In the modern monetary system, each CBDC helps anchor public trust in money in support of economic welfare, especially in a new cashless society.

Joseph Corr

2024-07-31 09:28:00 Wed ET

In the modern monetary system, each new CBDC helps anchor public trust in money in support of economic welfare, especially in a cashless society.

In the modern monetary system, each new CBDC helps anchor public trust in money in support of economic welfare, especially in a cashless society.

In our current assessment of central bank digital currencies (CBDC), we focus on the macro-financial stability implications of a new CBDC system. Our analysis can shine fresh light on CBDC system design and interoperability, as well as systemic user adoption. In the modern monetary system, each new CBDC can help anchor public trust in money in support of economic welfare, especially in a new cashless society. A sound and efficient CBDC system would need to involve both public and private actors to ensure interoperability and coexistence with the broader payment system. With careful CBDC system design, the central bank garners better control over money supply growth and inflation in the broader economy. This control helps the central bank better align monetary policy and financial system policy decisions with the dual mandate of both price stability and maximum employment (in addition to real output growth per capita in the wider macro context).

In human history, money and payments evolve rapidly to help deliver new business models and opportunities. Today, regional economies have become increasingly digital, and disruptive innovations reshape financial services and user needs. Many markets continue to witness the recent decline in the use of cash. At the same time, new forms of digital money emerge from the non-bank private sector. These major cryptocurrencies include Bitcoin, Ethereum, Dogecoin, Stablecoin, and so forth. In recent years, these fintech developments have dramatically accelerated since the onset of the Covid-19 pandemic crisis worldwide. From the U.S. Federal Reserve System to the European Central Bank, many central banks now attempt to explore how these new forms of digital money can help deliver their public policy objectives. In essence, these objectives include price stability, robust output growth, maximum employment, and macro-financial resilience etc in the modern monetary system.

To the extent that central bank money facilitates the widespread use of new digital payments, CBDC design and issuance remain sovereign decisions. In the ongoing work on G20 cross-border payments, CBDCs can help further enhance the efficacy of fast and safe global payment settlements worldwide. Each central bank may be able to facilitate these payment settlements with CBDCs despite different degrees of interoperability. Also, each central bank has the statutory power to issue its own CBDC with sound and efficient design features to better cooperate with many other central banks in support of broader financial stability both within each country and across many countries worldwide. Finally, CBDCs would likely cause ripple effects on public policy issues well beyond each central bank’s traditional remit.  

Any CBDC system would likely involve both public and private sectors in a delicate balance between macro-financial stability and technological innovations in support of broad user adoption of fast and safe digital payments. Relatively high domestic interoperability would ensure that each CBDC ecosystem coexists with many other national payment systems for better macro-financial stability, resilience, diversity, and inclusion. Operational CBDC ecosystem design features and functions would likely be a significant burden on each central bank. To the extent that each central bank may outsource some of these operational functions, each central bank should establish sufficient safeguards to ensure both the onshore and offshore transfer of capital among the major banks, insurers, and other non-bank financial institutions. Broader user access and the sound and efficient treatment of payment data would play an important role in CBDC system design. Specifically, user privacy concerns would likely trigger new technological challenges for CBDC design, adoption, and domestic interoperability. These new technological challenges include incentives for central financial intermediaries, carrots and sticks for financial service providers, global payment protocols for telecommunication, and technical interoperability and compatibility with traditional financial systems of granular data on digital payments, accounts, and transactions.

At the macro level, both retail users and merchants would likely cause ubiquitous CBDC adoption within each home jurisdiction. After all, central bank money is still the safest form of money available. Beyond security, however, most other valuable features of CBDC would include the lower costs to retail consumers and merchants, offline payments, better privacy protection and data encryption (in stark contrast to commercial options), and secure access for multiple users. With CBDC design and adoption, each central bank should leverage a reasonably flexible core ecosystem to target the total addressable market for both current and future user needs. Also, each central bank should promote healthy competition among core intermediaries, payment processors, and financial service providers in the new CBDC system. As online payments increasingly become part of the modern digital lifestyle, each new CBDC can combine technological innovations with modern payment features into a single minimum viable product (MVP) in a unique way.

Central bank strategies for CBDC system design should help address the diverse economic structures and payment landscapes in both home and host jurisdictions. CBDC adoption may be more widespread and more successful if new central bank money fulfills unmet user needs, achieves broad network effects, and implements state-of-the-art technology for fast and safe payment settlements (especially at the point of sale). Additional measures for broader CBDC adoption include the use of CBDC by public-sector authorities with some minimum level of acceptance. There is no one-size-fits-all solution, and not all central bank strategies would be equally desirable in all home and host jurisdictions.

Careful CBDC system design would help reduce any potential adverse impact on bank disintermediation. A significant shift from bank deposits into CBDCs, or even cryptocurrencies and some new forms of private digital money, would likely lessen the basic needs for bank intermediation and liquidity creation through private loans. Should the new CBDC system take time to adjust in support of the broader financial sector, the central bank should be able to limit any potential adverse impact of new CBDC issuance on private credit expansion. As the macro-financial system seems to dynamically evolve through key episodes of structural changes over many years, CBDC design and issuance can provide new opportunities for financial innovations, especially for banks, insurers, and other non-bank financial intermediaries.

