Central bank digital currencies:

foundational principles and core features

Executive Background

paper In January 2020 governors tasked this group with sharing

and developing our analysis of central bank digital currency
(CBDC). Safeguarding public trust in money, maintaining price
stability, and ensuring resilient payments infrastructure are
among the core means through which central banks support
public welfare. Central banks' interest in CBDC has increased as
a potential means of delivering their public policy objectives.
Profound, ongoing changes across finance, technology and
Bank of Canada society, as well as the ongoing Covid-19 crisis, provide
European Central Bank additional impetus for research and experimentation related to
CBDC.
Bank of Japan This report focuses on a publicly available “general
purpose” CBDC (a digital payment instrument, denominated in
Sveriges Riksbank the national unit of account, that is a direct liability of the central
bank). A “wholesale” CBDC, restricted to financial institutions, is
Swiss National Bank
also an active area of exploration for central banks but one that
Bank of England carries different opportunities, challenges and risks. The report
explores the use cases for, and challenges and opportunities
Board of Governors Federal Reserve System arising from, the possible issuance of a general purpose CBDC. It
is an exploration and does not imply that the central banks in
Bank for International Settlements this group are actively considering issuance.
Key messages

CBDC issuance and design is a sovereign decision for each jurisdiction based on an assessment of
how CBDC could support public policy objectives through the provision of a safe means of payment.
Central banks’ common mandates for stability mean that any CBDC would represent an evolution of their
current functions, within existing mandates. Diversity in use cases, existing financial and economic
structures and legal frameworks mean that CBDC designs will vary. Notably, monetary policy is a national
issue driven by national context. The monetary policy implications of CBDC are not the focus of this report
but are an area of continuing research for central banks.
This group has outlined “foundational principles” and “core features” of a CBDC, which
recognise the points above, to guide exploration and support public policy objectives (Table 1).
Given this agreement, there is considerable common ground for future international collaboration,
knowledge-sharing and experimentation. These principles emphasise that, in order for any jurisdiction to
consider proceeding with a CBDC, certain criteria would have to be satisfied. Specifically, authorities would
first need to be confident that issuance would not compromise monetary or financial stability and that a
CBDC could coexist with and complement existing forms of money, promoting innovation and efficiency.
A CBDC robustly meeting these criteria and delivering the features set out by this group
could be an important instrument for central banks to deliver their public policy objectives.
A CBDC could promote more resilient, efficient, inclusive and innovative payments,
depending on jurisdictional circumstances and if risks are effectively overcome. In jurisdictions where cash
use is declining and digitalisation is increasing, CBDC could also play an important role in maintaining
access to, and expanding the utility of, central bank money. A convenient and accessible CBDC can
also serve as an alternative to potentially unsafe forms of private money. Furthermore, all the central banks
who have contributed to this work remain committed to providing and supporting access to cash.
The potential financial stability implications of CBDC need to be considered carefully. There
are two main concerns: first that, in times of financial crisis, the existence of a CBDC could enable larger
and faster bank runs; and second, and more generally, that a shift from retail deposits into CBDC
(“disintermediation”) could lead banks to rely on more expensive and less stable sources of funding. These
risks are inherent in making a safe central bank money available to the public (a central purpose of a CBDC)
and are already present with the existence of cash, although a CBDC could bring new structural challenges.
Before launching a CBDC, a central bank would need to make an informed judgment that risks were
identified and would remain manageable. This could require an appropriate combination of safeguards
incorporated in the economic and functional design of the CBDC and financial system policies more
generally. The intent would be to allow public and robust private money to continue to coexist, including
through convertibility and interoperability. This group plans further work in this area.
CBDC issuance has cross-border implications. Unintentional barriers to transfers between
CBDCs could be avoided from the outset through international collaboration. The G20 roadmap on cross-
border payments will include work on factoring an international dimension into CBDC designs. The
contributing central banks and BIS will all play an active role in this collaboration.
Further development requires a continued and deepened shift in commitment towards
practical policy analysis and applied technical experimentation. This shift has already begun, yet the
speed of innovation in (payments and money-related) technologies requires collaborative
experimentation to be further prioritised.

