Central Bank Digital Currencies A Critical Review - SSRN-id4354985

Central Bank Digital Currencies: A Critical Review
Lambis Dionysopoulosa,∗, Miriam Marrab , Andrew Urquhartc

a
ICMA Centre, Henley Business School, University of Reading, Reading, UK
b
c
Abstract
This thematic literature survey offers a comprehensive understanding of the key aspects and
implications of central bank digital currencies (CBDCs) as a rapidly evolving area of academic and
policy research. We review in depth the key discussion around motivations for the introduction
of CBDCs and their design (looking at options of availability, provision, access, and supporting
infrastructure). In addition, we review studies and arguments laid out on the implications that the
introduction of CBDC may have for monetary policy and financial stability. Finally, we identify
sub-areas of CBDC research that need further investigation in future research.
∗
Corresponding author
Email addresses: [email protected] (Lambis Dionysopoulos),
[email protected] (Miriam Marra), [email protected] (Andrew Urquhart)
Electronic copy available at: https://ssrn.com/abstract=4354985

1. Introduction
The evolution of monetary systems has often been viewed as a private-sector development
(Menger, 1892, Clower, 1967, Kiyotaki and Wright, 1989, 1993), however, the most significant and
consequential shifts have been instigated by state responses to extraordinary events (Goodhart,
1998). Throughout history, states have encouraged the development of monetary systems in or-
der to support their geopolitical and economic expansion (such as in the cases of the Macedonian
(Graeber, 2014, Engels, 1980) and British (Ingham, 2004) empires); and the development of central
banking and finance to accelerate and sustain the capitalistic system (Varoufakis, 2013). Further-
more, large economic and political shocks like the Great Depression of 1929-39 and the two World
Wars (1914-18 and 1939-45) have triggered modifications to the gold standard monetary system1
(Eichengreen and Flandreau, 2005).
Likewise, in the most recent times high competition amongst financial players, global upheavals
such as the Global Financial Crisis of 2007-09, and, in the past three years, the COVID19 pandemic
and Russian-Ukrainian conflict in Easter Europe, have intensified the demand for more adaptable
monetary and fiscal policies that address contemporary needs while simultaneously mitigating
emerging challenges for the financial system. Those chiefly include increasing digitization, declin-
ing cash usage, ineffectiveness of monetary policy, and widening social divisions in the backdrop of
proprietary financial solutions, such as fintech and cryptocurrencies, which threaten national eco-
nomic sovereignty.2 Moreover, as the digital economy becomes increasingly important and reliant
on privately owned digital platforms with proprietary and opaque rules - potentially expanding
into all-encompassing metaverses - central banks are preparing for another intervention of epochal
proportions.
Central bank (CB) Digital Currencies, or CBDCs, are a novel form of digital central bank
(CB) money that represent the culmination of state efforts to manage this digital transition. They
are designed to provide attractive instruments for both wholesale and retail functions, as well as
1
The Great Depression resulted in countries abandoning the gold standard in favour of more flexible exchange
rate systems. The standard was further disrupted through various forms of government intervention necessary to
finance war efforts during the two World Wars. The gold standard became defunct following World War II as
governments adopted new monetary policies such as fixed or floating exchange rates.
2
As outlined in Section 3
2
bolster CBs’ influence and control over the economy through new monetary, fiscal policy tools and
programmable capabilities. As with past shifts in monetary policy, their introduction may have
significant disintermediating effects on the financial system, such as disintermediating commercial
banks and some of the operation of private money providers. While 86% of CBs are involved in
CBDC research, 60% in experiments and 14% in live pilot deployments (BIS, 2021), independent
academic research into this topic is still nascent; thus a comprehensive understanding of their key
aspects and implications remains limited.
Given the intricate nature of the CBDC topic, it is beneficial but challenging to categorise the
existing knowledge. As a consequence, only few reviews have been conducted using a methodical
approach (e.g. (Tronnier et al., 2020) and (Nobanee et al., 2022)) that catalogue research but do
not scrutinize it. Attempts at literature reviews (for instance Kiff et al. (2020) and Carapella and
Flemming (2020)) are either non-exhaustive or do not explore all important aspects of CBDC, such
as financial and macroprudential considerations. This thematic literature survey offers a guidebook
to understanding all aspects of CBDCs, encompassing discussion on money and payment systems,
central banking functionality, financial intermediaries and markets, and addressing key fintech-
related concerns. The review is organised as follows: Section 2 provides a universal description
and categorisation for CBDCs after discussing key concerns regarding their definition. Section
3 outlines arguments for CBDC issuance before analysing their design space. Section 4 analyses
the CBDC design space and options. Section 5 discusses key monetary and macroprudential
considerations and arguments against CBDC issuance. Section 7 concludes the survey and offers
suggestions for future research.
2. Defining CBDCs
Most literature defines CBDCs narrowly, for instance, many CBs focus on their retail and
consumer-facing aspects, as outlined in a joint report by seven central banks3 and the Bank of
International Settlements (BIS) in which CBDCs are defined as “a digital payment instrument,
denominated in the national unit of account, that is a direct liability of the CB” (Group of Central
3
The Bank of Canada, European Central Bank, Bank of Japan, Sveriges Riksbank (Central Bank of Sweden),
Swiss National Bank, Bank of England, and the Board of Governors Federal Reserve Systems.
3
Banks, 2020). This notion is echoed in individual reports such as those from the the Bank of
England (BoE), Bank of Canada (BoC), European CB (ECB), which respectively define CBDCs
as “an electronic form of CB money that could be used by households and businesses to make
payments and store value” (BoE, 2020), “a digital form of CB money that can be used for retail
payments” (Chiu et al., 2019), and “a CB liability offered in digital form for use by citizens and
businesses for their retail payments” (ECB, 2020). Some other reports emphasise its advantageous
role in facilitating the execution and settlement of cross-border transactions between financial
institutions, therefore defining CBDCs as a strictly wholesale instrument (Group of Central Banks,
2018, 2020).
Such distinctions are not limited to a CBDCs retail or wholesale functionality. A distinction can
also be made between a type of CBDC that is different from CB reserves and another that pertains
to the expansion of the reserve system to the wider private sector. Indicatively the Committee
on Payments and Market Infrastructures CPMI (2018) define CBDCs as “a digital form of CB
money that is different from balances in traditional reserve or settlement accounts”, a notion
that is echoed in others such as Barrdear and Kumhof (2016), Kumhof and Noone (2021), and
Griffoli et al. (2018) that envisage a remunerated or interest-bearing CBDC, distinct from existing
traditional reserves. Kumhof and Noone (2021), also explicitly mention that “CBDC and reserves
are distinct, and not convertible into each other”, and Griffoli et al. (2018) that CBDCs would
“differ from other forms of money typically issued by central banks: cash and reserve balances”.
On the other hand, Meaning et al. (2018) define CBDC as “any electronic, fiat liability of a CB
that can be used to settle payments, or as a store of value” noting that CBDC “already exists
in the form of CB reserves”. Overall, narrow CBDC definitions reflect the experimental state of
research.
In this thematic survey of CBDC research, we start by providing a more and universal definition
of CDBCs that can inlcude and emcompass the variety of definitions retrived in the reviewed
literature. Similarly to Kiff et al. (2020) we define CBDC as a digital liability of a CB, or other
competent authority, representing a jurisdiction’s sovereign currency available to the private sector.
In contrast to others, this abstractive definition accommodates the full range of CBDC possibilities.
4
While a dominant CBDC design may eventually emerge, a more broad definition would still be
preferable as different jurisdictions will adopt different CBDC options to accommodate their diverse
needs and legal frameworks (BIS, 2021). A CBDC is distinct from other monies in a number of
ways.
The Committee on Payments and Market Infrastructures (CPMI, 2015) was the first to con-
sider CBDCs in the context of different types of money by examining the physical or digital state of
money tokens, and whether their exchange can occur in a peer-to-peer manner, or requires a finan-
cial intermediary. Similarly Bech and Garratt (2017) introduce their “money flower” model which
distinguishes between accessibility, digital or physical state, issuer and “exchange mechanism”.
Bjerg (2017) distinguishes between reserves, cash, and commercial bank money based on param-
eters such as the issuer, physical or digital state and wholesale or retail availability. Adrian and
Mancini-Griffoli (2019) propose a “money tree” that classifies B-money, meaning fiat backed money
issued by private actors, eMoney, and I-Money, meaning commodity-backed eMoney according to
“type” (token/account, explored further in 4.3), “value” (convertibility at par/penalties applied),
“backstop” (entity where liability originates) and technology (database versus DLT/blockchain, a
form of decentralized record keeping explored in 4.4). Finally, BoE (2020) consider the functions
of money and their convertibility in their money classification. The frameworks are summarised
in Table 1, were we also consider the wholesale, retail, and universal availability of money. By
wholesale availability we mean money intended for use by appointed (financial) entities usually for
interbank transactions. By retail money, we mean money intended for use by the wider domestic
private sector as a medium of exchange. Universal money is also available to foreign entities.
Naturally, such categorisations are imperfect. In practice, some households and individuals
use deposits and cash as store of value, despite high rates of inflation. Similarly, proponents of
certain cryptocurrencies would argue that they can serve as a medium of exchange, store of value
or both. Indicatively, such arguments can be made in the case of Bitcoin which was explicitly
devised as a medium of exchange, or “peer-to-peer electronic cash” (Nakamoto, 2009), and is
even formally recognised as legal tender in countries such as El Salvador and the Central African
5
Table 1: Money Classification
Feature Deposits eMoney Crypto P. Metals Cash Reserves CBDC

Medium of Exchange ✓ ✓ ✗ ✗ ✓ ✗ ✓
Store of Value ✗ ✗ ✗ ✓ ✗ ✓ ?
Unit of Account ✓ ✓ ✗ ✗ ✓ ✗ ✓
Status D D D P P D D
Convertibility ✓ ? ✗ ✗ N/A ✓ ?
