Central Bank Digital Currencies

(CBDCs): A Comprehensive Overview

July 2023

Insights and Analysis from the

Bank for International
Settlements (BIS) Reports

1
 Contents

Introduction p.3

1. Understanding CBDCs p.4

2. CBDC Models p.5
1. Retail and Wholesale CBDCs
2. Direct, Indirect, and Hybrid CBDCs
3. CBDCs and Technology p.5
1. Unified Ledger and Tokenization
2. Distributed Ledger Technology (DLT) and Wholesale CBDC
(w-CBDC)
3. Role of the Private Sector in CBDCs
4. CBDCs and Cross-Border Payments p.12
1. Cross-Border Payments and CBDCs
2. Standardization in CBDCs
5. CBDCs and Financial Stability p.13
6. CBDCs and Access Policy p.14
7. CBDCs and Legal Aspects p.15
8. CBDCs and Financial Inclusion p.16
9. CBDCs and Security p.17
10. CBDCs and Privacy p.18
1. Privacy and CBDCs
2. Privacy and Quantum Computing
11. CBDCs and Innovation p.20
12. CBDCs and Economic Stability p.21

Conclusion p.23
References p.24

Version 1 July 2023

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Introduction

In the ever-evolving landscape of financial technology, the Bank for International

Settlements (BIS) has been at the forefront, providing invaluable insights and analysis on
emerging trends. One such trend that has been making waves in the financial world is the
concept of Central Bank Digital Currencies (CBDCs). The BIS has been closely monitoring
and studying this development, and their findings are nothing short of fascinating.

In their recent annual report, the BIS delved deep into the world of CBDCs and tokenization,
particularly focusing on the concept of a unified ledger in Chapter V. This unified ledger is a
groundbreaking concept that integrates CBDCs, tokenized deposits, and other tokenized
claims on financial and real assets on a single, programmable platform. The implications of
this are vast and transformative.

Imagine a world where financial transactions are automated, seamlessly integrated, and
settled instantly. A world where settlement times are drastically reduced, and credit risks
are minimized. This is the world that a unified ledger could potentially create. By allowing
transactions to be bundled, the unified ledger could revolutionize the way we conduct
financial transactions.

But that's not all. The BIS's exploration of CBDCs and tokenization extends beyond the
unified ledger. In this report, we'll delve into the BIS's findings, shedding light on the
complexities, potential benefits, and challenges of CBDCs. From understanding different
CBDC models to exploring their impact on cross-border payments, financial stability, and
more, we'll take a comprehensive look at the exciting world of CBDCs as presented by the
BIS. So, let's dive in and explore the future of finance.

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1. Understanding CBDCs

As we start this journey to understand the world of Central Bank Digital Currencies (CBDCs), it's
crucial to start with the basics. What exactly are CBDCs? In simple terms, CBDCs are a new form
of central bank money. But unlike traditional forms of money, CBDCs exist in a digital format and
are a direct liability of the central bank. They are denominated in the national unit of account and
can be used for a variety of purposes, from retail payments to wholesale settlement.

Now, when it comes to CBDCs, there are two main types that we need to be aware of: Retail
CBDCs and Wholesale CBDCs. Retail CBDCs are designed for everyday use by the general
public. Think of them as the digital equivalent of the cash in your wallet. They can be used for
buying goods and services, much like physical cash. But unlike cash, they can be designed to work
both online and offline, making them a versatile tool for improving financial inclusion.

On the other hand, Wholesale CBDCs are a bit different. They are restricted for use by financial
institutions that hold reserve deposits with a central bank. They are used for large-scale
transactions, like interbank payments and securities settlement. In essence, Wholesale CBDCs
could potentially enhance the functioning of the wholesale payment system, making it more
efficient and secure.

But the world of CBDCs doesn't stop there. There's another concept that's equally important - the
concept of a unified ledger. This is a single, consolidated record-keeping system where both
central bank money and other claims reside. The beauty of a unified ledger lies in the power of
tokenization. By converting rights to an asset into a digital token on a blockchain, the full benefits of
tokenization could be harnessed in a unified ledger. This enables simultaneous and instantaneous
settlement, enhancing the efficiency and security of transactions.

BIS Annual Economic Report 2023 (page 108),

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2. CBDC Models
As we delve deeper into the world of CBDCs, it becomes apparent that there isn't a one-size-fits-all
approach to their implementation. Different models of CBDCs have been proposed, each with its
own unique set of characteristics and implications. In this section, we'll explore three main models:
Direct, Indirect, and Hybrid.