Nevertheless, new financial system risks may arise if CBDC design and adoption inadvertently cause abrupt changes in the broader real economy. These changes would likely involve substantial reductions in private credit, as CBDC adoption may significantly reduce broader consumer reliance on bank deposits, loans, and non-bank credit lines. Widespread CBDC adoption would also increase the latent risks of systemic bank runs. In the modern monetary system, prudent and effective bank regulation combines with deposit insurance and bank failure resolution frameworks to help contain the latent risks of bank runs. In response to the recent bank failures of Silicon Valley Bank, Signature Bank, and First Republic Bank, the U.S. Federal Reserve System carefully applies the 5 major pillars of financial regulation, capital adequacy rules, liquidity controls, leverage limits, macro stress tests, and deposit insurance rules, to prevent these bank failures from snowballing into systemic bank runs. In addition to the Global Financial Crisis of 2008-2009 and corona virus crisis of 2020-2022, these recent bank failures provide vital lessons for bank regulation. In rare times of financial stress, the central bank would need to provide substantial capital and liquidity funds to bolster consumer confidence in the financial system. In modern bank failure resolution, these best practices continue to be relevant for many central banks worldwide.


The central bank should shape CBDC design features and functions to reduce any adverse impact of CBDC issuance on bank loans, non-bank credit lines, and latent risks of systemic bank runs.

New CBDCs should continue to support the fulfillment of central bank policy goals. These new forms of digital money should further enhance the central bank’s ability to carry out its macro mandate for financial stability and monetary policy decisions. Each new CBDC can provide benefits to the ongoing operation and resilience of the broader financial system (especially payment services). At the same time, each new CBDC may affect the extant financial market structures and business models. This latter impact can pose potential risks to macro-financial stability and resilience through bank disintermediation with fewer bank loans and private credit lines.

Many central banks are still in the early stages of investigating the business case for CBDC design and issuance. Most of these blue-sky investigations focus on the retail use of CBDCs. These CBDCs would likely co-exist with new private payment systems. Also, CBDCs would likely help minimize illicit usage of digital money with proper anti-money-laundering (AML) compliance rules, standards, and regulations. In the meantime, most central banks seek to design CBDC features, functions, and safeguards to ensure that the CBDC serves primarily as a transactional means of payment rather than as a stable store of value.

After all, CBDC design and adoption may pose new material risks that each central bank has to confront in rare times of severe financial stress. In practice, the central bank should shape CBDC design features and functions to minimize any adverse impact of CBDC issuance on bank loans, non-bank credit lines, and latent risks of systemic bank runs. To the extent that CBDC issuance affects payment settlement intermediaries as part of the broader financial system, these CBDC design features and functions reflect central bank business models, balance sheet strategies, and policy stances toward financial stability and asset market valuation. Ultimately, the size and scale of CBDC user adoption may influence changes in the central bank’s financial stability and monetary policy frameworks for the foreseeable future.

CBDC design and issuance would likely co-exist with private forms of digital money in a future financial system, which can differ dramatically from our current financial system today. These new private forms of digital money include Bitcoin, Ethereum, Dogecoin, Stablecoin, and so on. Unlike central banks, cryptocurrency issuers are not bound by standards, principles, and regulations for broader user demand, inter-operability, security, and many other sovereign considerations. In the worst-case scenario, significant crypto user adoption and its likely consequent fragmentation may result in exorbitant market power and bank disintermediation with lower public benefits. In this fresh light, each new CBDC, or new forms of central bank money, should be a vital policy instrument for the central bank to continue to serve the key macro policy objectives, even though the future financial system evolves rapidly to embed cryptocurrencies and many other private forms of digital money.

Potential demand for each CBDC is uncertain. CBDC design and implementation would likely affect this macro demand for each CBDC. Specifically, CBDC demand would depend on the importance of the fundamental factors below relative to many available alternatives such as cash, electronic money, bank deposits, and crypto-currencies and other tokens:

  1. Safety relative to available alternatives;
  2. Ease of access for better financial inclusion;
  3. Interoperability with alternative means of payment settlements;
  4. Technologically programmable innovation;
  5. Remuneration;
  6. Cost of use;
  7. Anonymous privacy protection; and
  8. Ease of switching between CBDCs and alternatives.


In practice, any remuneration would make each CBDC a more attractive substitute for cash, low-interest bank deposits, cryptocurrencies, and other cash substitutes. CBDC remuneration naturally appeals to risk-averse consumers who have already spread deposits across multiple bank accounts to minimize low-interest balances above the dollar limits of deposit insurance protection. To gain remuneration, many businesses may wish to transfer some of their cash balances to each new CBDC available in the home jurisdiction. Recent survey evidence shows that households can hold more than 55% of their cash deposits in CBDCs with some sort of design feature for remuneration. In particular, the lower estimates would likely apply if the CBDC had more cash-like design features, while the higher estimates would likely reflect new CBDC design with competitively higher remuneration. In the latter case, bank deposits may lose their appeal to consumers in the presence of CBDC design with better remuneration. In an illustrative scenario from the Bank of England, more than 20% of household and corporate bank deposits would migrate to CBDCs due to non-financial factors such as safety and convenience.

