Launching a CBDC must follow a clear process, involve multiple stakeholders, and consider the wider social, political, economic, and structural context.
The Bank for International Settlements outlines the following factors, based mainly on data from the World Bank:
• Digital infrastructure, such as mobile phone and internet use, is developed
• Capacity for innovation (R&D) across business, government and education is advanced
• Government institutions are effective (having a digital minister would be ideal)
• There is a large informal (shadow) economy
• GDP per capita, and financial development, are high
• Fewer citizens have access to transaction accounts
• There is public interest in CBDCs
Changing consumer behaviour around physical cash and mobile payments and its knock-on effects for financial inclusivity is also a significant driving factor
What it looks like
Every digital currency must have a similar structure, including an issuer, a service provider, users and a ledger. Differences occur depending on whether a two-tiered (involving a commercial bank) or direct approach is chosen. Here is a typical example of what both could look like:
A country-wide digital currency system will inevitably involve every kind of actor, from an individual citizen to a central bank governor. Some of the key stakeholders and their responsibilities are:
A central bank is responsible for issuing the CBDC. The central bank will also be responsible for removing CBDC from circulation. These actions can be referred to as minting and melting/ burning. Central banks will define the Terms of Service that are inherited automatically by any and all participants interacting with their issued CBDC. The CBDC itself is the API. Central banks manage the digital currency in accordance with the Terms of Service.
This may include (where appropriate, with other government agencies and partners) various actions associated with cash such as new issuances, freezing criminal funds, thawing CBDC funds, responding to court orders, managing various CBDC policies and complying with court orders. A central bank could choose to outsource several services to a CBDC service provider. These allow central banks to retain complete control over their CBDC, while also allowing private enterprises to support the central bank in providing key services to the users.
Services could include:
1. Onboarding of users
2. Distribution of CBDC to users
3. User support
Payment interface providers
One possible design for a retail CBDC is a two-tiered model. In a two-tiered model, central banks could choose to work with payment interface providers to enable overlay services in addition to the services mentioned above.
Payment interface providers will be regulated entities who provide services, such as:
1. Providing support for programmable money and automation (commonly referred to as smart contracts);
2. Account management, including management of user keys for managing funds, encryption, and decryption;
3. Provision of Know Your Customer or AML services;
4. Auditing and enforcement of CBDC terms & conditions; and
5. Analytics, reporting and dashboards.
Users who interact with the CBDC via the payment service providers will continue to comply with the Terms & Conditions set by the issuing central bank. Payment service providers are not necessary to facilitate peer-to-peer payments between users.
Users may either be citizens, merchants (e.g. a shop selling goods), or connected devices. Users hold digital currency themselves, exchanging transactions peer-to-peer. They can access additional services provided by Payment Interface Providers.
As an electronic bearer instrument, similar to cash, those who choose to hold CBDC themselves are responsible for securing and safeguarding their claim to central bank money. Any loss or compromise is the responsibility of the individual.
But unlike physical cash:
• In the case of lost keys, central banks may elect to allow (by itself or via Payment Interface Providers) services for recovering ‘lost’ funds; and
• Direct CBDC holdings may or may not be subject to remuneration (interest), depending upon the issuing central bank’s policy.
Transaction processors, in a blockchain-based CBDC, compete publicly to write CBDC transactions to blocks and append those blocks to the core ledger, risking significant capital investment to do so. As network nodes, their role is to record, index, and confirm transactions, while users transact in a peer-to-peer manner. This model prevents the double-spending of any coins, a service currently provided by centralised payment systems.
Central Banks may operate (or tender for the provision of) additional Transaction Processors to provide further CBDC resilience for their jurisdiction beyond the network baseline.
How long will it take to launch a CBDC?
At nChain, we are working with central banks to research and design a truly more resilient, trusted and inclusive modern economy, securing the livelihoods and prosperity of citizens for generations to come.
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