Direct CBDCs:

In this model, the central bank has a direct relationship with every user, similar to how physical
cash operates. This means that the central bank is responsible for managing all aspects of the
CBDC, from issuance to transaction validation and record-keeping.

Indirect CBDCs:

In the Indirect model, a financial intermediary (like a commercial bank) acts as a go-between for the
central bank and the user. The central bank issues the CBDC to the intermediary, who then
distributes it to the users. The intermediary is responsible for managing the customer relationship,
while the central bank maintains control over the CBDC supply.

Hybrid CBDCs:

As the name suggests, the Hybrid model combines elements of both the Direct and Indirect
models. In this model, the central bank involves intermediaries for the distribution of CBDCs, but
the claim of the CBDC holder is on the central bank. This model allows for a balance between the
central bank's control over the CBDC and the efficiency and customer service provided by
intermediaries.

CBDC Model Description Relationship

Central bank has a direct

Direct CBDC holder ↔ Central Bank
relationship with every user

Financial intermediary acts as

CBDC holder ↔ Intermediary
Indirect a go-between for the central
↔ Central Bank
bank and the user

Combines elements of both CBDC holder ↔ Intermediary

Hybrid
Direct and Indirect models & Central Bank

Project Helvetia (Pages: 16, 17, 18, 21, 24, 27)

Project Rosalind (pages 5,6)

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2. CBDC Models
In addition to these models, there's also the concept of a two-tier CBDC model. This model
involves the central bank issuing CBDC and providing the ledger infrastructure, while private-sector
service providers offer user-facing services, including digital wallets. This model allows for the
distribution of responsibilities between the central bank and private sector, leveraging the strengths
of both parties.

Central Bank Digital Currencies (CBDCs) can also be broadly classified into two types: retail
CBDCs and wholesale CBDCs, like we talked about in chapter 1:

Retail CBDCs:

These are designed for general public use for daily transactions, similar to cash. They aim to
provide a digital alternative to physical cash, ensuring that the public can access central bank
money. Retail CBDCs could potentially bring about several benefits, including increased efficiency
in retail payments, enhanced financial inclusion, and reduced dependency on physical cash.
However, the design and implementation of retail CBDCs would need to carefully manage potential
risks, including those related to privacy, security, and financial stability.

Wholesale CBDCs:

These are restricted for use by financial institutions for interbank payments and financial settlement
processes. They aim to improve the efficiency and functioning of the wholesale payment system.
Wholesale CBDCs (w-CBDC) could potentially bring about several benefits, including increased
efficiency in wholesale payments, reduced counterparty risk, and enhanced interoperability
between different financial systems. However, the design and implementation of wholesale CBDCs
would need to carefully manage potential risks, including those related to operational resilience,
cybersecurity, and financial stability.

In addition to retail and wholesale CBDCs, there are also hybrid CBDCs, which combine elements
of both retail and wholesale CBDCs. Hybrid CBDCs aim to balance the benefits of retail and
wholesale CBDCs, while managing their potential risks.

Project Helvetia (Pages: 16, 17, 18, 21, 24, 27)

Project Rosalind (pages 5,6)

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 2. CBDC Models
Bellow is a table explaining the relationship between retail, wholesale, and direct, indirect CBDCs

Direct Indirect Hybrid

Central bank issues

Central bank issues
Central bank issues CBDCs directly to the
CBDCs to financial
Retail CBDC CBDCs directly to the public but relies on
intermediaries, which
public. intermediaries for certain
distribute to the public.
functions.

Not applicable Not applicable

(Wholesale CBDCs are Central bank issues (Wholesale CBDCs are
Wholesale
typically issued to CBDCs to financial typically issued to
CBDC
financial institutions, institutions. financial institutions, not
not the public) the public)

It's important to note that the choice between retail, wholesale, and hybrid CBDCs would depend
on the specific objectives and circumstances of each central bank. Different types of CBDCs could
coexist, serving different purposes and complementing each other.

Project Helvetia (Pages: 16, 17, 18, 21, 24, 27)

Project Rosalind (pages 5,6)

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3. CBDCs and Technology
The world of CBDCs is deeply intertwined with technology. From the infrastructure that underpins
CBDCs to the systems that facilitate their use, technology plays a crucial role in shaping the CBDC
landscape. In this section, we'll explore three key technological aspects of CBDCs: Distributed
Ledger Technology (DLT), the API layer, and technology standardization.