One of the major drawbacks of CBDC introduction is a significant substitution away from private money, even if each central bank regards cash-to-CBDC substitution as neutral in terms of macrofinancial stability. As the financial system continues to evolve rapidly to include CBDCs, cryptocurrencies, and many other new forms of digital money, private banks remain the dominant source of private money in many countries worldwide. The modern money creation process intrinsically intertwines with bank credit provision. In turn, this private credit provision supports bank-driven intermediation and payment services. As a result, our current analysis focuses on the broader financial stability implications of CBDC substitution for bank deposits and many other private credit lines.

With no limits and restrictions on individual choices, each CBDC may lead to higher volatility in bank deposits, and a significant longer-run reduction in retail consumer deposits. This sea change can further affect bank profitability, loan creation, credit availability, and the overall provision of financial services. Indeed, the vast majority of bank and retail consumer deposits revolve around the heart of the commercial banking business of both maturity transformation and intermediation services. Any material loss in bank and retail consumer deposits would require banks, insurers, and other non-bank financial intermediaries to consider combinations of actions to maintain regulatory capital requirements, liquidity controls, and leverage limits etc. In practice, it would be difficult to sustain high bank profitability, especially if CBDC design with higher remuneration crowds out the traditional needs for bank deposits and retail consumer deposits. In this broader context, new CBDC issuance would likely influence substitution between deposits and CBDCs, intense competition in the commercial banking sector, loan origination from banks and non-bank financial institutions, and many other central bank rules and regulations for financial stability. Across a wide range of hypothetical CBDC take-up scenarios, the central bank has to design its CBDC system in response to a potential loss of retail deposit finance, as well as ripple effects on the average costs of capital, bank profitability, and prime interest rates across the commercial banking sector.

Specifically, each CBDC would structurally decrease consumer deposits available to commercial banks because each CBDC would provide competitive advantages as a better safe-haven asset with the same levels of liquidity and convenience. In an imperfectly competitive market for retail deposits, CBDC issuance would likely force commercial banks to match the CBDC interest rate in order to retain their fair share of retail deposits. In the broader context, consumers tend to save more as a result of the CBDC crowd-in effect, and commercial banks tend to lose deposits to the central bank due to the CBDC crowd-out effect. In equilibrium, CBDC issuance would further enhance financial inclusion as retail consumers choose to save more either in CBDCs or in bank deposits; at the same time, CBDC issuance would lead to lesser demand for cash. In this positive light, new CBDC design helps complete the market for retail deposits, especially in a new cashless society.

However, CBDC issuance would likely weigh on bank profitability and loan creation. If banks respond to CBDC issuance by further relying heavily on market funds such as wholesale deposits, long-term debt instruments, and longer-term money market funds, banks would face new upward pressure on their maturity transformation and liquidity provision primarily due to their greater reliance on substantially less stable sources of market funds. As a result, the higher volatility of market funds may then increase the procyclicality of bank loans. As private credit provision goes through macro boom-bust fluctuations through the real business cycle, any sharp declines in credit supply sow the seeds for severe financial downturns. During these macro-financial downturns, the real economy would likely experience substantially lower asset market valuation, higher unemployment, lower GDP output growth, and less effective monetary policy pivots for inflation control. In light of this longer-run macro chain reaction, the central bank should carefully assess the macro-financial impact of new CBDC design and issuance.

Intense competition from new CBDCs may prompt banks to increase deposit rates. As some recent empirical studies show, higher deposit rates can lead to less bank loan creation as some capital investment projects that are profitable only at a lower cost of market funds fail to secure cost-effective bank finance. When banks retain sufficient market power, they often attempt to compensate for higher deposit rates by boosting the interest charges on new loan origination. As a result, this common bank behavior usually tends to reduce the broad demand for traditional bank loans and credit lines. CBDC issuance can cause a substantial reduction in commercial bank deposits. This macro trend further translates into more expensive bank loans and credit lines. Hence, new CBDC design and issuance would likely cause some adverse impact on bank loan creation and liquidity provision.

Some other empirical studies focus on the risk that each new CBDC may sharpen depositor sensitivity to systemic bank crises by facilitating the rapid transfer of bank deposits. During a systemic bank crisis, the massive transfer of bank deposits into some CBDC would face substantially lower transaction costs (than the transaction costs of cash withdrawals). Each new CBDC would offer a safe-haven destination in the form of the central bank as the lender of last resort. In stark contrast to cash, the lower costs of running to some new CBDC suggest that more depositors would quickly withdraw cash-equivalent money at a lower probability of a systemic bank solvency crisis. Depending on its design features and functions, each new CBDC inevitably affects the speed, scale, and frequency of systemic bank runs, even with credible deposit insurance in place.

Should CBDC issuance reduce cash usage, banks may be able to benefit from the substantially lower costs of cash operations in support of better overall profitability. Recent empirical studies show that cash operations have long led to 10% to 15% of total bank operating costs. However, even if central banks issue their own new CBDCs, many governments intend to maintain physical cash, notes and coins, in support of fiscal spending programs for the foreseeable future. To help reduce key economic disparities in health care, education, and other fiscal spending programs, many governments still seek to maintain widespread cash distribution across their home jurisdictions.

