Central Bank Digital Currency : A Payments Perspective by World Bank, 2021

The Guidance Report

This document, titled “Central Bank Digital Currency: A Payments Perspective,” provides insights and guidance on central bank digital currency (CBDC). It explores CBDC’s role in the national payments system and analyzes its various aspects, including reasons for issuance, features, timing, infrastructure, and stakeholders. Lets understand this report in brief:

Executive Summary

The executive summary provides a concise overview of the document’s key findings and policy recommendations. It highlights the importance of Central Bank Digital Currency (CBDC) as a transformative tool in the payments landscape and emphasizes the need for careful consideration of its objectives and potential consequences.

Central Bank Digital Currency (CBDC): A Transformative Tool in the Payments Landscape

This document provides comprehensive guidance on Central Bank Digital Currency (CBDC), exploring its potential to revolutionize the payments landscape. It emphasizes the need for careful consideration of its objectives, features, timing, infrastructure, and stakeholder roles to ensure its effectiveness and minimize potential risks.

Key Findings:

• CBDC has the potential to enhance financial inclusion, promote innovation, improve payment efficiency, mitigate financial stability risks, and strengthen monetary policy.
• The decision to issue CBDC should be based on a thorough assessment of its potential benefits and challenges, considering the specific context of each country.
• CBDC should possess essential features such as interoperability, privacy, security, accessibility, and technological robustness.
• The timing of CBDC implementation should be aligned with broader economic and technological factors, ensuring market readiness and institutional capacity.
• A robust infrastructure is crucial for supporting CBDC operations, including a secure and scalable technology platform, a clear legal and regulatory framework, and well-defined institutional arrangements.
• Effective collaboration among central banks, financial institutions, regulators, and technology providers is essential for successful CBDC implementation.

Policy Recommendations:

• Promote financial inclusion: Leverage CBDC’s potential to reach underserved populations by providing low-cost and universal access to financial services.
• Foster innovation: Encourage the development of new payment and financial services based on CBDC, fostering a dynamic and competitive financial sector.
• Enhance efficiency: Streamline domestic and cross-border payments by leveraging CBDC’s real-time settlement and reduced transaction costs.
• Mitigate financial stability risks: Provide a safe and reliable alternative to private digital currencies, reducing systemic risks and promoting financial stability.
• Strengthen monetary policy: Enhance central bank control over the money supply and monetary policy implementation through Central Bank Digital Currency (CBDC).
• Ensure interoperability: Design CBDC to seamlessly integrate with existing payment systems and instruments, facilitating widespread adoption and usage.
• Balance privacy and security: Implement robust security measures to protect against cyberattacks and fraud while ensuring privacy and data protection.
• Promote accessibility: Make CBDC accessible to all segments of the population through a variety of channels and devices, including offline options.
• Choose appropriate technology: Select a technology platform that is scalable, efficient, and adaptable to future innovations and developments.
• Align timing with readiness: Implement CBDC at the right time, considering economic and technological factors, policy and regulatory frameworks, institutional capacity, and market demand.
• Develop robust infrastructure: Establish a secure and scalable technology platform, a clear legal and regulatory framework, and well-defined institutional arrangements to support CBDC operations.
• Foster collaboration: Encourage collaboration among central banks, financial institutions, regulators, and technology providers to ensure effective CBDC implementation.

Summary of Policy Recommendations under Each W Question

1. Why? – Reasons for Issuing CBDC:

• Financial inclusion: Promote access to financial services for underserved populations by leveraging CBDC’s potential for low-cost and universal access.
• Innovation: Foster innovation in the financial sector by providing a platform for new payment and financial services based on CBDC.
• Efficiency: Enhance the efficiency of domestic and cross-border payments by leveraging CBDC’s real-time settlement and reduced transaction costs.
• Financial stability: Mitigate risks to financial stability by providing a safe and reliable alternative to private digital currencies.
• Monetary policy: Enhance central bank control over the money supply and monetary policy implementation through CBDC.

2. What? – Features that CBDC Should Have:

• Interoperability: Ensure seamless integration with existing payment systems and instruments to facilitate widespread adoption and usage.
• Privacy: Balance the need for privacy with the requirements for anti-money laundering and countering the financing of terrorism (AML/CFT) regulations.
• Security: Implement robust security measures to protect against cyberattacks and fraud, ensuring the integrity and reliability of the CBDC system.
• Accessibility: Make Central Bank Digital Currency (CBDC) accessible to all segments of the population through a variety of channels and devices, including offline options.
• Technological requirements: Choose a technology platform that is scalable, efficient, and adaptable to future innovations and developments.