Issuer CM PS N/A, PS N/A CB CB CB
Access A A T, A T T A T, A
Availability R W, R, U W, R, U W, R, U W, R, U W W, R, U
Deposits: Funds held an account at a commercial bank by a customer
eMoney: A digital currency stored electronically and issued by a private sector entity
Cryptocurrency: A digital form of money upended by a decentralized network utilizing cryptography
P. Metals: Naturally occurring metals, such as gold or silver, that have an economic value
Cash: Physical currency. Reserves: Money held at central banks Status, P: Physical, D: Digital
Issuer, CB: Central Bank, CM: Commercial bank, PS: Private sector
Access, A: Account T: Token
Availability, W: Wholesale, R: Retail, U: Universal
Republic (Savage et al., 2022).4 Additionally, its diminishing rate of inflation and fixed maximum
supply support the narrative of bitcoin as “digital goal”, “sound money”, or “inflation hedge”, and
ultimately, store of value5 . Ethereum’s ether (ETH), the second most popular cryptocurrency, has
been used as a unit of account for many online non-fungible token (NFT) marketplaces. In practice
however, cryptocurrencies are, neither good mediums of exchange, nor good stores of value or units
of account; their adoption for retail payments remains low (Jonker, 2018), roll out as legal tender
problematic (Morris, 2022), and high correlation with other financial assets does not offer hedging
benefits (Klein et al., 2018). Moreover, in the case of ether, its use as a unit of account can be
attributed to excitement, the relatively niche and self-referential culture of the NFT space, and the
extreme market price volatility of NFTs, making accurate price quotes unnecessary. There is also
a lot of variation in each category. For instance, cash and deposits can serve as better or worse
stores of value depending on domestic inflation rates, and, if stablecoins6 are to be considered
under cryptocurrencies, those could better serve as mediums of exchange and units of account,
4
In fact competing narratives around Bitcoin have even resulted in hard forks (non-backwards compatible
changes) of the protocol, such as Bitcoin Cash.
5
Even Bitcoin’s proponents are divided as to which function it should serve, resulting in incompatible variations
of the protocol. Bitcoin (BTC) and Bitcoin Cash (BCH) are such example.
6
Stablecoins are cryptocurrencies designed to maintain a more stable market price, by usually tracking the value
of a national currency such as the USD. They are explored further in subsection 3.1.3
6
due to their relative stability.
3. Motivations for issuing CBDCs
3.1. The three phases of development
Regarding arguments supporting CBDC issuance, we observe that these are informed and
prompted by concurrent macro-economic events and changing trends in the financial system. Three
main developmental stages can be identified: i) For much of the decade following the 2008 finan-
cial crisis, many CBs had to contend with persistently low inflation levels; as such, CBDCs were
proposed as a potential remedy. ii) The emergence of fintech, cryptocurrencies and blockchain
technology prompted discussions regarding a structural reform of the financial system to achieve
greater efficiency, cost-savings, transparency and novel features. iii) More recently, the prolifer-
ation of foreign and private money solutions has been seen as a threat to financial sovereignty
leading to CBDCs being promoted as a possible response. In addition to these reactive develop-
ments, many sophisticated arguments have been put forward that did not directly relate to then
current economic events. Examples include using CBDCs to address declining cash usage, pre-
serving access to CB money in an increasingly digitized world and facilitating financial inclusion
for all citizens. In the following sections, we will explore both types of arguments in more detail.
3.1.1. The backdrop of persistent low inflation
Following the 2008 financial crisis, stimulating efforts such as quantitative easing (QE) proved
less effective than initially anticipated, leading to an increase in the size of the financial market and
meager growth in the real economy (Simmons et al., 2021). In the backdrop of persisting low infla-
tion, proposals for unconventional monetary policy utilising government electronic money emerged.
Indicatively Rogoff (2016), Agarwal and Kimball (2015), and Dyson and Hodgson (2016) suggested
that “digital cash”7 could eliminate the zero lower bound. By charging negative interest rates (de-
murrage fee) on government electronic money, CBs would encourage spending and stimulate the
economy. Naturally, households and firms would be incentivized to switch the demurrage-charged
7
The term CBDC was only popularised in a 2018 report of the same name by CPMI (2018)
7
digital cash for other forms of money, so limits on convertibility, or the elimination of physical cash
altogether would also be necessary. At the same time Agarwal and Kimball (2015) and Dyson and
Hodgson (2016) in particular, have recognised the fiscal utility of digital cash, especially through
the provision of “helicopter money”8 , a benefit also recognised by the Group of Central Banks
(2020), especially for identified users. Indicatively, Agarwal and Kimball (2015) suggest that by
paying a high interest on CBDC, CBs can simultaneously stimulate the economy and increase the
supply of money by instead increasing the value of an interest-bearing CBDC relative to other
monies. This use of government electronic money for new monetary and fiscal policy techniques
remained staple in CBDC literature since. Hence the first stage in the CBDC evolution was
motivated by the need for expanding the monetary and fiscal policy toolbox.
3.1.2. CBDC and improvements in payment systems
During the mid 2010s blockchain hype which peaked in 2017-2018, the enterprise sector explored
the potential of blockchain for cost savings and increased efficiency through ledger co-maintenance,
programmability and disintermediation; however these ambitions were not fully realised due to a
range of factors including consensus overhead costs, technological complexity implementation re-
quirements, lack of suitability or need for firm control over infrastructure (Gartner, 2019, Disparte,
2019, Bousquette, 2022).
This brief exploration, however, influenced discussions on CBDC design choices and in par-
ticular the use of alternative technologies for CBDC infrastructure as a source of efficiency, cost
effectiveness, interoperability and novel features. Bech and Garratt (2017), Raskin and Yermack
(2016), but also later CPMI (2018), Griffoli et al. (2018), and Kahn et al. (2019), identify of dis-
tributed ledger technology(DLT)/blockchain9 and cryptographically secured tokens as alternative
ledger and access methods for money. The authors discuss the trade offs from the perspective of
the CB, the financial system and in particular commercial banks, and the end-consumer perspec-
8
A form of fiscal policy where a central bank creates new money and distributes it directly to the public, typically
through government spending, in order to stimulate the economy.
9
blockchains are type of DLT with specific features. In their analysis, CBs, utilise the term DLT to distance
their offering from cryptucurrencies. Blockchain and DLT are analysed further in Subsection 4.4. For the purposes
of the present we will use the terms interchangeably.
8
tive but do not arrive at conclusive evidence as to what options are ultimately the best. Auer
and Boehme (2020) summarise the main points of this debate and connect it to contemporary
consumer needs.
Yet, as in the case of industrial applications, concurrent practical experiments suggested that
blockchains might not be a good substitute for conventional databases owning to the overheads
of consensus mechanisms (indicatively Chapman et al. (2017) and Chiu and Koeppl (2017)) and
that the debate between tokens and accounts as access methods was ultimately immaterial due to
reporting requirements and the nature of digital transactions that necessarily produce identifiable
“fingerprints” (Claussen et al., 2021).
However, as outlined by BIS (2021), the notion of utilising CBDCs as a potential source of
efficiencies was not abandoned, but re-framed under more pragmatic terms. Barrdear and Kumhof
(2016) suggest that an CBDCs could result in substantial efficiency gains by avoiding withdrawal
and processing fees, a claim also echoed in He et al. (2017). Andolfatto (2021), Keister and Sanches
(2021), and Chiu and Wong (2021) outline CBDC efficiency benefits in payment systems whereas
Auer et al. (2022) the potential benefits for cross-border transfers. Group of Central Banks (2020)
also suggest that CBDCs can provide a common method of transfer between proprietary payment
systems, making transactions cheaper and more efficient. This additional payment system can also
enhance the resilience in payments according to the BoE (2020). The same report outlines that
the benefits of efficiency and robustness can be brought to cross-border payments, although as
Auer and Boehme (2020) highlight, such matters are subject to political considerations. Finally,
World Bank (2021) outlines how CBDCs could facilitate interoperability and standardisation in
cross-border transactions remedying existing frictions such as lengthy transaction delays costs
(due to intermediation), lack of traceability and transparency, hindering anti-money laundering
(AML) and counter-terrorist financing (CFT) checks. This exploration reinforces the notion that
the novelty and impact of CBDCs relies chiefly on political and procedural consideration and the
potential expansion of the role of the CB.
9
3.1.3. The stablecoin and foreign CBDC threat to financial stability and sovereignty
This second exploratory phase was succeeded by concerns stemming from the rising competition
from private and foreign money.
Decentralized stablecoins are a type of cryptocurrency that seeks to mitigate volatility by main-
taining a stable price against a predetermined target. This target can be a financial asset, real
asset, other cryptocurrency, or a combination thereof, but is most often the US dollar, due to its
status as a global reserve currency and its stability. Stablecoins are important for several reasons,
including reducing volatility in the cryptocurrency market, enabling crypto-holders to maintain
liquidity, providing a blockchain-native unit of account, and enabling much of the functionability
of decentralized finance (DeFi) protocols10 . Additionally, they retain some of the desirable char-
acteristics of non-stablecoin cryptocurrencies, such as censorship resistance, borderless operation,
and decentralized issuance and access. Owing to this utility, their use11 has increased over the past
years.
Yet, stablecoins were also perceived by regulators as a potential threat to financial stability,
even more so than cryptocurrencies, owing to their positioning as payment instruments. In many
cases, they utilise unproven stability mechanisms which often fail12 negatively affecting (i) finan-
cial entities with stablecoin exposure, (ii) individual investors and financial markets, (iii) investor
confidence in cryptocurrencies, and (iv) their use as payment instruments, according to the Finan-
cial Stability Board FSB (2022). The G7 has expressed additional concerns which include issues
with stablecoin governance, cyber risks, market integrity and pricing, tax compliance, as well as
data, consumer and investor protection. For stablecoins that achieve global scale, they also cite
potential concerns for financial stability (similar to those of the FSB), and the implementation
and efficacy of monetary policy G7 (2019). Moreover, due to the market dominance of certain
stablecoins, such as Tether’s USDT, their potential failure has also been perceived as a potential
systemic risk for the financial system, and for the financial sector exposed in such assets, leading
10
DeFi applications blockchain-based and decentralized alternatives to traditional financial applications, such as
borrowing, lending, derivatives, and insurance.
11
The total stablecoin market capitalization reached a peak of approximately $200 billion in April of 2022 ac-
cording to defillama.com.
12
A recent example was that of UST (Dionysopoulos, 2022).
10
to direct regulatory intervention (Browne, 2021). Due to their substitutability with stablecoins,
the introduction of CBDC was seen as a way to mitigate the negative effects described above.
Despite their popularity, stablecoins fall short as a means of payment due to throughput limita-
tions of blockchain, transaction costs, and redemption limitations (Adachi et al., 2022). Moreover
an argument can be made that they lack the institutional backing to facilitate adoption and in-
tegration with existing payment systems and procedures. Those issues were to be mitigated by
global private stablecoins. Global private stablecoins were an attempt by established big tech
and big finance players to capture parts of the monetary system by leveraging their dominant
position. Perhaps the most popular was Facebook’s (now Meta) Libra (later Diem). Diem was a
“blockchain-backed”13 financial network that aimed to enable “open, instant, and low-cost move-
ment of money” and universal access to related financial services. While its economic design
became notably less ambitious owing to regulatory pressure, at one point Diem was to be backed
by a “basket” of currencies, financial and real assets creating a private “super-currency”14 to be
used across the platforms of Meta and its partners (Amsden et al., 2020). Putting things into
perspective, if each of Facebook’s active monthly users held 3 units of Diem, then it would become
more widely used than the United States Dollar15 . In the prospect of Diem’s destabilization of the
global financial system and hindrance of CB influence on monetary policy (Diez de los Rios and
Zhu, 2020), regulatory response was stern (Zetzsche et al., 2019) leading to the scaling down and
ultimately abandonment of Diem (Levey, 2022) and of other similar efforts16 .