Overall, each CBDC may impose additional operating costs through different bank channels with lower bank profitability, lower loan creation, and less bank resilience in response to systemic runs (despite more cost-effective cash operations). In any new steady state with meaningful take-up of CBDC or other forms of digital money, banks may have to react to a much smaller deposit base. If banks decide to reduce loan creation in order to repair their liquidity positions, these banks would probably reduce retail consumer deposits somewhere else in the same banking system. In this case, the macro trend propagates the liquidity problem to several other banks. Hence, most banks should opt for alternative sources of market funds for better re-insurance against long-run debt obligations. In turn, these banks would experience much higher costs of market funds. Bank loan prices may become more sensitive to financial market conditions. In principle, each central bank can serve as another source of market funds for commercial banks. Specifically, each central bank offers temporary or structural capital and liquidity programs to commercial banks. These central bank capital and liquidity programs would likely boost high-quality and liquid assets for commercial banks, especially during rare times of severe financial stress. Further, the quest for different sources of market funds may cause greater reliance on insurers and other non-bank financial institutions (currency exchanges, micro-loan organizations, credit unions, building societies, and pawn shops etc). In time, macro-financial regulators would probably need to extend their supervisory review powers to the non-bank financial sector.

CBDC issuance may pose greater challenges for some business models or at least parts of the broader banking sector. Mega banks with a relatively higher proportion of non-interest or low-interest transactional retail consumer deposits may be more likely to lose their deposits to each home CBDC than smaller banks, insurers, and other non-banking financial institutions with higher-interest deposits (e.g. currency exchanges, credit unions, building societies, and so on). Conversely, mega banks retain better access to wholesale debt capital markets than smaller banks, insurers, and other non-bank financial intermediaries. As a result, these mega banks would be able to retain high-quality and liquid assets to safeguard against extreme losses that might arise from rare times of severe financial stress. Smaller banks, insurers, and other non-bank financial intermediaries whose business models focus on retail payment services may be particularly vulnerable to new CBDC issuance.

At the same time, new CBDC issuance may help offer new opportunities for fintech innovations in the current digital age. These fintech innovations benefit both banks and non-bank financial institutions, as well as some tech titans (such as Apple and Meta in the U.S. and Alibaba and Tencent in China), to better serve as third-party providers of financial services. With unique design features and functions, CBDC issuance would empower banks and other intermediaries to provide new payment services to their retail customers in a diverse and competitive financial system. For instance, these new payment services can include mobile payments, credit cards, and programmable payments through fast and safe CBDC settlement. On the new global scale, CBDC usage and settlement would help dramatically reduce reliance on correspondent banks in international payments and electronic wire transfers. In parallel, greater competition for bank deposits and loans may further bring in new entrants from the non-bank financial sector. More diverse sources of market funds would help enhance the resilience of the macro-financial system, subject to robust and rigorous prudential rules and regulations.

CBDC issuance may partially replace bank notes and coins in circulation. This key result would lead to a swap between these 2 major liabilities on the central bank’s balance sheet. CBDC issuance may further substitute some fraction of consumer deposits at commercial banks. This key substitution would lead to a swap between CBDC and reserves as both liabilities on the central bank’s balance sheet, if banks maintain enough central bank reserves. The latter case would probably lead to a more significant impact on the aggregate balance sheets of various sectors in the real economy, especially the commercial banking sector.

In the worst-case scenario where CBDC issuance leads to a significant decline in deposits at commercial banks with sufficient pressure on short-term money market rates, the central bank may attempt to adjust the net supply of reserves to stabilize any interest rate pressure. This central bank attempt may involve either large-scale asset purchases or bank lending operations, both of which would increase the size of the central bank’s balance sheet relative to the pre-CBDC case. Specifically, as the central bank attempts to expand reserves through asset purchases, the central bank effectively extends its footprint with capital and liquidity support in those asset markets. After all, each central bank would need to mull over the size and volatility of CBDC liabilities on the central bank’s balance sheet in the long-run steady state. In light of its potential impact on central bank operations in money markets, CBDC issuance and design would need to accord with the central bank’s financial stability and monetary policy frameworks (e.g. the broader dual mandate versus an explicit focus on the long-term average inflation target).


The central bank should shape CBDC design features and functions to help ensure better interoperability with both cash and many other forms of digital money.  

High domestic interoperability would be key to any new CBDC system. Each new CBDC system should co-exist with many other domestic and international payment systems. The resultant CBDC system should interoperate with most other payment services to ensure better monetary diversity, accessibility, and resilience. For each CBDC system, domestic interoperability would need to be sufficient to achieve an easy flow of funds to and from most other payment systems and arrangements. In principle, the proper treatment of payment data would play a vital role in any CBDC system design.

Each CBDC system would likely comprise many common elements, features, and functions as traditional payment systems worldwide. With new CBDC design, each central bank faces the practical policy questions around access, structure, and key service provision in association with many payment systems today. Many payment systems comprise an operator for fast and safe settlement (specifically the central bank) and market participants from the commercial banking sector. Further, these payment systems comprise money market instruments, procedures, and rules for electronic fund transfers. Beyond this core system, a broader payment eco-system includes end users, technological processors, and market infrastructure providers with proper legal, supervisory, and contractual payment arrangements.

