The growth of private-sector digital currencies combined with a reduction in everyday use of cash opens up new opportunities, and risks, for central banks. In response, many countries are researching the possibility of launching a central bank digital currency, or CBDC, for retail purposes. They are considering many different approaches and designs, given their different needs and situations. However, the wrong design could lead to an inadequate system or have an unintended negative impact on the financial services industry.

Developing a successful CBDC is a complex undertaking given the interdependencies between policy and technology choices, as well as potential market impacts. And a CBDC may not even be the right solution. With that in mind, the Oliver Wyman Forum in partnership with Amazon Web Services (AWS) is issuing a white paper, Central Bank Digital Currency: From Vision to Design. We don’t make any recommendation as to whether a central bank should introduce a CBDC. Instead, we propose a framework to support policy makers as they mesh policy and technology choices and consider market impacts.

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This framework contains several key recommendations including:

•             Set a clear vision for the goals a CBDC would be designed to achieve through active engagement with the public, government, and stakeholders in the financial system

•             Evaluate technology solutions for their ability to fulfill those objectives

•             Understand how a CBDC may impact competition in financial services, recognizing that digital ecosystems are prone to network effects

•             Learn from the private sector, including financial institutions, international merchants, and cloud providers that can provide insight into cutting-edge innovations and best practices in developing and maintaining critical financial systems

•             Experiment to gain knowledge and inform choices throughout the process, and build in a capacity to continue innovating after any launch

From Vision to Design: A CBDC Strategy Framework

CBDCs have been proposed as a solution to a wide range of policy challenges, including a declining use of cash, financial exclusion and distribution of humanitarian aid, a perceived need for faster payment processes, and challenges arising from the increasing popularity of private currencies, among others. No system will be the best possible means of addressing all potential goals.

That’s why it’s critical for central banks to define a clear vision at the outset with at least a broad prioritization of objectives. They should flesh out the details of that vision with some key design principles, including the approach to privacy and individual protections and the division of roles and responsibilities between the public and private sector.

Considering the stakes involved in creating a digital currency, central banks should encourage broad public debate and engage actively with government and institutions that may play a role in a new CBDC system or be affected by it. Those consultations can help policy makers reach decisions on three key trade-offs: providing anonymity versus centralized identity-based services, allowing more individual self-reliance versus a reliance on distributors, and maintaining centralized versus distributed control.

Once they have thought through those trade-offs, central banks need to explore the technology solutions that can best meet their objectives. We identify three key technical design choices that need to be specified early in the design process: system management, which governs the operation of the core ledger and processing technology; wallet and account management, which covers how accounts are created and end users access their funds; and identity management, which governs what information about individuals is collected and made available, and to whom. In all three areas, policy makers have a spectrum of options offering varying degrees of centralization or decentralization, individual control, and privacy.

Range of Technical Design Choices

Finally, policy makers should evaluate the market incentives embedded in any planned CBDC. The policy and technology choices they make will determine what functions various actors can perform, how information flows, and how service providers gain access to the CBDC system. Those factors will produce different competitive dynamics and data-driven network effects. Central banks should include the private sector as a key participant in analyzing what incentives and business models will create the conditions for innovation and competition in financial services while best enabling the system’s maintenance, resilience, and continued enhancement.

Launching a CBDC is a multi-year effort that requires close cooperation between policy makers, technology teams, and all impacted stakeholders. There are likely to be many points at which various countries decide to continue, or not, toward a launch. Research, experimentation, and collaboration along the way can ensure that if a central bank decides to launch, it will have a well-designed, policy-driven CBDC system.