In parallel to Meta’s announcement of Diem, China became the first major economy to suc-
cessfully test CBDCs on a large scale (Areddy, 2021). Earlier, the Bahamas had become the
first country to launch a CBDC, the Sand Dollar, followed by Nigeria’s eNaira, and Jamaica’s
JAM-DEX. Concurrently, Saudi Arabia, the United Arab Emirates, Canada, France, Singapore,
17
Tunisia, and the Eastern Caribbean Economic and Currency Union launched pilot CBDCs .
13
It is unclear whether Diem’s infrastructure would be classified as a blockchain, or whether the term was used
to benefit from the publicity surrounding decentralized blockchains.
14
A currency used globally and backed by a basket of reserve currencies and assets.
15
Author’s calculations based on Facebook montly users from Meta Q3 2022 Earnings Slides, page 14 (Meta,
2022) and Claims in U.S. dollars, in December 2022 from COFER (data.imf.org).
16
JPM Coin by JP Morgan was another such attempt.
17
More information available at cbdctracker.org
11
CBDCs research was also expanding virtually everywhere (BIS, 2021), leading to concerns about
financial sovereignty.
In particular, Yeyati (2021) highlights the prospect of digital dollarisation stemming from po-
tential easy access to foreign CBDCs, and counter-propose a domestic CBDC issuance to mitigate
it. Andolfatto (2021) expands this argument by suggesting that a domestic CBDC would reduce
consumer incentives to adopt foreign and private monies and thus safeguard financial sovereignty,
by ensuring that the national currency continues to be perceived as financially secure, and com-
petitive in terms of features. Besides safeguarding against foreign CBDCs and private moneys,
Ferrari Minesso et al. (2022) offer an additional explanation for the fast pace of CBDC develop-
ment. They suggest that potential imbalances in the international monetary system stemming
from a lack of monetary policy autonomy as a result of CBDC introduction explain why issuing
a CBDC quickly could provide a significant competitive edge. Yet Chorzempa (2021) notes that
such advantage might be short lived due to changes in technology and markets.
Competing monies pose additional concerns that a CBDC can protect against. As highlighted
by BoE (2020), BoE (2019) and CPMI (2018) those may neither offer the same level of safety and
confidence as existing payment systems nor be subject to the same protections and guarantees as
deposits or cash. Additionally, CBDCs can counteract the potential for private payment systems
to become natural monopolies, thereby reducing market dominance and concentration risk (Kiff
et al., 2020, Group of Central Banks, 2020). On the contrary, a “well-designed” CBDC can facilitate
healthy competition between private payment service providers (BoE, 2020). Finally, CBDCs can
mitigate the impact of exclusions and bans from global financial systems and standards such as
SWIFT, as was recently the case with Russia (BBC, 2022).
3.2. Additional sophisticated arguments for CBDC issuance
3.2.1. Declining use of cash and financial inclusion
Surveys in Canada (Henry et al., 2018), the United States (Foster and Greene, 2021), Europe
(ECB, 2022), the UK (BoE, 2022), and in particular Sweden (Sveriges Riksbank, 2018), demon-
strate a diminishing usage of cash, in comparison to other forms of payment owing to a collection
of factors which include shifting consumer preferences, increasing digitization, and the knock on
12
effects of COVID-19. This has two important implications. First, absent a CBDC and by choosing
not to use cash, consumers no longer have access to the CB balance sheet and have to instead rely
completely on the private sector money. Second, if cash is gradually phased out, financial inclusion
will be impacted significantly (CPMI, 2018). Commercial banks and other financial intermediaries
that provide the main substitute for cash, i.e., deposits and eMoney, are incentivised, as for-profit
institutions, to only extend their services to countries, communities, or individuals if they can
generate a profit. This could leave underprivileged groups at risk, particularly in countries with
underdeveloped financial systems and low financial penetration where commercial banks may be
financially constrained. This presents a compelling case for a CBDC to serve as a medium of ex-
change and store of value to combat financial exclusion (Bordo and Levin, 2017, Group of Central
Banks, 2020, BIS, 2021, Camera, 2017). Additionally, CBDCs can also help CBs recoup seingorage
revenue lost from the declining cash usage (Kahn et al., 2019).
3.2.2. Privacy in payments
Despite its declining usage, cash remains an important instrument for preserving privacy in
payments due to its anonymous nature (Kahn and Roberds, 2009). If cash use diminishes, or it is
discontinued in favour of alternative public or private solutions, consumers will demand a private
alternative. In fact, research suggests that this is one of the driving rational for CBDCs (ECB,
2021). The lack of privacy in payments can hinder consumer welfare, for instance, Garratt and Lee
(2022) demonstrate that payment data collection techniques from private actors can contribute
to the establishment of monopolies. Here the role of the CB as the CBDC issuer is particularly
important, since it can, as a not-for-profit organisation, commit to the non-exploitation of user
data for commercial purposes.
Gross et al. (2021) showcase how CBDCs with cash-like privacy can be achieved through
zero-knowledge proofs, whereas Claussen et al. (2021) and BoE (2020) deem the possibility of
entirely anonymous or private CBDCs unlikely, citing that digital transactions produce “digital
fingerprints” that, given enough time and resources, can be traced back to parties involved in the
transaction, among other regulatory and political considerations. In practice, complete anonymity
is hard to achieve even in cases where a payment instrument is specifically devised with anonymity
13
in mind and utilises state of the art techniques (CipherTrace, 2021). The overarching consensus
is that some level of privacy, and not anonymity from the CBDC operator, can be achieved,
thus providing consumers with an alternative to private sector payments solutions that can be
privacy-invasive (Bech and Garratt, 2017, Group of Central Banks, 2020, Erlandsson and Guibourg,
2018). The concept of “tiered privacy” is also explored, with larger transactions revealing more
information about the transacting parties. As anonymity from the CBDC operator is unlikely, two
additional benefits of CBDC become apparent. Firstly, with sufficient adoption, CBDCs could
positively contribute to limiting or eliminating black markets that rely on cash. Secondly, as a
result of this, they could also lead to an increase in tax revenues and a reduction in tax evasion,
in particular from the adoption of eMoney by tax evaders or criminals (McAndrews, 2020).
The debate on CBDC privacy and anonymity is still-unfolding with significant implications in
a number of areas. Indicatively, Rogoff (2016), Rogoff (2015) and Bordo and Levin (2017) argue
that the widespread use of CBDC, or its introduction as a replacement for cash could also reduce
criminal activity, whereas Wang (2020) shows that a CBDC with cash-like privacy could increase
tax evasion. Finally, it should be noted that due to the centralised nature of the operator and
digital-record keeping a CBDC can be used as a tool for mass surveillance, something that many
CBs are considering and actively designing against (Uberti, 2022, Fanti et al., 2022), although this
could be perceived as a desirable property in certain regimes.
3.2.3. Programmability of payments and money
Another argument in favour of CBDC issuance is their facilitating of programmability of money

and payments. Programmability in money refers to programmable functions at the unit level,
allowing (or disallowing) their use or altering their value based on predetermined rules18 . Pro-
grammability of payments is an adjacent concept that refers to payment executions based on prede-
fined conditions. The BoE (2020) recognises three possible approaches to CBDC programmability,
namely i) integrating the functionality into the fundamental ledger, ii) providing the capability
through an additional “module”, iii) or “outsourcing” it to PSPs. Each option presents different
18
This would break the fungibility of money, especially if tied to identity
14
Programmability
[Model 2] [Model 1]
[Model 3]
Security Throughput
Figure 1: CBDC Programmability Trilemma
trade offs. For instance, implementing native programmability to a CBDC would potentially hin-
der throughput, as more computations would be performed as part of the payment execution, but
presents the safest option as it does not rely on third parties that have a higher chance of being
compromised than the CB.
Non-native programmability on the other hand presents trade offs that resemble those of the
“oracle problem” in blockchains. Blockchains are entirely isolated from the outside world and are
unable to natively access data such as a node’s hardware, file system, or other information feeding
through the internet. As a result, for processing real-life data necessary for some of their functions
(for instance, the time, date, or market prices) they rely on smart contracts called “oracles” which
“feed” (and some times pre-process to save computational resources) real-world information to
blockchains. While this increases the functionality and throughput, it comes with the risk of
compromised or inaccurate data sourcing. Programmable CBDCs relying on external modules
or payment service providers (PSPs) for their functionality will face a similar trade off and need
to trust that those sources are reliable and necessarily compromise on some decentralization and
potentially even security.
To summarise, 1 shows that CBs have three distinct options when it comes to programmable
CBDCs. In Model 1 they can achieve programmability and high throughput by sacrificing security,
in Model 2, they can achieve programmability and security by sacrificing throughput, whereas
in Model 3 they can abandon the prospect of programmability to maintain security and high
transaction throughput. This trilemma is presented in figure.
Nonetheless programmability in payments and money has significant implications. At a ba-
sic payment-level it can facilitate automated money transfers, for salary, subscription, or other
15
purposes, based on predetermined rules. It can also bolster the implementation of other policies
such as special taxes or discounts that can be applied when a unit is spent on a transaction that
meets certain criteria. For instance, money spent on carbon intensive activities could be valued
differently (lower) than money spent on education (valued higher). This can also influence the
implementation of fiscal policy by mitigating moral hazard. For example, programmable money
could disallow the spending of stimulus checks or other benefits on certain products, such as alco-
hol or tobacco, or even encourage its spending on essential goods (through adjusting its value at
the point of sale).
At this point, it is worth noting that programmability at the unit of money is not always
desirable. The ECB has announced that such feature “is not in line with the guiding principles
of the digital euro endorsed by the Governing Council” (Digital Euro Project Team, 2022). The
political economy implications of the above are very large and would need careful consideration.
4. CBDC design space and options
In this section, we review the current debate surrounding the design of CBDCs by looking
at five main aspects: i) its nature as a CB liability (in terms of expanding the existing reserve
system or creating a new form of CB liability); ii) its availability to end-users (whether wholesale,
retail, or universal digital currency); iii) its provision through a direct, indirect, or hybrid system
depending on the level of involvement of private financial intermediaries; iv) the type of user access
to CBDC, either through accounts or tokens, which relates to an ongoing debate on privacy issues
and transaction traceability; and v) the needed infrastructure, i.e. whether blockchain technology
can bring effective improvements in the opted design/system.
