurity risk, which must be controlled. All forms of direct and indirect exposure, as well as any liability and risk, must be managed with the creation of new digital societies and economies. Each of these must be properly identified and contained in terms of any legal or regulatory reform or revision program.

E. Market and Monetary Policy Choices

Central banks have been carrying out advanced research to assess all necessary market and monetary impacts and effects of different CBDC options. The goal is to ensure that these options are consistent with legitimate objectives, as well as existing policy mandates and targets, without any conflict or detrimental impacts or effects. A number of specific areas of concern can be identified, each of which would have to be confirmed and satisfied by the central bank before it proceeds to issue any official digital account or coin device. These are principally concerns with possible monetary policy conflicts, inter-bank and payment system integrity, infrastructure support, competition, narrow banking, free banking, sovereign banking, direct banking, and credit banking, as well as possible cross-border relevance and substitution and overall financial stability. Appropriate research would have to be carried out on the relevance of each of these concerns in any specific country or particular CBDC situation.

F. Account and Asset Characteristics and Conditions

A range of wider policy objectives would also have to be achievable in creating an official central bank, rather than private, account or coin model. The specific model adopted would have to be able to secure certain general systems and technology objectives. These would include speed and capacity, cost and efficiency, resilience and durability, scalability, functionality, interoperability, security, continuity, and confidence, with associated disadvantages being avoided.

In light of the technical options available, a series of more particular technical specifications can be identified if a coin option is to be used, as discussed above. These would principally be concerned with identity (including pseudonymity and privacy), authentication (hashing), transfer (transactions), verification (consensus and incentives), record structures, scalability, functionality, interoperability (including hyperlinks), wallet provision, resilience, code control, and governance. A number of further operational considerations must also be managed effectively.

The objective in each case would be attempting to ensure that the digital coin operated as far as possible, in a manner parallel to existing physical coin and note usage, with a high degree of confidence and security. The central bank would also wish to retain the necessary degree of oversight and control at all times.

G. Intermediate Choice

The most significant residual point of choice is the extent to which the central banks wish to retain a meaningful commercial bank sector within any new revised monetary and payments system or architecture. The adoption of a direct full retail CBDC model could substantially remove the deposit and payment functions of the existing commercial banks. Banks are already under substantial pressure as increasingly sophisticated forms of account management and credit risk assessment processes are being developed and other sources of funding are becoming available through capital markets, DeFi, crowdfunding, microfinance, and other online platforms. This could create substantial domestic and cross-border substitution risk. Technological advances would allow the central banks to assume an increasingly substantial direct market function, although this would also substantially increase the administrative burden, obligation, and cost involved; the possibility of systemic risk failure and consequent direct reputational damage; and indirect damage to other functions, including monetary policy and infrastructure management.

The most desirable short or medium-term model may then be to retain some intermediate commercial bank function, specifically allowing banks to continue with traditional deposit and account management, credit assessment, lending, and other processes in competition with other service providers. While larger central banks may wish to control their systems as much as possible, they could still delegate substantial amounts of financial and operational risk to the commercial bank sector in this way. More significant changes in overall market structure and consumer preference can then be monitored over time, and appropriate action taken, as necessary.

H. Composite and Combination Model

It is possible to construct a central bank digital account or coin model in accordance with the series of tests and objectives referenced above. This would be designed to fulfill all general policy objectives; capacity, technical, and operational specifications; and other considerations. This can also operate on a direct or intermediate basis depending upon local circumstances, specifically on the size and sophistication of the commercial bank sector and local markets.

In most situations, it is further likely that the central bank will wish to operate any new CBDC regime with other existing forms of money, including coins, banknotes, commercial bank accounts, central bank reserve accounts, and electronic money mechanisms. It would be appropriate to avoid any substantial domestic, and possibly cross-border, money substitution. The central bank can also, at least in the short term, retain new CBDC with other existing forms of payment to provide choice and continuity, including additional systems options if any CBDC function is not available at any particular point in time. This may then be reviewed over time as the relative benefits and limitations of each option become clearer and market and consumer preferences begin to emerge. The most desirable position may, nevertheless, always be to provide some additional choice and availability under a composite or combination model.

I. Laws and Regulations

An appropriate legal and regulatory framework must be constructed to ensure that the account or coin issuance selected is consistent with, and does not breach, any relevant laws and regulatory conditions. All financial and technology functions can only operate effectively if it complies with relevant laws and regulations. Appropriate amendments will have to be made, where necessary. A series of specific issues can again be identified with regard to central bank and systems considerations; asset choice; and wider rights of action and remedies. With regard to the issuing central bank, these include the necessary powers, objectives, or mandates; coin consistency; monetary framework compliance; competition law; legal tender status; liabilities; anti-money laundering and terrorist financing exemptions; counterfeiting; data protection; information provision; financial inclusion; international obligations; and overall legal and regulatory reconciliation and restatement. A separate range of issues must be taken into account regarding the specific type of legal account or asset model selected for use. It is also necessary to ensure that an appropriate private and public law remedy system is in place to protect all relevant rights and entitlements.