Central bank digital currencies: foundational principles and core features 1

Opportunities and risks

For the central banks contributing to this report, a common motivation for exploring CBDC is its
use as a means of payment. Providing trusted money is a core way in which central banks deliver their
mission and support wider public policy objectives. A decline in the use of cash for transactional purposes
(as experienced by several members of this group) could challenge public access to central bank money
and raise concerns about financial inclusion and rights to privacy. Even in jurisdictions in which cash
continues to be used frequently, a CBDC could support a more resilient and diverse domestic payment
system.
CBDC may offer opportunities that are not possible with cash. A convenient and accessible
CBDC could serve as an alternative to potentially unsafe forms of private money, offer users privacy, reduce
illegal activity, facilitate fiscal transfers and/or enable “programmable money”. Yet these opportunities may
involve trade-offs and unless these have a bearing on a central bank’s mandate (eg through threatening
confidence in the currency), they will be secondary motivations for central banks.
Introducing a CBDC could have financial stability implications that would need to be
assessed and managed carefully. These include first, the potential for digital bank runs in times of
stress and second, longer-term consequences for bank funding. While system-wide bank runs into
cash are now very rare, given deposit insurance and bank resolution frameworks, there is the possibility
that a widely available CBDC could make these events more frequent and severe, by enabling “digital runs”
towards the central bank with greater speed and scale than is possible with cash. The second set of
concerns is that the introduction of a CBDC could erode banks’ retail deposits, resulting in a less stable
funding mix. Any assessment of the materiality of these sources of financial stability risk, and the
effectiveness of possible mitigants, would depend on the specific design of a CBDC and the structure of
the financial system in which it might exist. Given designs and systems will differ by jurisdiction, so will the
broad financial system structural effects and risks, which will require significant research by a central bank
to completely understand. Further research into the implications of CBDC for financial stability, and the
possible safeguards and mitigants that might be put in place, will be a priority for this group.

Principles and features

The central banks contributing to this report agree on the foundational principles that will guide
CBDC exploration. Those are that a CBDC should: (i) “do no harm” to monetary and financial stability; (ii)
coexist with cash and other types of money in a flexible and innovative payment ecosystem; and (iii)
promote broader innovation and efficiency.
Based on these three principles, there is considerable common ground amongst the central
banks in this group on the core features of any future CBDC system. It must be resilient and secure to
maintain operational integrity. To provide utility to users, a CBDC must be convenient and available at very
low or no cost to end users. Furthermore, the CBDC system should have an appropriate role for the private
sector and be set up to promote competition and innovation. A clear legal framework must underpin the
system. Table 1 outlines these principles and core features in further detail.

Design and technology

Developing a CBDC with the core features outlined in Table 1 requires central banks and other
public authorities to make design choices and decide on related trade-offs. There will be no “one size

2 Central bank digital currencies: foundational principles and core features

fits all” CBDC; national priorities and domestic circumstances will determine designs. Key options and
trade-offs are set out in Table 2. Further collaborative research on technology options can help identify
the merits of alternative approaches. Specifically, work could focus on balancing privacy and combating
illegal activity; security and availability; resilience and interoperability; universal access and costs; and
programmability and system performance.

International cooperation

Central bank innovation is an opportunity for cooperation. Simultaneous research and exploration
of CBDC by central banks could inform ways to improve cross-border payments, as part of the G20
roadmap. This opportunity was acknowledged by the CPMI as one of 19 building blocks for improving
cross-border payments (CPMI (2020)). 1 Specifically, building block 19 focuses on factoring in an
international dimension should central banks decide to design a domestic CBDC for their respective
jurisdictions.
The potential for cross-border interoperability should be considered by central banks from
the outset of research on CBDC (focusing on broad harmonisation and compatibility between
currencies to encourage safe and efficient transfers). The central banks in this group are therefore
committed to coordinating as we move forward with our own domestic choices, exploring practical issues
and challenges.