4.1. Nature and availability of CBDCs
As implied above, not all CBDCs can be created equal. When it comes to their particular
characteristic and attributes CPMI (2018) highlight that “it is easier to define a CBDC by high-
lighting what it is not”. With regard to the choice between a CBDC that is distinct from reserves
(nR CBDC), and a one that pertains to the expansion of the reserve system to the wider private
sector (R CBDC), there are compelling reasons to pursue either option. Reserves have a special
16
status in the monetary system as they are subject to rules and limitations and serve as settlement
asset for interbank transactions. Owing to this, they also represent the safest form of money in an
economy. For that reason, a reserve CBDC that pertains to their expansion would be very safe,
although not flexible. In contrast, while any CBDC necessarily leads to the expansion of the CB
balance sheet, CBs can back CBDCs that are distinct from reserves with a different collection of
assets, potentially making them less secure, but more flexible, than reserves. A non-reserve CBDC
could be less safe if backed by more volatile CB assets, such as more risky financial instruments
compared to precious metals or foreign exchange (Kumhof and Noone, 2021).
Flexibility in non-reserve CBDCs also comes in other forms. As demonstrated by Kumhof and
Noone (2021), remuneration in the case of a non-reserve CBDC can be independent than that of
reserves, leading to greater flexibility in the conduct of monetary policy. For example, CBs could
keep the rate of reserves low to influence the market interest rate on interbank loans, while at
the same time increasing the CBDC interest rate to curb CBDC demand. A non-reserve CBDC
can pay positive, negative, or even no interest, without limiting the CBs options. At the same
time, distinguishing CBDC from reserves can allow them to pursue different design choices, such
as infrastructure and access methods.
Literature also distinguishes between three levels of CBDC availability. Those are, from more
to less restrictive, wholesale, retail, and universal CBDC (-W, -R, -U, CBDC, respectively). Like
CB reserves, a wholesale CBDC would be a liability of the CB and asset of appointed entities, such
as commercial banks or other non-bank financial institutions (NBFIs). By contrast, a retail CBDC
would also be available to the wider domestic private sector, meaning individuals and households.
Finally, a universal CBDC would be the most expanded version, also available to the foreign sector.
CPMI (2018) were among the first to distinguish between wholesale and retail CBDCs. As the
name suggests, wholesale CBDCs would be devised for wholesale applications between commercial
banks, as well as NBFIs. Retail CBDCs on the other hand would be suited for retail applications,
such as payments and domestic remittances and money transfers. Finally, a universal CBDC as
described by Fung and Halaburda (2016) and Bjerg (2017) would allow individuals to hold and
transact in different currencies at the retail level.
17
CPMI (2018) suggest that an interoperable wholesale CBDC could foster the robustness and
efficiency of cross-border settlement of securities and other financial instruments. Their argument
has become popular with policy makers, such as ECB’s president Cristine Lagarde who stated that
“Digital wholesale money is not new, as banks have been able to access CB money for decades.
But new technology can be used to make settling financial transactions more efficient. It also opens
the possibility of a retail CBDC, which would be very innovative in that it would be accessible to
a wide audience” (Lagarde, 2020).
A wholesale CBDC could enhance payment efficiency, not necessarily due to its technical char-
acteristics19 , but by introducing a clean slate for wholesale and cross-border functions, allowing
for their more efficient design, by reducing red tape and streamlining processes (Carney, 2019).
Notably, literature does not distinguish between a wholesale CBDC that is distinct from re-
serves, and a wholesale CBDC that simply pertains to the expansion of the reserve system to
other entities. In this dichotomy, the question is whether having a wholesale CBDC distinct from
existing reserves could be useful. We argue that depending on its monetary and technological char-
acteristics, a non-reserve wholesale CBDC serve as a fail-safe and can be used alongside reserves
by commercial banks. For example, a wholesale CBDC that utilises a different infrastructure
from reserves could enhance the resilience of the banking system. CPMI (2018) also highlight
that a creditworthy wholesale CBDC, especially if remunerated, could serve as an appealing asset
for NBFIs and other institutional investors and compete with financial instruments such as short
maturity government bills, with implication for on commercial banks’ funding.
By contrast, a retail CBDC serving as an instrument for consumer-facing applications could
result in an expanded role of the CB in retail functions and partial or entire disintermediation of
commercial banks depending on its provision and other features. Owing to its retail nature, such
CBDC could compete with commercial bank money, leading to changes in the funding composition
19
In fact, the benefits of blockchain/DTL for efficiency and robustness have been refuted mainly i) due to the
probabilistic finality of settlements in some blockchain/DLT arrangements, meansing that transactions are never
fully settled, but only become increasingly hard (more costly) to reverse as more blocks (transactions) are added,
ii) the need for centralised notaries that make the added complexity of DLT redundant, iii) and the potential
implementation of coordination mechanisms such as systems for liquidity saving (Chapman et al., 2017, Chiu and
Koeppl, 2017).
18
20
of commercial banks, especially in times of stress (CPMI, 2018). However, it could also pro-
mote positive change for households and individuals. Indicatively commercial banks, as for profit
institutions, are incentivised to only extend financial services when they can make a profit. A
retail CBDC, issued by a non-for-profit CB could be particularly important in facilitating financial
inclusion in developing and underdeveloped economies where the private sector lacks the universal
provision of robust payment services (Kiff et al., 2020).
A reserve retail CBDC would be the safest form of money that could be made available to the
private sector. However, as noted above, it would come at the expense of monetary policy flexibility,
since CBs would have to consider retail clients when implementing changes to reserve remuneration
and holding requirements. Instead, a non-reserve retail CBDC, while potentially less secure from
a financial standpoint, could provide a third monetary level (besides holding requirements and
interest) for central banks, while also serving retail functions for the wider private sector.
A universal CBDC, as described by Fung and Halaburda (2016) and Bjerg (2017), could en-
able what Auer and Boehme (2020) describe as “retail interlinkages” for cross-border payments.
Currently, digital transactions in a foreign currency necessarily involve one or more financial inter-
mediaries who imposes fees and inflated exchange rates. This process also often leads to delays due
to the number of counter parties involved in the process. With a universal CBDC end consumers
would be able to acquire foreign currency in advance of the transaction potentially for cheaper, as
is currently the case with cash. This advancement would be similar to current fintech and eMoney
deployments by the private sector that allow customers to hold and exchange currencies in digital
wallets. Yet, as a universal CBDC would be a liability of the CB, it would not be subject to the
same counterparty and financial risks of eMoney and digital wallets.
Depending on its remuneration and issuing authority, a reserve universal CBDC, could also offer
a compelling store of value in certain international markets and even compete with domestic short
term government bonds and other private sector financial instruments, such as savings accounts.
In times of crisis, universal CBDCs could also aggravate bank runs, not from deposits to cash as
is usually the case, but from deposits to what is essentially a foreign currency. The same could
20
This is explored further in Section 5
19
be said for a non-reserve universal CBDC, although those will likely be less “safe” compared to a
reserve counterpart.
4.2. Direct, indirect, and hybrid CBDC provision
As outlined in Section 3, in the second exploratory phase of CBDCs motivated predominately by

advances from the cryptocurrency and blockchain space, CBs and researchers examined alternative
CBDC designs as potential sources of financial safety as well as efficiency and resilience of the
financial system. The exploration revolved around three key areas: i) the specifics of CBDC
provision and in particular, the operational role of the central and commercial banks as well as
other financial intermediaries, ii) the method for accessing CBDCs and authorising transfers, and
finally iii) the ledger and process for recording said transfers and other other state transitions. The
overarching academic consensus was that i) the operational role of the CB influences the financial
safety of the CBDC instrument in addition to aspects of customer experience, ii) the access method
could impact the levels of privacy and anonymity of CBDC transactions, and finally, iii) that a
new novel infrastructure could be a source of efficiency and desirable features for CBDCs.
Auer and Boehme (2020) focus on a CBDC with retail applications and map six main con-
sumer needs, to specific CBDC design choices, forming a Maslow-like hierarchy for payments. In
particular they identify the needs for cash-like convenience and peer-to-peer functionality, resilient
and robust operations, universal accessibility and privacy, as well as the need for cross border
payments. A public consultation conducted by the Eurosystem on the digital euro (EU’s version
of a CBDC) identified privacy, security, lack of fees, availability, ease of use, and speed as the most
important consumer demands (ECB, 2020). Similar consumer needs are also outlined in a joint
report by seven CBs representative (Group of Central Banks, 2020).
Literature identifies three distinct models, the i) direct, ii) indirect, and iii) hybrid, (- -D, -
-I, - -H CBDC, respectively). According to Adrian and Mancini-Griffoli (2019), Auer and Boehme
(2020), and Bordo and Levin (2017), a direct CBDC is a direct liability of the CB and asset of the
private sector. In the case of a wholesale CBDC this would mean that banks and NBFI would hold
a direct liability of the CB. Similarly, in the case of retail or universal CBDCs, households and
individuals would hold a direct claim with the CB. Under a direct CBDC model the operational
20
role of the CB would be that of the primary operator of a CBDCs infrastructure and all of its
consumer-facing aspects. Indicatively it would be tasked with acquiring and retaining (wholesale
or retail) clients, performing due diligence, including know-your-customer (KYC), AML, and CTF
checks, or otherwise managing customer data, transactions and complaints or other inquiries. On
the operations side, it would be charged with developing and managing the technology necessary
for payments and their settlement, as well as other consumer facing features and applications
(Adrian and Mancini-Griffoli, 2019).
The option of a direct CBDC is attractive for its seeming simplicity, as the private sector holds
a secure, direct claim with the CB bank which is responsible for the entire CBDC’s operation.
21
Yet it incubates the disintermediation of commercial banks and other financial intermediaries
(Carstens, 2022, Auer et al., 2022). Such scheme would entail a large expansion of the CB mandate,
the costly building of a vast infrastructure, and the CB’s need to acquire consumer-focused skill.
Besides the obvious point of cost, this expansion is also tied to concerns around the willingness and
ability of CB to compete with existing and future private sector deployments, and the crowding
out of the private sector (BoE, 2020, ECB, 2020, Group of Central Banks, 2020, Auer and Boehme,
2020). Finally, to support a CBDC (although this is a concern in every provision method), the
CB might be incentivised to engage in credit provision to support their expanded balance sheet,
further increasing its role and involvement in the financial system.
An indirect CBDC is comparatively a more modest proposal, in which the private sector (con-
sumers in the case of a retail and universal, and NBFIs in the case of wholesale CBDCs) hold
accounts with commercial banks, which are backed by CBDC held with the CB (Bordo and Levin,
2017, Auer and Boehme, 2020). This scheme has been described with various names in literature,
such as “synthetic CBDC” (Kumhof and Noone, 2021), and “two-tier CBDC” for its resemblance
to the existing two-tier financial system. An indirect CBDC presents a number of possibilities.