3. When? – The Appropriate Timing for CBDC:

• Economic and technological readiness: Align CBDC implementation with broader economic and technological developments to ensure its effectiveness and sustainability.
• Policy and regulatory framework: Establish a clear policy and regulatory framework for CBDC before its launch, addressing issues such as legal tender status, consumer protection, and data privacy.
• Institutional capacity: Develop the necessary institutional capacity within the central bank and other relevant authorities to manage and oversee the CBDC system effectively.
• Market demand and readiness: Assess the level of market demand and readiness for CBDC among consumers, businesses, and financial institutions.

4. Where? – The Right Infrastructure for CBDC:

• Payment systems architecture: Design a payment systems architecture that is interoperable, scalable, and resilient, accommodating both CBDC and existing payment instruments.
• Technology infrastructure: Select a technology platform that meets the performance, security, and scalability requirements of CBDC, considering factors such as distributed ledger technology (DLT).
• Legal and regulatory framework: Establish a clear legal and regulatory framework for CBDC that addresses issues such as consumer protection, data privacy, and AML/CFT compliance.
• Institutional arrangements: Define the roles and responsibilities of different stakeholders involved in CBDC implementation, including the central bank, financial institutions, and technology providers.

5. Who? – Defining the Role of Stakeholders in CBDC Implementation:

• Central bank: Lead the development and implementation of CBDC, overseeing its design, operation, and regulation.
• Financial institutions: Play a key role in distributing and facilitating access to CBDC for consumers and businesses.
• Regulators: Ensure that CBDC complies with relevant laws and regulations, addressing issues such as consumer protection, data privacy, and financial stability.
• Technology providers: Develop and maintain the technology infrastructure for CBDC, ensuring its security, reliability, and scalability.
• International organizations: Facilitate collaboration and coordination on CBDC development and implementation among different countries.

Also Read: CBDC’s Programmability: Revolutionizing Digital Transactions and Governance

Section 2: Setting the Stage: CBDC in the Context of the National Payments System

This section explores the relationship between CBDC and the national payments system and provides an overview of the national payments system (NPS) and its evolution. It discusses the different components of the NPS, including payment instruments, payment service providers, and infrastructure. It also highlights the role of central banks in overseeing the NPS and ensuring its efficiency and stability.

Section 3: Reasons for Issuing CBDC (Why?)

This section examines the potential motivations for issuing CBDC. It identifies various reasons why countries might consider introducing CBDC, such as enhancing financial inclusion, promoting innovation, and improving the efficiency of cross-border payments. The section also discusses the potential risks and challenges associated with CBDC issuance.

Section 4: Features that CBDC Should Have (What?)

Focusing on the essential characteristics of CBDC, this section outlines key aspects to be considered and provides policy recommendations. This section explores the key features that CBDC should possess to be successful. It addresses aspects such as interoperability, privacy, security, and technological requirements. The section also discusses the trade-offs between different features and the need to find the right balance for each specific context.

Section 5: The Appropriate Timing for CBDC (When?)

This section explores the timing considerations for CBDC implementation. It highlights the importance of aligning the introduction of CBDC with broader economic and technological factors, along with policy recommendations for optimal timing. The section also discusses the need for careful planning and preparation before launching a CBDC project.

Section 6: The Right Infrastructure for CBDC (Where?)

Discussing the necessary infrastructure for CBDC, this section examines key aspects to be considered and offers policy recommendations. It covers topics such as payment systems architecture, scalability, and interoperability.

Also Read: Google Pay App Detailed Review

Section 7: Defining the Role of Stakeholders in CBDC Implementation (Who?)

Examining the roles and responsibilities of stakeholders involved in CBDC implementation, this section provides considerations and policy recommendations. It emphasizes the need for collaboration and cooperation among central banks, financial institutions, regulators, and technology providers.

The document concludes by emphasizing the multidimensional nature of Central Bank Digital Currency (CBDC) implementation and the importance of collaborative decision-making. It highlights the potential benefits of CBDC while acknowledging the need for careful evaluation of its implications on the financial system.

By following this guidance, policymakers and relevant authorities can navigate the complexities of Central Bank Digital Currency (CBDC) implementation and harness its potential effectively.

Note: These policy recommendations are general in nature and should be tailored to the specific circumstances of each country. The document contains additional appendices providing historical context, principles for financial market infrastructures, forms of money, cross-border Central Bank Digital Currency (CBDC) considerations, and existing literature on CBDC’s impact on monetary policy and financial stability.

Link to Download detailed Report: CENTRAL BANK DIGITAL CURRENCY, A Payments Perspective