At the heart of any CBDC ecosystem would be a CBDC core rulebook. This CBDC core rulebook outlines the legal basis, governance, risk management, access, and many other rules and regulations for market participants in the broader ecosystem. With a core ledger, the central bank issues, redeems, and settles CBDC payments, transactions, and retail fund transfers across the commercial banking sector. Many market participants would act as intermediaries between the central bank and end users. These intermediaries can include banks, payment service providers, mobile operators, and fintech firms, subject to access policies set out in the core rulebook. Each use case would follow its own business and technical rules and regulations for market participants in the payment infrastructure. These rules and regulations would determine how particular use cases work with respect to payment initiation, settlement, compensation, data use, and privacy protection. In principle, the core ledger for CBDC design, issuance, and implementation should include both online and offline payments in the home jurisdiction and elsewhere worldwide.

CBDC system design would likely differ over home and host jurisdictions because each central bank makes the best decisions to suit its unique circumstances. Each central bank may broaden retail consumer access to central bank money as much as possible. Also, each central bank may choose to provide a wide variety of retail payment settlement methods to encourage financial inclusion and macro-financial system resilience. With proper protocols for privacy protection, each central bank would likely design the home CBDC system in support of cross-border payments, domestic retail consumer payments, as well as fiscal transfers. Different elements, features, and functions can reflect the relative importance of these motivations for CBDC system design. Each central bank would need to design the broader CBDC system in close alignment with international standards for anti-money-laundering (AML) and counter-finance of terrorism (CFT) compliance.

For better CBDC system design and issuance, high interoperability would help the central bank embed several technological characteristics that suffice to achieve an easy and smooth flow of funds to and from the vast majority of alternative payment systems worldwide. This interoperability would help ensure that each new CBDC system co-exists well with the wider global payment ecosystem. Each central bank has a menu of options for CBDC system design to achieve high interoperability in this special context. In essence, the central bank establishes and implements key common standards for payment messages, data protocols, and technical graphical user interfaces (GUI) to communicate with most other payment systems worldwide. To achieve high interoperability for CBDC system design, each central bank needs to standardize several technological characteristics of the home CBDC ecosystem in order to ensure global compatibility across both home and host jurisdictions.

High interoperability helps achieve broader CBDC end user adoption, co-existence, innovation, and efficiency in the global payment system. Should payment systems fail to interoperate, each central bank faces the risk of macro market fragmentation with less open CBDC system design. In addition, greater user costs may arise from a lack of competition in the home payment system with less interoperable CBDCs. In effect, high interoperability helps address asset market frictions for cross-border payments such as high user costs, access restrictions, and many other latent risks in the form of low speed and a lack of transparency.

At a basic level, interoperability would entail global standards for payment systems worldwide. These global standards would include a reasonable range of technical specifications, operational requirements, and rules and regulations for supervisory review, control, and accreditation. Additional global standards would pertain to key data protocols, payment messages, cyber endpoint security requirements, system processes, and supervisory obligations. In practice, these global standards usually help harmonize national discretions with substantially lower frictions and barriers. In principle, these global standards would be essential for the baseline success of any CBDC system interoperability measure such as a graphical user interface (GUI) and a home-host interlink for payment messages, transactions, and fund transfers. For many governments and central banks around the world, unique digital identity schemes usually help harmonize the fast and secure authorization, settlement, and encryption of cross-border payments.

Among CBDC issuers and processors, high interoperability promotes competition between payment service providers, creates both the incentives and conditions for technological innovation, and enhances the operational resilience of each broader home payment system. Across home and host payment systems, both users and merchants can benefit substantially from highly interoperable CBDC systems with cost-effective multiple memberships and lower market frictions in terms of both the speed and scale of cross-border payment settlement. In effect, highly interoperable CBDC systems create, support, and reinforce positive network effects across both home and host payment systems worldwide. Each central bank maintains its own unique ledger as part of the home CBDC system; and highly interoperable systems for home-host CBDC design and issuance transactionally integrate each national payment system into the wider global payment ecosystem. Both global application programming interfaces (API) and software development kits (SDK) can help each central bank update its own unique core ledger for CBDC design and issuance as part of the broader global data consortium for CBDC multiple memberships across the home and host jurisdictions.

In response to CBDC issuance, domestic legal barriers may include differences in supervisory review and compliance requirements, payment settlement rules, and consumer protection laws and regulations. Should there be dramatically different supervisory requirements between new CBDC design and other payment systems, there may be an insufficient overlap to ensure a smooth flow of funds across home and host jurisdictions. Know-your-customers (KYC), anti-money-laundering (AML), and counter-finance of terrorism (CFT) rules and regulations may further add costs to the long prevalent CBDC and payment systems. In this broader context, CBDC system interoperability extends to the current laws, rules, and regulations for better macro-financial stability.


The central bank should shape CBDC design features and functions to fulfill unmet user needs in support of ubiquitous CBDC adoption with positive network effects.