In what we will call “strict indirect CBDC” a commercial bank would be required to fully back
private sector deposits CBDC held at the CB. By contrast, in a “relaxed indirect CBDC” model
private sector deposits would be partially backed by CBDC. The non-reserve versus reserve status
21
Explored further in Section 5
21
of CBDC enters this discussion too. Specifically, in either the “strict” or “relaxed” indirect CBDC
private sector deposits could be backed by either a CBDC that is distinct from reserves, or re-
serves with the CB. In the latter scenario, a CBDC would essentially be either a reinvention of the
existing two tier system, or simply constitute a stricter version of existing reserve requirements.
In either case, commercial banks would have the same consumer-facing and operational re-
sponsibilities as they do today. Due to its minimally disruptive nature, an indirect CBDC would
not translate into material improvements for the private sector, especially in terms of protection.
For instance, in case of insolvency of the commercial bank, it is unclear how a CB would honor
consumer claims. Deposits up to a certain amount are already guaranteed in many countries, thus
rendering an indirect CBDC redundant. At the same time, and according to many definitions
including the one in the present, an argument can be made that such arrangement would not
constitute a CBDC in the first place, as is not a direct liability of the CB and asset of the private
sector (Group of Central Banks, 2020).
Auer and Boehme (2020) also describe a hybrid CBDC arrangement in which consumer-facing
activities are carried out by financial intermediaries, such as payment service providers (PSPs)
and commercial banks, while the CBDC remains a direct claim with the CB. This approach
marries the safety stemming from a direct claim with the CB with the convenience of the private
sector managing consumer-facing functions. A hybrid arrangement could also implement a “check
pointing” system in which the CB would periodically record end-consumer balances to ensure that
claims are honored in case of technical and financial failure of a PSP. Other back-up arrangements
where the CB would operate an emergency transaction system can also be envisaged. Yet, as Auer
and Boehme (2020) point out, the downside of a hybrid approach would be the complexity of its
implementation. Most CB are considering to opt for a hybrid indirect CBDC (Auer et al., 2020).
4.3. CBDC Access
With regard to access to the CBDC, two methods are currently debated: the account and the
token-based methods. Account CBDCs rely on “strong” and verifiable identities, whereas token
systems on an individual’s ability to perform a specific action, such as demonstrate knowledge of
a special value (Kahn et al., 2019, BoE, 2020, Brunnermeier et al., 2019). King (2020) report that
22
among the 46 central banks in their survey, 58 percent focus their research on a “token model”
In particular, an account-based CBDC would operate in a similar manner to checking accounts
with commercial banks where access relies on an individual’s ability to veritably prove that they
are the account holder (e.g., with a password or other form of identification). For that reason it
can be thought of as a “I am, therefore I own” system (Bossu et al., 2020, Auer and Boehme,
2020). By contrast, a token-based CBDC would be more akin to a bearer instrument, such as
cash. In such scheme, individuals perform actions to i) verify the payment object’s (CBDC)
validity and ii) the counterparty’s authority, or access over the payment object. In the case of
many cryptocurrencies this amounts to producing and verifying a digital signatures utilising a
public and corresponding private key. More specifically, transactions are initiated by “signing”
information about the payment object and transaction instructions with a secret private key. The
validity of the transaction (and the payment object) is verified when the signer’s corresponding
unique public key is compared to the signature generated by the private key. This is possible due
to a mathematical relationship between the private and public keys that allows for the validation
of the signature only against the public key (Antonopoulos, 2014). Knowledge of the private
key (represented as an alphanumeric value) enables full access to the underlying asset, therefore
token-based systems can be thought of as “I know, therefore I own” systems (Bossu et al., 2020,
Auer and Boehme, 2020), and bearer investments, as whoever “bears” the private key “bears” the
payment instrument. The main concern associated with account-based CBDC is identify theft or
impersonation, whereas loss of keys is an issue in token-based solutions.
Account and token CBDC deployments would also differ in terms of their accountancy, and
their introduction would likely necessitate changes in the legal and accounting frameworks to
accommodate those. Account-based CBDCs, as existing checking accounts, would be minimally
disruptive and follow the rules of double entry accounting. Balances would be recorded in accounts
and transactions would work by debiting the payer’s account (assets) and crediting the payees
account (assets). By contrast, token-based systems come with “built-in” accounting in the form of
an unspent transaction output (UTXO). In a token-based CBDC UTXOs would represent a certain
amount of CBDC value that can be spent by a specific private key. When a UTXO is spent, it
23
is “destroyed” by a new one, that can be spend with a different private key. This association of
private keys with UTXOs constitutes a novel system for keeping track of balances without the use
of accounts or balance sheets.
The three primary considerations in the token versus account debate relate to privacy/anonymity
and cash-likeness. Cash has value to consumers because it is by nature anonymous, thus protecting
individuals’ privacy (Kahn and Roberds, 2009). Garratt and van Oordt (2021) discuss privacy in
payments. Because of their non-reliance on ’strong identities’ token-based CBDCs were initially
promoted as private/anonymous alternatives to accounts, as well as more cash-like, as transfers
would not involve the debiting and crediting of accounts, but rather the peer-to-peer transfer
of tokens (Bossu et al., 2020, Auer and Boehme, 2020, Bordo and Levin, 2017, Claussen et al.,
2021, Kahn and Rivadeneyra, 2020). Yet, as Claussen et al. (2021) and BoE (2020) demonstrate,
complete anonymity/privacy and cash-likeness in CBDCs is likely unattainable. Claussen et al.
(2021) identifies the three main factors for this: i) First, the fact that digital processes necessarily
produce digital fingerprinting which, given enough time and resources can be traced back to the
counterparties in the transaction. ii)Second, the need for a remote ledger to facilitate the no-
tarisation of transactions, which would, even for some time store information that could be used
to identify the counterparties of a transaction. iii) Finally, regulation is likely to necessitate the
involvement of the CB as a notary, and requires that under certain conditions the identities of
individuals enmeshed in transactions must be known to facilitate KYC, AML and CTF. Indeed,
in a first report published by a consortium of central banks, complete anonymity for CBDC is
deemed “not plausible” (Group of Central Banks, 2020).
4.4. CBDC Infrastructure
The advent of blockchain and cryptocurrencies motivated the exploration of alternative CBDC
infrastructures as sources of efficiency and novel features. The debate resolves around the use of
conventional databases and real time gross settlement systems, versus DLT/blockchain. See Auer
and Boehme (2020), Danezis and Meiklejohn (2015), Benos et al. (2017), Scorer (2017).
As with many new technologies there is a lot of confusion surrounding DLT/blockchain and
what exactly they pertain to. Studying the writings of Haber and Stornetta (1991), Nakamoto
24
(2009) and the Ethereum (Buterin, 2014) and Hyperledger (Androulaki et al., 2018) whitepa-
pers as well as Antonopoulos (2014), we will define blockchain as an append-only data structure
where information is grouped in sets, called “blocks” with each block cryptographically referenc-
ing, through a hash function, forming a “chain”. This data set is distributed in a network of peers
who can independently verify its validity while its updating is subject to special rules. DLT is a
super-set of blockchain as references data sets that don’t necessarily utilise cryptography (hashes)
to link information together. We use both terms interchangeably in the present.
Notably, DLT/blockchain can accommodate either an account or token/UTXO CBDCs, as is
the case in Ethereum and Bitcoin respectively. In a private setting it can also support a direct,
indirect, and hybrid provision CBDC scheme depending on the participants’ authorisation levels.
Similarly, databases are also suitable for direct, indirect, or hybrid CBDCs (by changing partic-
ipant’s access levels), account CBDCs (as is currently the case with customer accounts at com-
mercial banks) and even token/UTXO CBDCs, since under such scheme, a token/UTXO CBDC
would in essence be “a chain of digital signatures” stored in a database instead of DLT/blockchain
(Nakamoto, 2009).
DLT/blockchain has been studied as a potential source of efficiency, especially in terms of re-
ducing reconciliation and data management costs by automating or streamlining, clearing, offering
greater transparency, and tamper evidence (see for instance (Chiu and Koeppl, 2019), Santander
(2016), Morgan Stanley (2016), and Ruttenberg (2016)). Yet the overarching academic consensus
is that the above are not necessarily hindered by the choice of technology, but by existing pro-
cesses (Board of Governors of the Federal Reserve System (U.S.) et al., 2016, Benos et al., 2017).
Additionally, DLT/blockchain deployments come with a number of drawbacks that mostly relate
to scalability.
At this point a distinction needs to be made between private and public deployments (Dinh
et al., 2017). While the data structure and its organisation remains the same, in public blockchains,
network participants are usually unknown and mutually distrusting nodes that are economically
incentivised to achieve consensus on state of the data set in a process secured by cryptography
and game theory. This process is associated with significant overhead costs and hinders scalability
25
to the point that a public DLT/blockchain deployment would be unsuitable for the volumes of a
CBDC (especially its retail and universal variants) (Budish, 2018, Chiu and Koeppl, 2019, Auer and
Boehme, 2020). Indicatively, for validating and submitting new blocks, Bitcoin (the most popular
cryptocurrency by most measures) utilises Proof-of-Work (PoW), which involves the computation-
ally intensive solving of cryptographic puzzles (mining) by special nodes called “miners”. PoW,
in conjunction with restrictions on block size and production frequency to facilitate accessibility
to a wider audience, translate to a throughput of about seven transactions per second (Nakamoto,
2009, Antonopoulos, 2014). Ethereum, another popular public blockchain utilises Proof-of-Stake
(PoS), which despite being more efficient compared to PoW, owning to artificial limits in block size
and production to facilitate accessibility, can only process between 15-30 transactions per second.
“Public” blockchain deployments that achieve higher throughputs have compromised on decen-
tralization or security, forming the popular blockchain trilemma, between scalability, security, and
decentralization.
Faced with this trilemma, CBs will opt for scalability and security over decentralization (see for
instance (Group of Central Banks, 2020, ECB, 2020, BoE, 2020)). Danezis and Meiklejohn (2015)
and Benos et al. (2017) describe how some amount of centralization will be necessary in a CBDC
scheme to mitigate the overheads of distributed consensus. In fact, blockchain was rejected by
China as it cannot accommodate the volume of transactions required for a CBDC (Gigichina, 2022).
Databases are the more intuitive option as participants are known (usually vetted) and securing
and updating the data set can rely on their access-level, role and other business incentives, instead
of inefficient consensus mechanisms. Additionally, those participants can have access to specialised
hardware and software to facilitate the fast processing of transactions and state transitions, as is
currently the case with commercial banks and PSPs. Databases remain an intuitive choice when
other aspects such as resilience and vulnerabilities are considered, since DLT/blockchain does not
necessarily constitute a material improvement and comes with its own set of trade offs.