Distributed Ledger Technology (DLT):

At the heart of CBDCs lies Distributed Ledger Technology (DLT), a decentralized database
managed by multiple participants across multiple nodes. DLT provides a secure and efficient
infrastructure for the issuance and transfer of CBDCs. It allows for the creation of a unified ledger
where both central bank money and other claims reside, enabling simultaneous and instantaneous
settlement.

Distributed Ledger Technology (DLT) is a type of database that is spread across multiple sites,
countries, or institutions. DLT is the technology that underpins blockchain and is often associated
with its most famous application: Bitcoin. However, DLT can be used in many other contexts,
including the issuance and management of CBDCs.

In the context of CBDCs, DLT can be used to issue a novel wholesale central bank digital currency
(w-CBDC) and build a link between the new securities settlement platform and the existing central
bank payment system. This was demonstrated in Project Helvetia, a joint initiative of the Swiss
National Bank (SNB) and the Bank for International Settlements (BIS) Innovation Hub.

In Project Helvetia, two proofs of concept (PoCs) for settling tokenized assets were conducted: (i)
issuing a w-CBDC and (ii) building a link between the new securities settlement platform of SDX (a
financial market infrastructure group) and the existing central bank payment system. Both PoCs
were found to be realistically possible and legally robust.

Project Helvetia (pages 7, 17, 19, 22, 26-27)

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3. CBDCs and Technology
The w-CBDC, existing on a permissioned DLT platform, accessible to financial intermediaries,
opens more of the functionalities possible with tokenization (e.g., instant and simultaneous
settlement). Yet issuing a w-CBDC that captures these possibilities would also bring new
operational challenges and raise novel policy and governance questions for central banks.

Linking a DLT platform to the central bank payment system, in contrast, has fewer challenges but
also provides fewer benefits. It is simpler from a central bank operational and policy perspective,
but it may limit the functionality and potential provided by the DLT platform. For example, many
Real-Time Gross Settlement (RTGS) systems would not allow atomic multilateral settlement as in
the w-CBDC proof of concept, as they (i) settle transactions sequentially, often including a queuing
mechanism in case of insufficient balances, and (ii) do not allow simultaneous blocking of balances
across multiple parties.

Delivery versus Payment (DvP) is a securities industry settlement method that ensures that
delivery of securities occurs if, and only if, payment occurs. This method is used to enhance the
efficiency and reduce the risk of settling securities transactions.

The Central Securities Depository (CSD) is a facility for holding securities, which enables securities
transactions to be processed by book entry. Physical securities can be immobilized by the
depository, or securities can exist only as electronic records. In the context of CBDCs and DLT,
traditional CSDs could potentially be replaced or complemented by DLT-based systems.

Project Helvetia (pages 7, 17, 19, 22, 26-27)

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3. CBDCs and Technology

API Layer:

An API (Application Programming Interface) layer in a CBDC system provides a set of standardized
functionalities that enable different systems to interoperate. This layer can be ledger-agnostic,
meaning that central bank ledger choices can be abstracted. It can also be application-agnostic,
supporting a broad and diverse range of use cases. The API layer is crucial for the interoperability
and functionality of the CBDC system.

Technology Standardization:

As CBDCs become more prevalent, the need for technology standardization becomes increasingly
important. Standardization in areas such as message formats, data elements, cryptographic
algorithms, and numbering and coding systems can enhance the interoperability and efficiency of
CBDCs. It can also facilitate the integration of CBDCs with existing financial infrastructure and
systems.

Technological Aspect Description

A decentralized database that provides a

Distributed Ledger Technology (DLT)
secure and efficient infrastructure for CBDCs

Provides standardized functionalities for

API Layer
interoperability between different systems

Ensures compatibility and efficiency through

Technology Standardisation standardized message formats, data
elements, cryptographic algorithms, etc.

Project Helvetia (pages 7, 17, 19, 22, 26-27)

Project Rosalind (page 8)

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3. CBDCs and Technology
Unified Ledger and Tokenization:

The unified ledger concept in CBDCs refers to a single, consolidated record-keeping system where
both central bank money and other claims reside. Tokenization is the process of converting rights
to an asset into a digital token on a blockchain. The full benefits of tokenization could be harnessed
in a unified ledger due to the settlement finality that comes from central bank money residing in the
same venue as other claims. A unified ledger enables simultaneous and instantaneous
settlement, enhancing the efficiency and security of transactions.