Next steps

A CBDC could be an important instrument for central banks to fulfil their public policy objectives
and to evolve in step with the wider digitalisation of people’s day-to-day lives. Public trust in central
banks is central to monetary and financial stability and the provision of the public good of a common unit
of account. To maintain that trust and understand if a CBDC has value, a central bank should proceed
cautiously, openly and collaboratively.
Further development requires a continued and deepened shift in commitment towards practical
policy analysis and applied technical experimentation. This shift has already begun, yet the speed of
innovation in (payments and money-related) technologies requires collaborative experimentation to be
further prioritised. To further mutual understanding, we propose:
1. This group of central banks, together with the BIS, will continue to work actively and
collaboratively on CBDC, without prejudging any decision whether or not to introduce CBDC in
our jurisdictions. We will further explore:
a. the practical implications of the core features set out in this report while advancing our
understanding around other open questions (eg the trade-offs in CBDC designs that
aim to mitigate financial stability risks); and
b. practical issues and challenges for cross-border transfer of domestic CBDC;

1 Committee on Payments and Market Infrastructures, Enhancing cross-border payments: building blocks of a global roadmap,
July 2020.

Central bank digital currencies: foundational principles and core features 3

 and contribute to these international workstreams. In particular, we support the G20 roadmap on
cross-border payments and subsequent work on building block 19 on CBDC (“factor an
international dimension into CBDC designs”), led by the CPMI and the BIS.
2. We invite the BIS to continue promoting information-sharing and collaboration between central
banks on CBDC research.
3. We invite the BIS Innovation Hub to explore further technological experiments that could support
our work and we support their plans to explore the technologies that could enable
interoperability and cross-border transactions between domestic CBDCs.
4. This group of central banks will continue domestic outreach efforts to foster an open and
informed dialogue on CBDC in our jurisdictions. We will provide domestic stakeholders with
opportunities to participate in this dialogue. We will reach out to other central banks, including
in developing economies, and to international organisations.

Foundational principles and core CBDC features Table 1

Foundational principles

There are three common guiding principles for central banks’ consideration of CBDC issuance that flow from their
mandates.

4 Central bank digital currencies: foundational principles and core features

 Core features

Meeting the basic principles requires a CBDC to have certain core features covering the CBDC instrument, the
underlying system and the broader institutional framework in which they exist.

Central bank digital currencies: foundational principles and core features 5

 Summary - key design and technology decisions Table 2

Controls design

Interest-bearing Two fundamental and complementary design features for a CBDC are whether and how to make
and limits/caps it interest-bearing and to impose a cap or limit on individual holdings. CPMI-MC (2018) explored
the implications of these choices, noting that interest could play a role in controlling demand for
CBDC and facilitate pass-through of interest rate decisions.* Yet designing a “deposit-like” CBDC
could hasten any disintermediation of existing deposit takers. Limits could mitigate the financial
stability impact of such disintermediation, including by impeding a possible “run to CBDC” during
a crisis, but they would also limit the effectiveness of making a CBDC interest-bearing and come
with a wider set of potential drawbacks. Understanding of the interactions between these design
features and the potential trade-offs involved is in its relatively early stages. A central bank should
have robust means to mitigate any risks to financial stability before any CBDC is issued.