That is not to say that DLT/blockchain can be made more, or even entirely, centralized to
accommodate for a CBDC function. CBs could opt for a Proof-of-Authority (PoA) mechanism
that relies on a small set of trusted and reputable entities to act as transaction validators and
26
update the ledger (Wood, 2015). In the case of a direct CBDC, there would be a sole validator, the
CB, whereas in the case of an indirect or hybrid CBDC, commercial banks and other PSPs would
also have validator rights. Yet, such scheme would largely constitute a reinvention of the existing
processes, but with extra steps rendering the use of DLT/Blockchain redundant as its “main
benefits are lost if a trusted third party is still required” (Nakamoto, 2009). Yet, as explored in
subsection 3.2.3 in the context of programmability DLT/blockchain might offer benefits as it could
allow for native execution of open-source code originally intended for decentralized blockchains,
potentially yielding cost-savings in development time. In the interest of preserving space, the
CBDC design tree is included in Appendix A.
5. CBDCs, monetary policy and financial stability
5.1. CBDCs and monetary policy
Davoodalhosseini et al. (2020) summarise the main ways in which a CBDC could improve
monetary policy, categorising them in “proactive” and “defensive”. Under proactive arguments,
they outline how a CBDC can facilitate the effectiveness, implementation, and transmission of
monetary policy, as well as help stimulate the economy when necessary. By allowing for differen-
tiated interest rate schemes dependent on the size of the deposit balance, incentivizing consumers
to maintain efficient levels of liquidity and minimizing opportunity cost. Additionally, a CBDC’s
substitutability with deposits could improve the transmission of monetary policy as any change in
remuneration would be more quickly and accurately reflected to other consumer rates. Finally and
in conjunction with the phasing out of cash or high denomination notes, a CBDC could eliminate
the zero lower bound, incentivizing spending when needed. However, the authors point out that
quantitative estimates of such benefits are limited, and there are ill-understood caveats associated
with the elimination of the zero lower bound and the discontinuation of cash or the imposing of
other restrictions. Additionally, such measures might blur the line between moentary and fiscal
policy.
In terms of defensive arguments, the authors outline that a CBDC could preserve the effective-
ness of monetary policy and safeguard the financial sovereignty by reducing consumer incentives to
27
adopt alternative or competing monies, not denominated in the national currency. Such potential
adoption would depend on the national currency being perceived as (i) financially risky or unstable
(due to inflation or other factors), and/or (ii) severely lacking in features compared to other public
or private monies. Naturally, such a scenario is unlikely in a stable developed economy with a
healthy financial system.
Besides offering an overview of the ways CBDCs interface with monetary policy, the above also
highlights the most important components of a CBDC when it comes to monetary policy, namely,
its ability to bear positive and negative interest, wholesale, retail, or universal availability, and
convertibility with other monies. In this section, we will analyze those considerations in further
detail.
5.1.1. Interest rate considerations
As noted, the choice of whether a CBDC should bear interest is crucial. Depending on the
economic cycle, this interest can be positive, zero or even negative. The concept of paying in-
terest on short-term CB liabilities was first proposed by Friedman (1960), who suggested that an
equivalent rate to the risk-free rate should be paid in order to make sure that the cost of holding
money is equal to the marginal cost of its production. Keister and Sanches (2021) posit that a
remunerated CBDC can serve as a new monetary policy tool that can be used to influence the
efficiency of exchange and aggregate investment. The optimal interest rate depends on the char-
acteristics of the CBDC and of other payment methods it is in competition with. As suggested
in Meaning et al. (2018), interest paid can very depending on the entity that bears the CBDC
instrument. For instance, CB might wish to offer different remunerations for commercial banks,
NBFIs, or individuals and households to achieve different policy goals. Different interest rates
can also be charged based on the size of CBDC holdings (Meaning et al., 2018). This argument
favours a CBDC that is distinct from reserves, allowing for greater flexibility. In a system that
is non-distinct from reserve, if the CB charges different interest rates for different reserve holders,
this would de facto break their fungibility and create a two tiered CBDC system, of reserve-like
and non-reserve CBDCs.
28
Bordo and Levin (2017), who consider CBDC and reserves to be distinct, suggest that the
introduction of a remunerated CBDC may provide a unique opportunity to reform the existing
monetary policy framework. In a growing economy with a stable price level, the interest rate paid
on CBDCs would be positive. However, if the economy were to be exposed to a major shock, it
would be possible for the CB to reduce interest rates as required (even to negative levels through
demurrage fees) in order to stimulate economic growth and promote price stability. However, the
effectiveness of negative interest rates is hindered by the use and circulation of cash money because
cash would become more attractive when nominal interest rates approach zero and especially
when they turn negative. This is supported by Agarwal and Kimball (2015),Goodfriend (2000),
and Rogoff (2016) who propose that replacing cash with a CBDC could make it simpler to set a
negative rate on CB money and thus bypass the zero lower bound. Nevertheless, as these authors
acknowledge, the elimination of cash is not an essential outcome of CBDC. Bordo and Levin (2017)
also note that interest rates can facilitate the establishment of a constant price level target that
would serve as a natural focal point for expectations and a nominal anchor. Additionally, nominal
interest rate adjustment on CBDCs could replace other monetary policy techniques (such as QE)
as the primary monetary policy tool.
Finally, a (positively) remunerated CBDC could facilitate a more competitive financial system
ensuring that government-issued money bears the same return as other risk-free assets and pro-
viding an incentive for depositors to shift funds into CBDC accounts over less competitive private
sector institutions. Andolfatto (2021) and Chiu et al. (2019) study the financial implications of
this more competitive landscape, noting that it does not necessarily hinder credit provision and
bank funding, but does reduce monopoly profits, whereas Mancini-Griffoli et al. (2019) warn that
remunerated CBDCs could result in increased loan interest rates and diminishing credit demand22 .
Moreover, providing wide access to the CB’s balance sheet through a retail or universal CBDC and
offering market participants an interest rate could more effectively guarantee that no entity would
lend at a rate lower than the floor, thus making the floor a more effective limitation (Meaning
et al., 2018).
22
Explored in subsection 5.2.
29
5.1.2. Technological availability considerations
When a CBDC is available to more entities in the private sector, it allows for a direct imple-
mentation of monetary policy, without relying on the existing monetary transmission mechanism
(Bordo and Levin, 2017). This argument is based on the idea that decisions concerning the remu-
neration and convertibility of a CBDC can be more influential when more economic agents have
access to it. Therefore, altering (increasing or decreasing) the interest rate, or convertibility (by
limiting or expanding it) of a wholesale CBDC would be less impactful compared to doing the
same for a retail or universal CBDC.
Additionally, Meaning et al. (2018) suggest that with a retail CB, the demand curve for elec-
tronic CB money could become less or more volatile depending on the positive or negative corre-
lation of shocks affecting new market participants with those of existing participants. In the case
of a positive correlation, more active management of the demand curve by CB would be required,
whereas, in the case of a negative correlation, the demand curve would become less volatile, re-
quiring less intervention. Finally, the more available a CBDC is, the more the CB’s balance sheet
can expand (Bindseil, 2020) with important implications for the financial system, such as those
seen with quantitative easing (Plosser, 2019).
5.1.3. Convertibility considerations
Convertibility of a CBDC for other monies is an important attribute that influences monetary
policy. With convertibility here we mean the ability for a CBDC holder to exchange it with other
forms of money, such as deposits and cash, at face value. Naturally, at-par convertibility with
every form of money (for instance eMoney, crypto, or foreign currencies) cannot be enforced, but
in the case of deposits and especially cash it can be desirable. For instance, absent at-par CBDC
convertibility with deposits or cash, any changes in the interest rate of a CBDC would not influence
deposit rates or cash demand as strongly as in the case of convertibility at par. On that note,
Agarwal and Kimball (2015), Assenmacher and Krogstrup (2018), and later Kumhof and Noone
(2021), argue for a dual-fiat currency system relying on flexible exchange rates between CBDCs,
cash, and deposits, to facilitate financial stability and overcoming the lower bound.
30
Meaning et al. (2018) on the contrary, argue that the ability of depositors to convert commer-
cial bank money into CB money on demand is essential for preserving confidence in bank deposits
whereas, Kumhof and Noone (2021) counter-argue that it is high regulatory oversight and com-
pliance requirements rather than guaranteed convertibility of financial instruments which drive
confidence in the commercial banking system. Although there is no concrete evidence to support
either position conclusively, certain events from the 2008 financial crisis as well as capital controls
imposed in Greece and Cyprus during the Eurozone debt crisis provide strong arguments both for
increased oversight and direct convertibility. Moreover, as we will demonstrate in the next section,
Kumhof and Noone’s suggested CBDC is of arguable utility to the wider private sector, in part
due to their non-convertibility requirement.
Meaning et al. (2018) offer another argument in favour of direct convertibility. The authors
note that in certain scenarios excessive QE has resulted in commercial banks holding an excess
of reserves, which in a case of a CBDC that is non-distinct from reserves could be used for asset
purchases from the private sector. This would not be directly possible in a CBDC scheme that
is distinct from reserves (like the one proposed by Bordo and Levin (2017)). Instead, commercial
banks would need to first switch reserves for CBDC (either with the CB, or other private entity)
before offering it to other entities in the private sector.
5.1.4. Other considerations
Davoodalhosseini (2022) examines the optimal monetary policy under a cash-only, CBDC-only
and a dual cash-CBDC regime. In their model, a CBDC is interest bearing and users incur a
(technological) cost for using it. At the same time, due to its remunerated electronic nature,
a CBDC can improve the efficacy of ”helicopter drops”. Assuming that the CBDC perfectly
substitutes cash and its cost is low, the optimal policy is to abolish cash.
Conversely, if the CBDC cost is set too high, the model predicts that only cash should be used.
In the case of co-existence, if the cost of utilizing CBDC is not too high, the optimal policy would
be to use only one form of payment. This is because if both cash and CBDC are allowed to co-exist,
and are perfect substitutes, consumers may decide to use cash in order to avoid taxes associated
with CBDC, leading to an underutilization of the attractive feature that CBDC offers - bearing
31
interest. If cash and CBDC are not perfect substitutes, co-existence can be optimal.
Barrdear and Kumhof (2022) consider a similar scenario where deposits and CBDC are not
perfect substitutes. The authors find that the introduction of a CBDC increases the steady-state
GDP through reductions in real interest rates, distortionary taxes, and transaction costs, due to
a reduction of defaultable debt, cost of government financing, and increased liquidity respectively.
Additionally, a CBDC expands the monetary policy toolbox by offering an additional policy lever
in the form of the interest it pays. Finally, Chen and Siklos (2022), examine the potential impact
of CBDC on inflation and financial stability using historical data and McCallum’s policy rule.
