The difficulty of designing a CBDC - icoinic
Andy Wong - Fundamental Analyst - Icoinic B.V.
Andy Wong

The Bank of International Settlements (BIS) and a group of seven central banks, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Banks released a report on Central Banks Digital Currencies (CBDCs). The report outlined the feasibility of CBDCs. It discussed the motivations, challenges, and risks of designing a CBDC, and actually putting it in action.

Core principles

The seven banks and the BIS described the core principles a CBDC, and a normal currency should adhere to. It should not compromise monetary or financial stability, it would need to coexist with and complement existing forms of money, and finally, it should promote innovation and efficiency. 

With these core principles, the group identified features that must be included in the CBDC as a system and in the CBDC as an instrument.

Features for the instrument

The instrument, a currency, needs to be 1) convertible, it should exchange at par with cash and private money. 2) Convenient, it has to be as easy to use as cash, which means it needs to be 3) accepted and available at all times, where users will need to have the ability to make offline transactions. And finally, it should have a 4) low cost or very low cost to use it.

Features for the system

The system as a whole had different features that need to be considered. With the most important ones being 1) secure and resilient, the system has to be resistant to cyber-attacks and needs to function even after geographical or geopolitical disruptions which could lead to operational failures. 2) Instant, the settlement needs to be instant or near-instant. Building on top of the first feature, the system has to be 3) available at all times, each user should be able to make transactions 24/7/365. Needless to say, with the advancement of technology everything can be bought online, and with the lingering pandemic more and more people are sheltering at home and ordering their needs online which would make 5) throughput increasingly important, the system needs to process a very high number of transactions. 6) Interoperable, besides the ease of use, the system needs to allow for easy flow of funds between different systems. 7) Flexibility and adaptiveness, as more changes will come, the system needs to be prepared for said changes and need to adapt to changing conditions.

The features outlined are incredibly difficult to realize. Besides needing the features described for the instrument and the system. The group also discussed the needs for institutional features, a robust legal framework will have to be established before a CBDC can work. A central bank should have clear authority underpinning the issuance of CBDCs. Besides the framework, CBDCS will need to conform to the appropriate regulatory standards of each jurisdiction.

Motivation and Challenges

Central banks focus on research and development of a CBDC for a multitude of reasons. One reason is providing a CBDC for payments that will enable broad access to central bank money. Currently, cash serves as a backup payment method to electronic payments if those networks cease to function. About 30% of the transactions done are still by cash. However, with the Corona crisis, a cashless society is on the rise. And if access to cash is marginalized, the value of cash as a backup payment method will diminish. In this case, a CBDC could act as an additional payment method. 


Compared to cash a CBDC could be easier to use and distribute in remote areas and during natural disasters. However, significant development has to be made for offline capabilities of the system. 

Counterfeiting and cyber risk

A common threat among CBDCs will be the risk of counterfeiting and cyber risk. At the moment cash has sophisticated anti-counterfeiting features and large-scale issues rarely occur. On paper, it is possible to attack the CBDC system, with immeasurable damages that come along, which could threaten the confidence of the wider system as a whole. 

Financial Inclusion

By creating a CBDC, a broad portion of the population will have easy access to electronic money and could make transactions with ease. However, the increase in digitalization might create potential barriers to entry for those living on the fringes of society. Aspects like digital literacy, access to IT and privacy concerns might exclude a section of the population.

Key trade-offs

It is inevitable that a CBDC and its underlying system will need to make design decisions regarding scalability and security. Stronger security will add extra processing time, which is true for any system. 

Another key trade-off is the decision of whether or not a CBDC is interest-bearing. A non-interest-bearing CBDC might lead to the extinction of cash, which can conflict with multiple core principles. However, if a CBDC is interest-bearing a negative interest rate could compensate for the threat of extinction of cash.

A different trade-off would be about user convenience. If the system would allow offline peer-to-peer payments transactions to happen, additional safeguards would be required to counter the risk of fraud. However, security features and centralized control are more difficult to implement in distributed systems. One would have to use a centralized ledger with a cap on offline transactions to prevent the risk of fraud. But in the event of a prolonged operational problem, it would reduce the resilience of the system.


While CBDCs might simplify the ease of transactions, still a lot of development is needed to put a system in place that will adhere to the core principles as outlined in the report. The motivations and challenges described in this article are just the tip of the iceberg. There are many more aspects to think of and have not been thought of yet. Further research is needed to paint a clear picture of the pros and cons of issuing a CBDC. As of now, the only government that is actively developing and implementing a CBDC is the People’s Republic of China. The group of seven and the BIS are currently not working on the issuance of a CBDC.

Luc Correia Cabrito