Tokenization of money and assets has great potential, but initiatives to date have taken place in
silos without access to central bank money and the foundation of trust it provides. A new type of
financial market infrastructure – a unified ledger – could capture the full benefits of tokenization by
combining central bank money, tokenized deposits and tokenized assets on a programmable
platform. As well as improving existing processes through the seamless integration of transactions,
a unified ledger could harness programmability to enable arrangements that are currently not
practicable, thereby expanding the universe of possible economic outcomes. Multiple ledgers –
each with a specific use case – might coexist, interlinked by application programming interfaces
(APIs).

The demands on governance arrangements increase with the scope of the ledger. For example, a
unified ledger for cross-border payments would require seamless interoperability across private
payment service providers (PSPs) and central banks located in various jurisdictions with different
regulatory and supervisory frameworks. It would hence require significant harmonization efforts
across jurisdictions. A ledger of this kind has great potential to enhance the monetary and
financial system.

BIS Annual Economic Report 2023, pages 105-108, 113-116, 124-125

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4. CBDCs and Cross-Border Payments
In our interconnected world, the ability to make seamless cross-border payments is more important
than ever. CBDCs hold significant potential in this area, offering new ways to improve cross-border
settlement systems. In this section, we'll explore how CBDCs could transform the landscape of
cross-border payments.

The traditional system of cross-border payments often involves multiple intermediaries, each with
their own processes and systems. This can lead to inefficiencies, high costs, and long settlement
times. CBDCs, with their digital nature and the potential for programmability, could offer a more
streamlined and efficient solution.

One approach that has been identified and explored in experiments is the deployment of CBDCs in
separate domestic platforms with interoperability linking them. This would allow for the
seamless transfer of CBDCs across borders, reducing the need for intermediaries and potentially
lowering costs and settlement times.

An alternative approach is the creation of a “corridor network” where multiple CBDCs are
combined. In this model, central banks agree on a common governance for the network,
allowing for the efficient transfer of different CBDCs within the network. This could further enhance
the efficiency of cross-border payments, providing a unified platform for the exchange of different
CBDCs.

However, it's important to note that the implementation of CBDCs for cross-border payments is not
without challenges. Issues such as regulatory compliance, security, and interoperability would need
to be addressed. Furthermore, the impact of CBDCs on foreign exchange markets and monetary
sovereignty would need to be carefully considered.

Approach Description

CBDCs are deployed in separate domestic

Separate Domestic Platforms with platforms. Interoperability between these
Interoperability platforms allows for the seamless transfer of
CBDCs across borders.

Multiple CBDCs are combined in a "corridor

network". Central banks agree on a common
Corridor Network governance for the network, allowing for the
efficient transfer of different CBDCs within the
network.

BIS Innovation Hub Project Dunbar:: (Pages: 3, 4, 5, 6, 10, 18, 32, 33)

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5. CBDCs and Financial Stability
The introduction of Central Bank Digital Currencies (CBDCs) into the financial ecosystem is not a
trivial matter. It has the potential to significantly impact various aspects of the financial system,
including financial stability. In this section, we'll explore the potential implications of CBDCs on
financial stability.

Financial stability refers to the resilience of a financial system to shocks and the ability of the
system to smoothly conduct its key operations even in the face of adverse events. It's a crucial
aspect of any financial system, and any new introduction, such as CBDCs, needs to be carefully
evaluated for its impact on financial stability.

One of the key considerations is the potential for CBDCs to alter the dynamics of bank deposits. If
CBDCs are seen as a more attractive option compared to bank deposits, this could potentially lead
to a shift of funds from banks to CBDCs, especially in times of financial stress. This could, in
turn, affect the liquidity and stability of banks.

Another consideration is the impact of CBDCs on the central bank's balance sheet. The issuance of
CBDCs would increase the liabilities of the central bank, which could have implications for its
monetary policy operations.

However, it's important to note that these risks can be managed with careful design and
implementation of CBDCs. For instance, the central bank could limit the amount of CBDCs that
each individual or entity can hold, or it could pay a lower interest rate on CBDCs compared to bank
deposits to make CBDCs less attractive as a store of value.

Furthermore, CBDCs could also have positive effects on financial stability. By providing a risk-
free payment instrument, CBDCs could reduce the risk of payment system failures. They could
also promote competition and innovation in the financial sector, leading to a more resilient and
efficient financial system.

BIS Innovation Project Dunbar:: (Pages: 3, 4, 5, 6, 10, 18, 32, 33)

BIS Innovation Project Jura: (Pages: 5, 9, 10, 12, 18, 21)
BIS Innovation Project Leap: (Pages: 10)

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6. CBDCs and Access Policy
Access policy is a crucial aspect of any financial system, and the introduction of Central Bank
Digital Currencies (CBDCs) brings this issue into sharp focus. In this section, we'll explore the
access policy related to CBDCs and its potential implications.