Their model predicts that while CBDC is unlikely to result in higher inflation, there is a risk to
financial stability. It also suggests that eliminating large denominations from circulation will not
negatively impact inflation control, but does not advocate eliminating physical currency entirely.
5.2. CBDCs and Financial Stability
This section explores existing research on the potential impacts of CBDC on the financial
system, contingent on the CBDC design, substitutability with other forms of public and private
money, and any restrictions set in place to mitigate substitution between them, bank market power
and more. In most cases, authors consider a hybrid CBDC solution. As highlighted in subsection
4.2, this solution is the most intuitive as it allows each agent to focus on their core competencies,
namely, the CB on providing access to safe money, and the private sector on handling customer
relationships.
The literature so far has focused on how different designs of CBDCs will affect bank funding,
deposits, lending, consumer welfare, and financial system fragility through bank runs. For instance,
if a CBDC is highly substitutable for cash or deposits it terms of functionality, while paying higher
interest and offering additional technological features, it could be desirable enough that consumers
abandon alternative assets to use it - leading to disruption in the financial system. On the contrary,
if a CBDC does not offer sufficient utility or substitute value compared to existing instruments
then it would cause minimal disruption but may be redundant. Overall, a CBDC can improve
allocative efficiency provided that their interest rate is reasonable. However, besides remuneration,
CBDCs can compete with other monies across multiple dimensions, including safety, privacy, and
32
Table 2: Overview of Papers
Author Model Intstr. Comp. Design I Rd Rl Runs

Andolfatto (2021) DD X,C,D M nR,R,H,-,- ✗ ↑ - ✗
Fernández-Villaverde et. al. (2021) DD X,D M/C -,R,D,A,- N/A N/A N/A ✓
Kim and Kwon (2019) DD X,D C nR,R,D,A,- ✗ ↑ ↑ ✓
Schilling et al. (2021) DD X,D M/C nR,R,D/I,A/T,- N/A N/A N/A ✓
Chiu et al (2019) LW X,D C nR,R,D,A,- N/A ↑ ↓ ✓
Keister and Sanches (2019) LW X,C,D C nR,R,-,-,- ✓ ↑ ↓ N/A
Williamson (2021) LW X,C,D C -,R,-,-,- N/A N/A N/A \cmark
Dong and Xiao (2021) LW X,C,D C -,R,I,-,- ✗ ↑ ↓ N/A
This table provides an overview of various papers examining the financial implications of CBDC implementation. Papers
utilise different models which they apply to CBDCs with different characteristics. The columns report the author, the
model being studied, the payment instruments examined, the competitive environment examined, the design of the
CBDC, whether the CBDC impairs commercial bank income/funding, the deposit rate, the lending rate, and whether it
can facilitate bank runs.
Model: DD: Diamond and Dybvig (1983), or variation, LW: Lagos and Wright (2005), or variation
Instr: Payment instruments examined. X: CBDC, C: Cash, D: Deposits
Comp: Competitive environment examined, where M: Monopolistic, C: Competitive
Design CBDC: nR or R: Reserve or non-reserve. W, R, or H: Wholesale, retail, or universal. D, I, or H: Direct, indirect,
or hybrid. A or T: Account or token. B or D: Blockchain or Database.
I: Impairs commercial bank income/funding
Rd: Deposit rate, Rl: Lending rate, Runs: Can facilitate bank runs
novel features such as programmability, which remain largely unexplored in literature23 .

Table 2 provides an (non-exhaustive) overview of relevant research articles, the models used and
their often contradicting findings. Overall, there remains no definitive answer concerning whether
there exists a design that offers tangible utility while also avoiding disruption across the financial
system. This question is further compounded by the ever-evolving nature of research into this
area along with numerous mutually exclusive design options available. Additionally, most studies
concentrate on how CBDCs will affect commercial banking rather than non-banking entities. The
latter could be particularly vulnerable given certain proposed designs where banks still have some
minor role within the framework of certain CBDC systems. Finally, the role of wholesale CBDCs
in financial disintermediation is not examined.
5.2.1. CBDC effects on deposits, funding, lending and consumer welfare in different competitive
environments
Andolfatto (2021) and Chiu et al. (2019) examine the potential effects of implementing a
23
Although Agur et al. (2022) explore the concept of privacy/anonymity
33
hybrid remunerated retail CBDC, distinct from reserves, on bank lending and funding activity,
in an economy with a monopoly bank, and imperfect competition respectively. In both cases,
the introduction of CBDC gives consumers the option to hold deposits outside the traditional
banking sector, creating competition between commercial bank deposit rates (Rd) and CBDC
interest rates (Rc). Rational consumers typically opt for whichever rate is higher, assuming no
technological advantages between CBDCs and deposits or disruptive financial events that make
CB liabilities more attractive.
When the interest rate of reserves (Rr) remains below Rc (Rr < Rc), commercial banks have
every incentive to match Rd to Rc to maintain customer deposits. This is because the commercial
bank’s cost of money is Rr and not Rc. As long as there remains a positive spread between these
two rates, it pays for banks to retain deposits despite any reduced profit margins from raising
Rd=Rc. Additionally, this potential rate increase leads to more favourable terms for depositors
which expands financial inclusion24 . Andolfatto (2021) observes no effect on bank lending in his
model, as the opportunity cost for loans is determined by Rr instead or Rc. Chiu et al. (2019)
underline that a CBDC might increase bank lending due to the expansion in deposits. Monnet
(2021) and Dong and Xiao (2021) also agree with the findings of Andolfatto (2021) in terms of Rd
but deviate in terms of the impact on the lending rate.
Overall the main benefit of a CBDC is found in an imperfectly competitive deposit market,
in which commercial banks limit the amount of deposits available in order to suppress Rd. The
introduction of a CBDC establishes a floor rate for Rd=Rc, reducing bank’s incentives to restrain
the supply of deposits. As a result commercial banks offer more deposits, reduce loan rates, increase
lending activity, and expand financial inclusion. This holds true so long as Rc ≤ Rr. In a scenario
where Rc > Rr a bank would make make a loss if they chose to maintain deposits, resulting
in higher cost of funding for commercial banks, and suppression of deposits. Chiu et al. (2019)
also caution that lending rates may increase in case commercial banks face liquidity constraints
due to Rc > Rd. Andolfatto (2021) offers the additional insight that higher Rd resulting from
increased competition could have disinflationary effects on the economy, while also offering more
24
As consumers are more incentivised to bear the costs of opening a bank account.
34
compelling terms for depositors and facilitating financial inclusion. Kim and Kwon (2019) find
that the introduction of a CBDC suppresses supply of credit by commercial banks resulting in
a higher nominal rate and lower reserve-deposit ratio also leading to an increased probability of
bank runs.
Keister and Sanches (2021) study the introduction of a CBDC in a competitive bank market.
They consider three distinct scenarios, a CBDC with a high degree of substitutability with cash,
deposits, or both cash and deposits respectively and comment on the trade-offs of each. They find
that if there is a strong incentive for financial inclusion, it is optimal to have a CBDC with a high
degree of substitutability for cash. When the number of productive projects is limited compared
to the demand for deposit-like money, then it may be advantageous to devise a deposit-like CBDC,
particularly when financial frictions are moderate. If a CBDC can fulfil both roles simultaneously,
its circulation could be either broader or more restricted than if it had high substitutability with
either cash or deposits. Overall, while a CBDC always causes some disintermediation social wel-
fare can still increase. Importantly, in the scenario of a CBDC with high substitutability with
deposits, they arrive at the same conclusion as Andolfatto (2021) and Chiu et al. (2019), noting
that increased competition raises Rd, and expands the commercial bank depositor base.
Their findings deviate from those of Andolfatto (2021), Chiu et al. (2019), and Monnet et al.
(2021), to the extent that under perfect perfect competition, commercial banks are unable to
insulate themselves from changes in funding costs, since they already offer competitive Rd, and
as a result pass their costs onto borrowers. This can lead to a decrease in aggregate lending
and investment. Yet, when payment efficiency is low, introducing a CBDC may be sufficient for
achieving gains in payment efficiency that could offset any losses incurred by reduced aggregate
investment.
Similarly, Keister and Sanches (2021) and Agur et al. (2022) examine the welfare implications
of introducing a CBDC. They consider a scenario in which consumers need to allocate their income
between cash, deposits and a CDBC according to their preferences on the payment instruments’
degree of security versus anonymity, positive network effects stemming from their widespread use,
and remuneration (if any) vis a vis other instruments.
35
On the privacy-to-security spectrum, cash and deposits fall at the two extremes, with cash being
entirely private and non-secure and deposits entirely secure but non-private. Instead, a CBDC is
socially valuable as it can be designed to occupy any point in the privacy-to-anonymity-spectrum.
The authors find that the more cash-like a CBDC is, the more it substitutes cash even causing its
disappearance due to the lack of network effects stemming from its lower usage. On the contrary,
a deposit like CBDC leads to increased competition with commercial banks and increased deposit
and lending rates, before contracting credit provisions to firms.
The latter is in contrast to the findings of Andolfatto (2021) who concludes that assuming
commercial bank market power and provided Rr < Rc, the commercial bank lending process is
not hindered, and that the depositor base can even expand if the commercial bank accepts lower
profit margins to retain customer deposits by matching Rd=Rc. Such an assumption is absent
from Agur et al. (2022).
For Agur et al. (2022), interest paid on CBDC is seen as introducing distortions in consumer
choice of payment instrument. Yet, the authors recognise the interest rate’s utility in limiting the
substitutability of CBDC with other monies, and in preserving consumer welfare by controlling
payment instrument network effects. The authors also consider other political economy factors
for an interest bearing CBDC which include the preservation of cash, limiting impact on bank
intermediation, the introduction of CBDC after cash has fallen out of favour or when anonymous
payment instruments create negative social externalities, and when banks have market power the
optimal CBDC rate can deviate from zero.
5.2.2. CBDC effects on bank runs and financial disintermediation
On the point of disintermediation and deposits, Mersch (2018), Kim and Kwon (2019), Bindseil
(2020), Williamson (2022), and Schilling et al. (2020), highlight the possibility of CBDCs facili-
tating bank runs in times of financial stress and Cecchetti and Schoenholtz (2017) suggest that
unsophisticated consumers might exchange deposits for CBDC when the first signs of financial risk
appear. While the authors recognise that tools to enable such bank runs exist today (for instance,
cash or government debt) the digital nature of a CBDC could aggravate the switching. Addition-
ally Fernández-Villaverde et al. (2021) utilise the Diamond-Dybvig model to showcase how the CB
36
can emerge as a monopoly depository institution. In their model, a non-fiscally backed CB has
access to liquidity transformation (long term investment) through arrangements with investment
banks and is able to replicate the socially optimal contract offered by commercial banks. Yet, if
the CB were to receive fiscal backing it would monopolise deposits. Moreover, due to the CB’s
contract rigidity with investment banks (the CB cannot call on its investment) runs on CB are
deterred. Consumers aware of this fact opt to deposit with the CB instead of commercial banks,
leading it to become the monopoly depository institution. With its new monopoly power, the CB
can deviate from the socially optimal contract.