Technical design

Ledger design The design of a transaction ledger has implications for the governance structure of a CBDC
ecosystem as well as how competition and innovation will take place within it. A ledger could be
centralised, decentralised (eg through use of distributed ledger technology) or a combination.
Ledger functionality and access will hinge on ledger designs and how payments are authenticated.
Ledger The functionality of the ledger will determine the basic functions available for all payments and
functionality therefore constitutes an important policy choice. More sophistication (eg enabling synchronised
payments) could drive initial adoption but also increase costs and limit differentiation between
service providers, depending on other design choices.
Ledger access Deciding on the access requirements, for example which entities can read (ie provide supporting
services) and write (ie settle payments) on the ledger will have a bearing on the safety and
efficiency of the entire ecosystem. A balance will need to be struck between encouraging diversity
and competition within the ecosystem, and maintaining sufficient regulatory standards for private
service providers. A service role for public sector entities (and potentially the central bank) will
need to cohere with the wider ecosystem.
Authentication Payment authentication designs (eg identity-based, token-based or multifactor) will have a
requirements significant bearing on the underlying data structure of a CBDC system and consequently its
integration with others (eg for digital identity verification as part of KYC or transaction monitoring
requirements). How payments are authenticated will also be driven by the level of privacy afforded
to users within compliance with the law (eg for anti-money laundering).
Transfer and A token-based CBDC could be stored on a physical device (eg a smartphone or card). A payment
storage would represent a movement of this local “store of value” and would not require an intermediary.
A payment using an account-based CBDC would be a transfer of the rights or liability (as for
traditional bank accounts), requiring an intermediary to process the payment. Hybrid
arrangements could exist but their complexity could create a significant burden on the functioning
of a system. A token-based system could make a CBDC more amenable to offline use (ie when
connectivity to the ledger is not available), which is a core feature of a CBDC. However, this
functionality may give rise to fraud and other security risks (which could require caps on the
number or value of offline transactions permitted).
Governance A CBDC system will require a rulebook formalising the roles and responsibilities of the operator(s),
participants and potentially other service providers and stakeholders. Beyond the rulebook, other
governance arrangements will also need to be considered (eg clarifying a central bank’s discretion
in modifying elements of the system, how data-sharing and privacy will be structured and the
organisation of any interoperability arrangements).
Incentive design
CBDC funding Issuing a CBDC will require capital expenditure and impose running costs. Deciding who should
pay will have implications for ecosystem efficiency, competition, innovation and inclusiveness.
Directly recovering costs from the public users would be transparent but could be a disincentive
to adoption. Charging service providers will require them to have a viable business model to
recover their costs. Public subsidies could reduce or eliminate the need for charges but could
impact private payment providers.

6 Central bank digital currencies: foundational principles and core features

 Intermediary How and where private sector intermediaries in a CBDC system can generate revenue will have a
business models significant impact on competition, innovation and privacy within the system. Decisions will be
required on whether all costs are transparently charged through fees (and whether these are borne
by merchants, users or both) or if some subsidisation through public funding, private cross-
subsidy or allowing access to consumer data is permitted.
Design and technology trade-offs
Security/ offline There may be a desire for a CBDC to enable users to settle transactions peer-to-peer, similarly to
transactions banknotes. This heightens the need for fraud protection and other security features. Depending
on the features, the number or value of transactions permitted offline could be capped (before
being reset by a verified online transaction).
Cost of service Banknotes create the same user experience for all users. CBDC, assuming multiple devices are
provision/ available, can create differing experiences. For example, smartphone users will have greater
universal access functionality than those with stored value cards. Active dedicated devices can close that gap, albeit
at a higher cost.
Privacy/ Privacy is designed to hide information and compliance to reveal it as required. A combination of
compliance cryptography and operational or institutional arrangements may enable both features and satisfy
users that privacy is well preserved. As an example, multiple agencies could hold fragments of
decryption keys that are only brought together after due process to reveal information.
Privacy/ capacity Privacy techniques that are computationally demanding may be costly and impose limits on a
and scalability system’s capacity and scalability.
Programmability/ Heavy use of programmable functions will require a higher level of technical performance from
performance the system, adding costs or reducing operational resilience.
* Committee on Payments and Market Infrastructures and Markets Committee, Central bank digital currencies, March 2018.

Central bank digital currencies: foundational principles and core features 7