At present, central bank money is primarily available via settlement accounts to a limited range of
financial entities, mainly banks. This is due to the fact that central bank money settlement is
encouraged or required for systemically important payment and settlement systems. However, the
introduction of CBDCs could potentially change this dynamic.

With CBDCs, the central bank could potentially provide a form of central bank money to a
wider range of entities, or even to the general public. This could democratize access to central
bank money, enhancing financial inclusion and competition.

However, this expanded access also raises several important considerations. For instance, the
central bank would need to manage the risks associated with providing access to a wider range of
entities. This could include credit risk, operational risk, and legal risk, among others.

Furthermore, the central bank would need to ensure that equitable access to central bank money is
maintained, guided by objective criteria. This could involve setting eligibility criteria for access
to CBDCs and establishing mechanisms to monitor and enforce compliance with these criteria.

In the future, as multiple settlement platforms emerge with multiple assets and currencies, central
banks would want to ensure that equitable access to central bank money is maintained. This could
involve issuing CBDCs on several Distributed Ledger Technology (DLT) platforms. However, this
could induce liquidity fragmentation unless it is feasible to seamlessly transfer funds across
systems or platforms.

BIS Innovation Hub Project Dunbar, pages 12, 15, 32,49, 50

BIS Innovation Hub Options for access to and interoperability of CBDCs for cross-border payments,
pages 5, 14, 15, 16, 17, 23, 31, 33

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7. CBDCs and Legal Aspects
The introduction of Central Bank Digital Currencies (CBDCs) into the financial system is not just a
technological or economic issue, but also a legal one. In this section, we'll explore the legal aspects
related to CBDCs and their potential implications.

The legal framework for CBDCs needs to be robust and comprehensive. It needs to cover a wide
range of issues, including but not limited to:

Legal Status of CBDCs:

The legal framework needs to clearly define the status of CBDCs. Are they considered legal
tender? What rights and obligations do CBDC holders have? These are crucial questions that need
to be addressed.

Rights and Obligations of Parties:

The legal framework needs to clearly define the rights and obligations of all parties involved in
CBDC transactions. This includes the central bank, financial intermediaries, and CBDC holders.

Dispute Resolution:

The legal framework needs to provide mechanisms for resolving disputes related to CBDC
transactions. This could involve existing legal mechanisms, or new ones specifically designed for
CBDCs.

Regulatory Compliance:

The legal framework needs to ensure that CBDCs comply with existing financial regulations,
including anti-money laundering (AML) and counter-terrorism financing (CTF) regulations.

One example of a legal framework for CBDCs is the general revision of the People’s Bank of China
Law (draft), which stipulates that Chinese currency includes both physical and digital forms, and
thus confirms the legal tender status of the e-CNY.

However, it's important to note that the legal framework for CBDCs will likely vary from country to
country, depending on the specific legal and regulatory environment.

Project Dunbar: Cross-border payments - a blueprint for the future? (Pages: 13, 16, 21, 29, 53)
Project Inthanon-LionRock: Central bank digital currency (Pages: 12, 13)
Project Leap: A technical perspective (Pages: 14, 21)
Project Polaris: A handbook for offline payments with CBDC (Pages: 14, 15)
Project Jura: (Pages 4, 8, 18, 19, 21, 22, 23)

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8. CBDCs and Financial Inclusion
Financial inclusion, the goal of making financial services accessible and affordable to all individuals
and businesses, is a key objective for many policymakers around the world. Central Bank Digital
Currencies (CBDCs) could play a significant role in advancing this goal. In this section, we'll
explore the potential of CBDCs in promoting financial inclusion.

CBDCs, by their very nature, have the potential to broaden the accessibility of payment
services. As a digital form of central bank money, they can be designed to work both online and
offline, making them accessible to a wide range of users, including those in remote or underserved
areas.

For instance, the e-CNY system, as explored in the BIS Innovation Hub, is designed with financial
inclusion in mind. The system provides fiat money for a large population in various scenarios. Its
offline payment capacity and hardware-based wallets facilitate access for the underbanked
population as well as foreign visitors.

Furthermore, CBDCs could potentially be used to deliver government benefits or stimulus

payments directly to citizens, bypassing traditional banking systems and reducing the time and cost
associated with these transactions.