If each central bank designs its own unique CBDC to fulfill the mainstream macro policy goals (such as macro-financial stability, fast and secure payment settlement, economic growth, maximum employment, and inflation control), there would need to be widespread CBDC acceptance by retail consumers and merchants within the home jurisdiction. Specifically, ubiquitous CBDC user adoption would likely result from its future functionality and efficacy to all users and merchants. After all, central bank money remains the safest form of money available. Beyond security, several other valuable features of CBDC include the lower overall costs to retail consumers and merchants, online and offline payments, better privacy protocols, and multiple memberships across both the home and host jurisdictions.

Each central bank should tailor its own unique strategies for broad CBDC adoption to the diverse economic structures and payment landscapes within both home and host jurisdictions. If CBDC fulfills unmet user needs, achieves network effects, and applies state-of-the-art current technology at the point of sale, CBDC user adoption may become more widespread and more successful. Additional measures include the use of CBDC by public authorities with the minimum viable product (MVP) to facilitate fiscal transfers in association with health care, education, social security, and many other aspects of the social safety net.

For the vast majority of G20 central banks, the common motivation for new general purpose retail CBDC issuance is its use as a transactional means of payment. For this reason, widespread CBDC user adoption as a transactional means of payment would likely create the greatest value for public policy objectives. In addition to this mainstream motivation, each new CBDC should serve as a relatively stable store of value in the long-term steady state. Indeed, any new form of central bank money should serve as not only a new technologically state-of-the-art means of payment, but also a reasonably stable store of value with relatively few extreme asset price fluctuations. For better CBDC design, each central bank should carefully mull over these fundamental factors to help shore up widespread CBDC retail user adoption in due course.

In recent years, many fintech innovations can help transform the money market for retail payments at an exceptional pace. Good examples include mobile payments, digital wallets, smart debit and credit cards, cross-border online fund transfers for e-commerce, cashless online and offline business transactions, fintech platforms, and one-stop-shopping graphical user interfaces (GUI). As a result, these common retail payment methods have become faster, safer, and more cost-effective for end users, merchants, and online businesses worldwide. In this broader context, each central bank would need to take into account these recent fintech transformations for better CBDC design, issuance, and implementation.

In a digital form, each CBDC would provide the unique competitive advantages of central bank money: safe and fast final payment settlement, liquidity, and integrity. In addition, it would be important for new CBDC issuance to meet both current and future user needs and merchant requirements. Specifically, each central bank may need to anticipate the future user needs and merchant requirements that the extant payment services cannot fulfill in due course. For instance, new fintech platforms provide proprietary alpha stock signals and personal finance tools for stock market investors worldwide. In light of the recent macro trends in asset management, each central bank should attempt to design its own unique CBDC issuance in response to a broader variety of strategies for smart stock investment portfolio diversification. These fundamental factors both broaden and sharpen central bank strategies for effective CBDC design, issuance, and implementation.

Each central bank should design its own unique CBDC to achieve positive network effects by targeting some asset market segments. These network effects can arise from the mutual widespread acceptance by both retail consumers and merchants. Consumers would only use some CBDC if many merchants were ready and willing to accept this CBDC. At the same time, merchants would only accept some CBDC if many retail consumers were ready and willing to use this CBDC as a mainstream method of payment. For widespread CBDC design and acceptance, each central bank would need to carefully account for positive network effects for both sides of retail payments. Recent evidence shows that new payment mechanisms often tend to attract wider user adoption in the mass market for peer-to-peer (P2P) payments. For this reason, each central bank may choose to emphasize P2P functionality in order to facilitate broader CBDC user adoption. Specifically for P2P payments and transactions, merchants face greater incentives to accept some CBDC, especially for e-commerce and credit card verification in the cyber space. For smooth CBDC design and issuance, high interoperability can play a vital role in reducing financial market frictions in response to both broader user and merchant requirements.

If each central bank builds its own CBDC on the current state-of-the-art technology, both users and merchants can more easily set up their own CBDC online accounts, services, apps, and mobile devices (such as smartphones, tablets, and computers). Across a reasonable range of scenarios, it is important for merchants to integrate CBDC into their extant payment infrastructure. This lean startup approach focuses on the minimum viable product (MVP) version of CBDC design and issuance. Over time, each central bank conducts iterative continuous improvements to incorporate auxiliary CBDC design features and functions as part of the payment infrastructure. As a result, this baseline would likely lead to near-instant widespread user adoption by the vast majority of merchants at the point of sale.

Recent mobile money programs showcase many successful stories in the broader business context. Swish is a mobile phone app with more than 85% user adoption in Sweden. Since its bold and smooth launch in 2012, Swish has quickly expanded its main menu of services from instant P2P fund transfers to both online and point-of-sale payments with QR codes. Key success factors for Swish include a central focus on a mass market with no convenient alternative digital apps, easy end user registration, and a strong push from banks to encourage Swish consumer adoption to reduce the long prevalent use of cash. Moreover, some similar mobile apps have had comparable success (MobilePay in Denmark and Vipps in Norway). In Kenya, more than 95% of the residents use the mobile money platform M-Pesa. Since its bold launch in 2007, M-Pesa has heavily applied the short-message-service (SMS) technology to provide broad user access to basic banking services in the absence of credit cards and other digital alternative apps.

