A Proposal for a Minimally Invasive Retail Central Bank Digital Currency (CBDC)

The concept of a Central Bank Digital Currency (CBDC) is an innovation whose time appears to have come. Many Central Banks (CBs) are considering whether or not to develop such a ‘digital currency’ and, if so, how precisely to best implement systems and processes to manage such an innovation. There is a common understanding that the core role of any CBDC is to give citizens access to ‘Central Bank Money’, which, as a ‘liability’ of a Central Bank is the safest money that a citizen can hold, but beyond that there is a lack of agreement on exactly which other attributes a CBDC should have.Numerous models for implementation of a ‘retail’ CBDC have been proposed but as yet (end-2021) no clear favourite model has emerged. What has become apparent, in these sometimes-feverish discussions, however, is that implementation of any CBDC will be far from a trivial exercise and some of the models proposed will involve considerable changes to existing banking systems and processes and hence significant operational risks. This situation is complicated by the fact that no clear business case has emerged yet for implementing such a ‘parallel’ currency. As part of the discussion of this problem, the Bank for International Settlements (BIS) has called for discussions of possible models, that involve ‘Minimally Invasive Technology’. This paper addresses that call by proposing a solution that is based on existing proven technologies, processes and well-established financial products. The aim of the proposed solution is to provide citizens with access to CBDC but also to do so in a way that: increases financial inclusion; manages the difficult trade-off between preserving citizens’ privacy yet protecting society from money laundering and fraud; allows flexibility in implementation; and minimises and implementation and operational risks.By reimagining how a Central Bank implements its ‘promise to pay bearer’ promise, the overall solution becomes simpler, and at the highest level becomes a relatively simple accounting problem, as to how to reflect changes in Central Bank liabilities resulting from ‘issuing’ a retail CBDC