However, it's important to note that while CBDCs hold significant potential for promoting financial
inclusion, their implementation would need to be carefully managed to ensure that they are
accessible and usable by all, including those with low digital literacy or limited access to
technology.

BIS Innovation Hub Project Rosalind: Pages 12-14

BIS Innovation Hub Project Jura: Pages 21, 29
Impacts of Financial Literacy on Loan Demand of Financially Excluded Households in China

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9. CBDCs and Security
In the digital age, security is of major importance, especially when it comes to financial
transactions. As Central Bank Digital Currencies (CBDCs) are a digital form of central bank money,
their security is a key concern. In this section, we'll explore the security aspects related to CBDCs
and their potential implications.

The security of CBDCs encompasses several aspects, including but not limited to:

Transaction Security:

CBDC transactions need to be secure from fraud and unauthorized access. This could involve the
use of cryptographic techniques to secure transactions and verify the identity of parties involved in
a transaction.

System Security:

The systems used to issue and manage CBDCs need to be secure from cyber threats. This could
involve the use of secure hardware and software, as well as robust security protocols and
practices.

Data Security:

The data associated with CBDCs, including transaction data and personal data of CBDC holders,
needs to be secure. This could involve the use of encryption and other data protection techniques.

Operational Security:

The operations involved in the issuance and management of CBDCs need to be secure. This could
involve the use of secure operational practices and controls, as well as contingency plans for
dealing with operational disruptions.

However, it's important to note that while security is a key concern, it needs to be balanced with
other considerations, such as usability and accessibility. A CBDC system that is highly secure but
difficult to use may not be successful in achieving widespread adoption.

BIS Annual Economic Report 2023: Pages 108-109

BIS Innovation Hub Project Inthanon-LionRock (page 19)
BIS Innovation Project Leap: (pages 16, 17, 31)

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10. CBDCs and Privacy
Privacy is a fundamental right and a key concern for many individuals, especially when it comes to
financial transactions. As Central Bank Digital Currencies (CBDCs) are a digital form of central
bank money, their impact on privacy is a critical issue. In this section, we'll explore the privacy
aspects related to CBDCs and their potential implications.

The design of CBDCs would need to consider issues of privacy. This would involve balancing the
need for transparency and security with the need to protect users' personal information. The
challenge lies in ensuring that CBDCs provide sufficient privacy to users, while also preventing illicit
activities such as money laundering and terrorist financing.

For instance, the e-CNY system, as explored in the BIS Innovation Hub Inthanon-LionRock, is
designed with privacy in mind. The system adopts a "managed anonymity" approach, where the
identity of users is known to the central bank but not to the public or other parties. This approach
allows for the protection of users' privacy while also enabling the central bank to monitor
transactions for illicit activities.

However, it's important to note that the level of privacy provided by CBDCs can vary depending on
the specific design and implementation of the CBDC system. Furthermore, the privacy implications
of CBDCs would need to be carefully managed in accordance with local laws and regulations, as
well as international standards.

Furthermore, Project Leap has highlighted the potential threat of quantum computing to the
privacy and security of CBDC systems. Quantum computers, once operational, could break current
cryptographic protocols, posing a significant risk to the confidentiality of data in CBDC systems.
This threat is particularly concerning for data that must be kept secure and private for more than 10
years, as these data could be harvested now and decrypted later when quantum computers
become powerful enough.

To mitigate this risk, Project Leap has explored the implementation of post-quantum
cryptography, which is resistant to quantum computer attacks. The project demonstrated that
post-quantum cryptography is compatible with the use of public networks and can be integrated
into current cryptographic systems. However, the transition to post-quantum cryptography will be a
major undertaking, requiring a strategic and long-term quantum roadmap. This includes identifying
and inventorying the systems that are vulnerable to quantum computer attacks, replacing
vulnerable cryptographic schemes with new quantum-safe cryptographic protocols, and adapting to
the way data are protected under these new protocols .

Project Polaris: (Pages: 16, 17, 20, 64, 66, 67, 68, 108, 109)

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10. CBDCs and Privacy

The project also emphasized the importance of cryptographic agility, which is the ability to switch
between cryptographic schemes and algorithms without affecting the applications. This will be
crucial in the transition to quantum-resistant encryption, especially since the new quantum-resistant
cryptographic standards are still under discussion.

In terms of privacy, a trade-off between security and performance may be necessary for
applications where performance is critical, such as instant payment applications or CBDC systems.
The level of security can be adapted to different central bank processes, offering enough
flexibility for hybridization.