However, not all mobile apps turn out to be successful payment services worldwide. In Germany, Paybox offers a mobile phone payment platform. Since its launch in 2000, Paybox has sought to facilitate retail payments and fund transfers between bank accounts in Germany. Paybox retains weak competitive advantages over the extant retail payment systems, high costs for users, and a lack of cooperation from merchants. As a consequence, Paybox has never achieved broader user adoption at a sustainable scale.

Beyond mobile payments, some people view DigiCash from the early-1990s as the world's first digital currency. Like Paybox, DigiCash has never been able to witness widespread user adoption worldwide. For DigiCash, the vast majority of consumers do not value the unique selling proposition (USP) of anonymous payments. Further, banks continue to enjoy the hefty fees and profits from credit cards and online fund transfers. For this reason, banks remain hesitant to accept DigiCash for most retail consumers. In addition, DigiCash has had few partnerships with current merchants and consumers. In combination, these fundamental factors prevent DigiCash from becoming a mainstream digital currency worldwide.

Since the early-1990s, the Bank of Finland has successfully introduced the Avant smart card system. Avant now serves as a digital version of cash with state-of-the-art smart card technology. Also, Avant offers anonymous retail payments and fund transfers. In time, Avant quickly achieved widespread user adoption in only 3 years of business operations. The Bank of Finland eventually sold Avant to commercial banks. Nowadays, however, Avant faces new intense competition from alternative digital apps such as PayPal and Stripe (America), Wise (Britain), Revolut (America, Australia, and Ireland), Grab (Singapore), Gojek (Indonesia), Pix (Brazil), Mercado Pago (Latin America), LINE Pay (Japan), Alipay and WeChat Pay (China), and UPI and Paytm (India). Beyond domestic payments and fund transfers for e-commerce, these fintech service providers now specialize in low-cost cross-currency transfers, business cash operations, and smart stock market investment portfolio strategies. In recent years, these fintech firms have grown rapidly and substantially with easy user registration via emails, smartphone apps, and QR codes.


The central bank should shape CBDC design features and functions in light of key ongoing policy perspectives on the blockchain ledger technology.

The main motivation for general-purpose retail CBDC design and issuance should rest on the vital role of central bank money as a public good. At the same time, any CBDC design and issuance can serve as a fintech innovation and a new business opportunity for the modern monetary system. In this broader context, each central bank seeks to deepen the practical policy analysis of CBDC design and issuance for better macro-financial stability. In principle, each central bank shares many key ongoing policy perspectives on the state-of-the-art blockchain ledger technology.

For better retail CBDC design in G20 countries, no single form of engagement fits all general purposes or all stakeholders. There is no easy one-size-fits-all solution. Open consultations should involve both public-sector and private-sector actors and stakeholders. These stakeholders should include banks, insurers, many other non-bank financial intermediaries (currency exchanges, microloan organizations, credit unions, building societies, and so on), tech titans, and fintech firms. In light of many different jurisdictional circumstances, each central bank may choose to take some different approaches to shaping private-sector propositions for reasonable CBDC design and issuance services and business cases. In principle, each central bank can define the proper and practical scope of retail CBDC design and issuance. At the same time, each central bank empowers some private-sector actors, especially big banks, tech titans and fintech firms, to innovate technologically within a unique set of policy principles for widespread CBDC user adoption, design, and issuance. At a bare minimum, the resultant fintech innovations for high CBDC interoperability would accord with the central bank’s broader financial stability and monetary policy stances.

Each central bank already specializes in building a unique value chain for a mass market retail product in the form of bank notes and coins. Some of this central bank specialty can be applicable to CBDC design and issuance. Each central bank has an open menu of options for CBDC design and implementation. For instance, each central bank can choose to procure some fintech services from the private sector. Also, each central bank can outsource some CBDC design features and functions to big banks, tech titans, and fintech firms. Alternatively, each central bank retains the policy option to design its own unique CBDC as part of its internal development. In essence, each central bank should identify its respective institutional constraints and preferences with proper adjustments for macro financial stability and monetary policy stances. In CBDC design and issuance, the central bank would need to be mindful of its own balance sheet strategies, bank regulations, and comparisons to many other forms of money (near-cash bank notes and coins, online wire transfers, offline payments, cross-currency remittances, cryptocurrencies, and so forth).

The global payment system requires the central bank to carefully mull over how its own unique CBDC issuance may help with wholesale and cross-border use cases. Each central bank has to make strategically important decisions about how its own unique CBDC interacts with foreign forms of central bank money across both home and host jurisdictions. In light of faster and safer cross-border wholesale and retail payments, the central bank would further need to consider non-resident access to its own unique CBDC. In each highly interoperable CBDC system, the central bank retains good control of cross-border payment details through the blockchain ledger technology. In comparison to central bank reserves today, each wholesale CBDC helps activate programmable tokenization within the future financial system. Each wholesale CBDC would specifically facilitate fast delivery and payment settlement in central bank money for financial tokens, cryptocurrencies, and alternative assets. This wholesale CBDC tokenization can lead to significant efficiency gains in atomic payment settlement in due time. In close alignment with the lean startup approach to CBDC design and issuance, the central bank seeks to make iterative continuous improvements with further governance and standardization well beyond the global standards for payment messages.