J. Technical, Cross-Border and Global Delivery

It would appear from the research papers on CBDC design produced to date that an appropriate central bank currency model could be developed that would secure all conditions and objectives identified at the domestic level. Certain adjustments may be required in operational testing to ensure that an appropriate set of detailed technical parameters are secured. Technical delivery should be possible, even if this may be subject to some delays in terms of technical accommodation and advance. The principal issue may then become when, rather than if, central banks should issue digital currency. Related cross-border payment, exchange, and convertibility issues may then be considered under emerging multiple or mCBDC system models. Central banks are working through the BIS Innovation Hub to develop appropriate arrangements to allow multiple or overlapping CBDC systems to work together in an integrated and consistent manner.

K. Market Support and Reputation

One of the principal concerns that arises regarding both a central bank and a private coin model is protecting the continuity of supply and avoiding wider financial and economic damage. This may be even more significant in the context of CBDC. It is necessary to protect confidence in the CBDC and the value of the associated domestic currency. This may be partly dealt with by developing more specific correction or continuity planning measures. This may include support, or parallel, ledgers where multiple copies are not kept under a DLT system. Central banks may, nevertheless, wish to consider having other contingent options or facilities in place, such as some form of currency or coin of last resort (CLR) or digital lender of last resort (DLR or DLLR), as opposed to more traditional LLR support facilities. The objective would be to allow customers to convert digital coin holdings, subject to clear proof of entitlement, into some other form of account value or banknote in appropriate cases. This could again operate through commercial banks, with customers being able to convert CBDC into other forms of money, such as through existing account balances that would be settled through central bank accounts. This could create a form of delegated LLR, although this would still constitute a central bank liability.

The overall objective would be to protect the stability of the currency and financial system, as well as the standing and reputation of the central bank. One of the concerns that arose with central banks assuming, or re-assuming, regulatory functions is that perceived regulatory damage could have a detrimental impact on confidence in the discharge of other central bank functions, including monetary policy and financial stability. A defective or failed digital currency issuance could have equally significant wider effects, including significant cross-function or cross-policy disruption and dislocation. All the measures referred to above may be able to prevent this from eventually occurring if appropriate support measures are adopted, as needed.

L. Contingent Preparation

It remains unclear at this time whether, and to what extent, all central banks may issue digital currency in the short or long term, and on which model basis. Significant pressure has been created by associated market developments; this includes a decrease in cash usage and large technology and BigTech companies assuming an increasingly dominant role in the financial area by offering innovative new forms of digital payment systems or possible coin options, such as Facebook’s Diem (Libra) coin. The development and testing of other advanced models, including the Chinese DCEP system, also creates separate pressure not to fall behind technologically because of the associated dangers of possible loss of competitive advantage and currency substitution. If any one of the major international currencies is issued with a digital format option, this will, in and of itself, place considerable pressure on other central banks to provide equivalent facilities. Other social or political pressures may also emerge. A responsible central bank should, therefore, undertake all necessary preparatory monetary, technological, and legal research to be able to issue its own currency in a digital form, to the extent necessary. An informed and balanced response at this time may accordingly be contingent preparation and conditional full model design and construction.

XV. CBDC Close

Sovereign or digital central bank currency provision could bring substantial benefits and advantages, especially in terms of speed, cost, efficiency, and growth, as well as increased innovation, financial capability, and inclusion. Many other direct and indirect consequential benefits may arise. An associated range of challenges and considerations must be managed against this, especially in terms of possible monetary and financial impact and control, as well as legal and regulatory compliance, including private data privacy and control. Other concerns arise, regarding technological dependence and delivery, concentration, and commercial bank viability, as well as ongoing systems security, integrity, and continuity, consequential cross-function disruption, central bank policy, and reputational damage. Further technological advances may be able to respond to many of these over time, while appropriate policy and legal adjustments can be made to deal with residual areas of exposure or concern. Significant policy decisions, nevertheless, remain, especially with the nature of underlying market control. Many of the immediate and future developments that arise may be driven by further technological advances and by market and user pressure. The regulatory treatment of FinTech more generally is still being reviewed across the globe, and many official CBDC projects are at an advanced stage of development, with central banks having to consider issuing their own CBDC either on a reactive and protective basis or for proactive and stimulatory reasons. Innovation and evolution may then become increasingly official, rather than private market led, over time and, consequently, centralised and controlled, rather than decentralised and open. The next stage in the CBDC policy and product development cycle will then be a further shift from informed conditional preparation and contingent capability design to full model construction and operational verification and validation. Whether this will evolve in parallel to private markets or replace and subsume them outright remains to be seen. This will form a core part of all future financial technological change and more general social and market evolution and development over time.