Project Polaris: (Pages: 16, 17, 20, 64, 66, 67, 68, 108, 109)

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11. CBDCs and Innovation
Central Bank Digital Currencies (CBDCs) are not just a new form of money, but also a platform for
innovation. They have the potential to spur new developments in payment systems, financial
services, and even broader economic activities. In this section, we'll explore the innovative aspects
related to CBDCs and their potential implications.

Offline Payments:

CBDCs could potentially enable offline payments as we saw in chapter 8, which could be vital for
financial inclusion and resilience. Offline payments with CBDCs could work both online and offline,
making them accessible to a wide range of users, including those in remote or underserved areas.
However, implementing offline functionality is complex, involving several technology, security, and
operational considerations.

Multiple Ways to Pay:

CBDCs could support multiple ways to pay, enhancing accessibility and usability. For example,
purely smartphone-based solutions may not be accessible to all potential users who may instead
use cards or feature phones.

Innovation in Payment Solutions:

The introduction of CBDCs could spur innovation in payment solutions. However, for any solution
to be adopted, it is essential that all parties in the distribution chain be competitively incentivized to
promote and manage the solution.

Civil Contingency:

CBDCs could potentially function in situations where established infrastructure and network
connectivity are unavailable for a prolonged period of time, such as cyber attacks, natural
disasters, or conflicts. In these civil contingency scenarios, the ability to pay with CBDC when
offline could allow the payments ecosystem to continue to function where other electronic payment
methods would be unable to operate.

Trust:

Supporting an offline payment capability could foster citizens’ trust in the CBDC system as a whole
if it works whenever and wherever they need it to, whether online or offline, and therefore can be
trusted to be reliable and available.

BIS Handbook for Offline Payments with CBDC (pages 13, 16, 21, 26, 28, 70, 73, 88, 89, 102,
103, 118, 119)
Project Polaris: (Pages: 13, 16, 21, 26, 28, 70, 73, 88, 89, 102, 103, 118, 119)

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12. CBDCs and Economic Stability
The introduction of Central Bank Digital Currencies (CBDCs) into the financial system could have
significant implications for economic stability. In this section, we'll explore the potential impact of
CBDCs on economic stability.

Resilience:

CBDCs could potentially enhance the resilience of the financial system. For instance, the ability to
make offline payments with CBDCs could be particularly beneficial in situations where established
infrastructure and network connectivity are unavailable for a prolonged period of time, such as
during cyber attacks, natural disasters, or conflicts. In these scenarios, the ability to pay with
CBDCs when offline could allow the payments ecosystem to continue to function where other
electronic payment methods would be unable to operate. This resilience could prove crucial in
maintaining economic stability during times of crisis.

Inclusion:

CBDCs could support financial inclusion, which is a key aspect of economic stability. By providing a
form of digital money that is accessible to all, including those who are currently unbanked or
underbanked, CBDCs could help to promote economic participation and stability. For instance, the
e-CNY system is designed with financial inclusion in mind, providing fiat money for a large
population in various scenarios. Its offline payment capacity and hardware-based wallets facilitate
access for the underbanked population as well as foreign visitors.

Efficiency in Cross-Border Payments:

CBDCs could potentially improve the efficiency of cross-border payments, which is a critical aspect
of global economic stability. By enabling direct transfers between parties in different countries,
CBDCs could reduce the time and cost associated with cross-border payments, thereby enhancing
economic efficiency. The G20 has endorsed an ambitious roadmap to enhance cross-border
payments around the world, and CBDCs are a focus area of this roadmap.

Innovation:

The introduction of CBDCs could spur innovation in the financial sector, leading to the development
of new financial products and services, or new business models. This could enhance the dynamism
and resilience of the financial sector, thereby contributing to economic stability. For example, the e-
CNY system facilitates the ecosystem to explore innovative use cases such as real-time direct
government-to-citizen payments for citizens’ services such as tax refunds, healthcare support,
childcare funding, and stimulus payments.

BIS Handbook for Offline Payments with CBDC (pages 13, 20, 21, 73, 75, 76, 77, 78, 79, 101, 102, 103, 104)
BIS Innovation Hub Project Dunbar (pages 5, 18, 32, 33, 34, 36, 47).

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12. CBDCs and Economic Stability
However, it's important to note that while CBDCs have the potential to enhance economic stability,
their implementation would need to be carefully managed to ensure that they do not introduce new
risks or vulnerabilities into the financial system. For instance, a common multi-CBDC platform
may be more likely to be implemented as a series of regional platforms rather than as a single
global platform. This naturally leads to considerations around how it may be possible to connect
these individual regional platforms to realize synergies such that participants transact directly
across jurisdictions, including via the lower-volume corridors.