A foundational legal question concerns the legal classification of a new retail CBDC. Specifically, each central bank can classify its own unique retail CBDC as a current classification such as cash or bank deposits, or a wholly new type of classification. The legal classification of a new retail CBDC can have profound policy implications for a wide variety of rules and regulations on retail payment settlement finality and authorization for retail CBDC issuance. In some home and host jurisdictions, each central bank proposes changes and adjustments in legislation to rephrase both the central bank charter, statute, and provisions etc with respect to retail CBDC design, issuance, distribution, and implementation. Further, some CBDC design features and functions help determine the key data protocols in support of privacy protection for real-time retail CBDC payment settlement. The central bank has to pay further attention to some rules and regulations on how its own unique CBDC converts into several other forms of payments such as cash, bank deposits, foreign CBDCs, and cryptocurrencies etc. Home-host harmonization plays an important role in the bold establishment of both rules and regulations on non-resident access to some CBDC issuance, design, and distribution worldwide.

What CBDC tools may be helpful for the central bank to better manage rare times of severe financial stress? CBDC quantity limits can help the central bank constrain the extent of potentially harmful levels of disintermediation due to abrupt structural changes in CBDC adoption with substantially higher costs of credit across the real economy. At the same time, however, these quantity limits may impact CBDC user adoption with less convenient CBDC payments and near-cash transactions. Some other technical solutions involve CBDC waterfall or cascade features and functions. In this case, CBDC payments and near-cash transactions that would breach some waterfall limit would automatically lead to simple fund transfers into bank deposits. These CBDC waterfall and cascade features and functions help ease the adverse impact of abrupt failures of both CBDC retail payments and near-cash transactions. In practice, these CBDC obligatory automatic transfers may cause some additional operational complexity and legal challenges. CBDC retail payments should usually succeed across both CBDC payer and receiver accounts, and these digital wallets accord with CBDC data protocols and standards for retail payment messages. As a result, these CBDC quantity limits and automatic transfers help correct any major failures of both CBDC retail payments and transactions, especially in the broader home-host context.

In addition to CBDC quantity limits and automatic transfers, price measures such as CBDC fees and remuneration tiers allow for any size of CBDC retail payments at higher costs. In principle, the central decision about the dollar amount of CBDC fund transfers above some dollar threshold primarily reflects CBDC user incentives and preferences. In stark contrast to CBDC quantity limits, these price measures may permit substantial inflows into both domestic and foreign CBDCs in rare times of severe financial stress, because higher costs help prevent systemic CBDC runs. In recent years, some central banks, such as the European Central Bank and Bank of Japan, have applied negative interest rates to non-monetary-policy deposits for fiscal stimulus to trickle down to the economy in the Global Financial Crisis 2008-2009 and the recent rampant Covid pandemic crisis from 2020 to 2022. The same policy logic runs through CBDC system design, issuance, and implementation with some price measures.

What would be the macro-financial stability implications of applying the blockchain ledger technology in CBDC design and issuance? Any CBDC architecture choices are likely to be made in the broader context of both business and policy constraints. With the blockchain ledger technology, programmable payments would help allow for some central bank authorization, automation, and new conditions around some CBDC system design, issuance, and distribution in the home and host jurisdictions. In light of atomic payment settlement, micro-payments refer to retail payments with relatively small dollar values. Within the extant payment infrastructure, it would be infeasible for the central bank to process these micro-payments within a short time frame. In this light, the blockchain ledger technology empowers each central bank to process a large number of micropayments with almost real-time atomic payment settlement. In support of CBDC micro-payments, the blockchain ledger technology contributes to low-cost payment settlement in an efficient manner. Specifically, the blockchain ledger technology can help the central bank process millions of CBDC micro-payments per second. Quantum computing technology continues to develop quickly in response to the new emergent threat of cyber security vulnerabilities. In recent years, these latest technological developments help break current classical cryptography in many payment systems today. A new generation of post-quantum cryptography (PQC) can help make CBDC system design highly resistant to cyber attacks by quantum computers.


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This analytic essay cannot constitute any form of financial advice, analyst opinion, recommendation, or endorsement. We refrain from engaging in financial advisory services, and we seek to offer our analytic insights into the latest economic trends, stock market topics, investment memes, personal finance tools, and other self-help inspirations. Our proprietary alpha investment algorithmic system helps enrich our AYA fintech network platform as a new social community for stock market investors:

We share and circulate these informative posts and essays with hyperlinks through our blogs, podcasts, emails, social media channels, and patent specifications. Our goal is to help promote better financial literacy, inclusion, and freedom of the global general public. While we make a conscious effort to optimize our global reach, this optimization retains our current focus on the American stock market.

This free ebook, AYA Analytica, shares new economic insights, investment memes, and stock portfolio strategies through both blog posts and patent specifications on our AYA fintech network platform. AYA fintech network platform is every investor's social toolkit for profitable investment management. We can help empower stock market investors through technology, education, and social integration.

We hope you enjoy the substantive content of this essay! AYA!


Andy Yeh

Chief Financial Architect (CFA) and Financial Risk Manager (FRM)

Brass Ring International Density Enterprise (BRIDE) © 



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