Capabilities and considerations for a multi-CBDC common platform

BIS Handbook for Offline Payments with CBDC (pages 13, 20, 21, 73, 75, 76, 77, 78, 79, 101, 102, 103, 104)
BIS Innovation Hub Project Dunbar (pages 5, 18, 32, 33, 34, 36, 47).

Central Bank Digital Currencies (CBDCs): A

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Conclusion

The exploration of Central Bank Digital Currencies (CBDCs) represents a significant step forward
in the evolution of money. As we have seen in this report, the potential benefits of CBDCs are
manifold, ranging from increased efficiency in payments, enhanced financial inclusion, improved
cross-border transactions, to the potential for fostering innovation in the financial sector.

However, the journey towards the widespread adoption of CBDCs is not without challenges. The
design and implementation of CBDCs need to balance a range of considerations, including but not
limited to, efficiency, security, privacy, and inclusivity. The legal and regulatory frameworks need to
be robust and comprehensive, covering a wide array of issues such as the legal status of CBDCs,
the rights and obligations of parties, dispute resolution, and regulatory compliance.

Moreover, the potential implications of CBDCs on financial stability cannot be overlooked. The
introduction of CBDCs could alter the dynamics of bank deposits and have an impact on the
central bank's balance sheet. Therefore, careful management and regulation are required to ensure
that CBDCs do not introduce new risks or vulnerabilities into the financial system.

As we look to the future, the landscape of CBDCs is likely to continue evolving. Central banks
around the world are in various stages of CBDC exploration and experimentation, and we can
expect to see further developments and insights in this exciting area of financial innovation.

The journey of CBDCs is just beginning, and the road ahead is filled with opportunities for learning,
innovation, and growth. As we navigate this path, it is crucial to keep in mind the ultimate goal: to
create a financial system that is more efficient, inclusive, and resilient, serving the needs of all
members of society.

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 References

1.Bank for International Settlements. (2023). Annual Economic Report 2023. Retrieved from
https://www.bis.org/publ/arpdf/ar2023e.pdf
2.Bank for International Settlements. (2023). Project Rosalind: The macroeconomics of central bank
digital currency. Retrieved from https://www.bis.org/publ/othp69.pdf
3.Bank for International Settlements. (2023). Central bank digital currencies: foundational principles
and core features. Retrieved from https://www.bis.org/publ/othp33.pdf
4.Bank for International Settlements. (2023). Project Dunbar: Cross-border payments - a blueprint for
the future? Retrieved from https://www.bis.org/publ/othp47.pdf
5.Bank for International Settlements. (2023). Project Polaris: A handbook for offline payments with
CBDC. Retrieved from https://www.bis.org/publ/othp64.pdf
6.Bank for International Settlements. (2023). Project Leap: A technical perspective. Retrieved from
https://www.bis.org/publ/othp67.pdf
7.Bank for International Settlements. (2023). Project Jura: Cross-border payments - a vision for the
future? Retrieved from https://www.bis.org/publ/othp44.pdf
8.Bank for International Settlements. (2023). Project Inthanon-LionRock: Central bank digital
currency. Retrieved from https://www.bis.org/publ/othp40.pdf
9.Bank for International Settlements. (2023). Options for access to and interoperability of CBDCs for
cross-border payments. Retrieved from https://www.bis.org/publ/othp52.pdf
10.Bank for International Settlements. (2023). Project Helvetia. Retrieved from
https://www.bis.org/publ/othp35.pdf

This report is prepared by the author independently and is not affiliated with, endorsed by, or
sponsored by the Bank for International Settlements (BIS) or any other organization. The views and
opinions expressed in this report are those of the author and do not necessarily reflect the official
policy or position of the BIS or any other organization.

The information provided in this report is for general informational purposes only. While the author
has made every effort to ensure the accuracy of the information contained in this report, the author
assumes no responsibility for errors or omissions, or for the results obtained from the use of this
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accuracy, timeliness or of the results obtained from the use of this information.

This report is not intended to be and should not be used as a substitute for professional advice.
Readers should consult with a qualified professional for advice regarding specific needs or concerns.

The author does not endorse any specific product, service, manufacturer, company, or brand
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© 2023 Hugo Garin All rights reserved.

No part of this report may be reproduced, distributed, or transmitted in any form or by any means,
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