Considering those effects, Kumhof and Noone (2021) envisage a minimally disruptive CBDC
which: i) would pay an adjustable interest rate, allowing for the market for CBDC to settle without
the need for extensive balance sheet adjustments or changes in the general price level; ii) be distinct
from reserves, with no guaranteed direct convertibility to one another at the CB, so as to address
the risk of a ’run by the back door’ scenario; iii) not be subject to guaranteed convertibility with
bank deposits at commercial banks, so as to avoid runs on the aggregate banking system; and iv)
be issued by the CB only against eligible securities, such as government bonds, and strictly at its
discretion.
They examine its potential first-order effects on commercial banks’ balance sheets by consider-
ing the scenario of an initial introduction of a CBDC, and that of confidence crisis in the banking
system, leading to an increased demand for CBDCs by households and individuals. If these prin-
ciples are upheld, they conclude that in the first scenario: i) The core functions of the commercial
banking sector, namely, the provision of credit to borrowers and liquidity to depositors, are not
impaired, despite diminishing deposits. ii) Commercial banks and their customers, through their
respective portfolio decisions, decide how much depositors switching to CBDC affects the size and
composition of commercial bank balance sheets. iii) Banks can still fulfil their traditional role as
intermediaries. For the scenario of a loss of confidence in the banking system, we explain how the
probability of a run from bank deposits to CBDC can be notably reduced by using the same core
principles.
While the authors acknowledge the potential of CBDC to serve as the most secure form of money
37
in the economy, their proposed restrictions may diminish this utility. For instance, under conditions
of extreme financial stress, access to CBDC might be limited as a result of public and private sector
actions. For example, decreased interest rates set by the CB (potentially even demurrage fees),
refusal from commercial banks to convert government securities and deposits into CBDCs, or
refusals from NBFIs and other private entities to exchange CBDC for deposits could reduce the
appeal of CBDC as a safe instrument. It is thus uncertain if such a CBDC would be attractive or
beneficial. Features such as anonymity and programmable payment capabilities may make it an
attractive medium of exchange rather than only a safe asset; however, its competitiveness in this
capacity against offerings from the private sector and its appeal to consumers remain debatable.
Other authors share similar concerns with Kumhof and Noone (2021) but have proposed less
radical solutions. For instance, Meaning et al. (2018), Fernández-Villaverde et al. (2021), and
Williamson (2022) posit that such concerns can be mitigated through deposit insurance schemes
by the CB and Kim and Kwon (2019) as well as Brunnermeier and Niepelt (2019) argue that if the
CB lends CBDC deposits to commercial banks it can reduce the risk on bank runs and improve
financial stability. Bindseil (2020) outline how Kumhof and Noone (2021) proposed limitations
might be redundant. They showcase how interest rate on CBDCs is not a necessary condition for
market clearing or inflation control, instead suggesting that, similar to cash, a potential CBDC
oversupply would be neutralised by returning to the CB which would then adjust reserves and open
market operations accordingly. Similarly they question the choices of distinguishing CBDC from
reserves and establishing non-convertibility outlining that similar schemes exist between cash and
reserves. Overall they argue that in their attempt to create a minimally disruptive CBDC, Kumhof
and Noone’s suggestions disrupt the status quo and counter-propose other solutions. Similarly to
Panetta (2018), they suggest limiting the amount of CBDC holdings per consumer, and even
offering remuneration tiers depending on the amount of holdings to mitigate bank runs to CBDCs.
Finally, they also note that the attractiveness of CBDCs also relies on other features, besides
remuneration, while recognising that a remunerated CBDC would provide a useful monetary policy
level for adjusting a CBDCs substitutability with other monies, a notion also echoed in Agur et al.
(2022).
38
A strand of literature also suggests that concerns around the levels of commercial bank disin-
termediation might be exaggerated, and measures such as those proposed by Bindseil (2020) and
Kumhof and Noone (2021) might be redundant. Indicatively, Williamson (2022) posits that bank
runs might be less disruptive under a CBDC regime whereas Keister and Monnet (2022) find that
CBDCs might decrease financial fragility as the CB can monitor the flow of funds into CBDCs
and identify weak banks giving policymakers more time to act, discouraging depositors to run on
banks.
6. Arguments against CBDC issuance
While section 2 has listed a number of arguments in favour of the introduction of CBDC, this
section allows us to explain the existing counter-arguments against. The CBs tend to favour CBDC
because they allow them to increase their control over the financial system and mitigate some of
the existing financial risks.
Regarding motivations, recently, many CBs have placed great emphasis on issuing CBDCs in
order to protect financial sovereignty, particularly against the issuance of foreign CBDCs. The
theoretical arguments supporting this idea were presented in Subsection 3.1.3 and include the
threat of currency substitution and bank runs to foreign assets. However, some of these concerns
may be exaggerated. For example, Martin Chorzempa, a senior fellow at the Peterson Institute
for International Economics, testified to the US-China Economic Security Review Commission
on the threat of China’s CBDC, stating that it has yet to demonstrate greater cost-effectiveness,
efficiency, privacy, or convenience than other solutions, and is therefore unlikely to challenge the
dollar’s international dominance in the short to medium term (Kaminska, 2021). Additionally,
Engert and Fung (2017) argues that the potential of a CBDC to reduce the effective lower bound
and combat financial crime can be achieved through other means, such as the implementation of
regulatory measures to promote competition in retail payments. Finally, Quarles (2021) notes how
a CBDC may pose a threat to resilience by serving as a honeypot for cyber-criminals, due to its
digital nature, large surface, and significance relative to other forms of money. Moreover Bindseil
(2022) highlights that the alleged transformative potential of digitisation in money and payments,
39
as well as CBDCs in particular, might be overestimated, citing the constant evolution of money
and the relatively unchanged issues of commercial and central banking.
The proposed alternative infrastructures and design options discussed in subsection 4.4 have yet
to show a clear advantage over existing systems in terms of meeting the needs of both consumers
and central banks. In fact, many suggested solutions would come with significant costs. For
example, developing a new DLT/blockchain record-keeping infrastructure, or expanding the CB’s
role as the sole financial intermediary as advocated by direct CBDC schemes, would be costly and
disruptive and less desirable. Additionally, the introduction of a CBDC would require educating
consumers, who may be resistant to change, on its use and proper security practices. Even if
accessing a CBDC requires minimal equipment, such as a smartphone, the CB would need to
provide this for consumers who do not have it, especially if cash usage decreases.
The factors of cost and destabilization have led many to abandon more radical CBDC schemes
in favor of deployments that iterate on and do not replace existing infrastructure and schemes,
with any additional features, such as programmability, likely offered as optional “add-ons,” as
outlined in subsection 3.2.3. In academic research, most authors abstract away from CBDC infras-
tructure, as, for the most part, a CBDC that satisfies CB motives can be designed entirely within
the boundaries of existing systems, particularly through adjustments of interest rates and the
availability of a reserve or non-reserve CB liability to the private sector. This raises the question
of whether a CBDC is truly a new payment instrument or simply a shift in policy to increase CB
influence. Lastly, and importantly, despite the consumer need for cash-like privacy and anonymity,
as discussed in Subsection 3.2.2, CBDCs can serve as a tool of mass surveillance, due to the con-
centration of information on citizens. Naturally, this lack of cash-like privacy and anonymity is
another argument against CBDC issuance.
CBDC schemes involving the private sector are viewed favorably, with some (such as Bofinger
and Haas (2020) and Engert and Fung (2017)) arguing that they can offer products and services
that serve the same purpose as CBDCs while achieving higher customer satisfaction and lower
costs. This is supported by the analysis of the direct and hybrid CBDC schemes in Subsection
4.2. Mobile payment services like Apple Pay, Google Pay, PayPal, AliPay, and WeChat Pay al-
40
ready handle trillions of transactions annually, and blockchain providers25 offer CBDC-as-a-service,
demonstrating the private sector’s capability in providing solutions at a large scale. Additionally,
proposals for scaling blockchain deployments such as rollups26 can theoretically enable hundreds
of thousands of transactions per second, potentially making stablecoins or even cryptocurrencies
a viable solution for payments.
Furthermore, Engert and Fung (2017) outline several arguments against the issuance of a
CBDC, even if it is designed entirely within existing boundaries. Chiefly, they note that cen-
tral banks have been able to effectively influence consumer rates through the adjustment of the
overnight rate, thus rendering the need for an additional monetary policy level redundant. Addi-
tionally, they argue that the ability of a CBDC to pay interest is incompatible with strong privacy
and anonymity due to regulatory and tax considerations, noting that such remunerated CBDC
would hinder any benefits to financial inclusion for individuals without access to strong identities.
CBDC interest would also inhibit any marginal seigniorage gains in proportion to the level of
the interest rate. Regarding the argument of using CBDCs to eliminate the zero lower bound,
the authors warn that such a move would have significant political economy implications that
may damage the reputation of the CB, in addition to impairing the welfare of less sophisticated
consumers who might rely on such income. Finally, as we outline in Subsection 5.2, while most
authors suggest that a reasonably designed CBDC can provide welfare benefits through increased
competition, they simultaneously recognize that, absent that level of restraint, its implications for
the financial system will be severe, including funding constrained commercial banks raising fees
and rates for customers, and the disintermediation of large parts of the existing financial system.
There could also be potential negative consequences and costs related to the widespread adoption
of digital payment solutions by consumers with low financial literacy, but not much literature has
been developed yet on this topic.
Overall, as the more radical schemes of total anonymity, decentralization, and disintermediation
25
See for instance Consensys, Ripple, and nChain.
26
Rollups are a blockchain scaling solution that utilises off-chain computations to increase scalability and through-
put while maintaining the security of the underlying blockchain. Transactions are combined into a single “rollup”
transaction which is broadcast to the main chain, enabling a higher transaction throughput.
41
have been abandoned in favor of more modest proposals, the above arguments suggest the potential
redundancy of CBDCs.
7. Summary and Future Research
Nearly every CB in the world is examining the issuance of CBDCs and many at an advanced
stage. CBDCs are therefore an eventuality whose impact is still unclear due to the complexity of
their design and the implications for the financial system. It is essential that research keeps up
to speed to avoid any of the discussed negative consequences of CBDCs. The extant literature
reviews on this topic have followed a systematic approach and have been useful in organizing the
earlier knowledge. However, navigating the fast-growing research on CBDC can be particularly
labyrinthine due to its pace and complexity.
This thematic literature survey provides a comprehensive handbook for understanding all
CBDC aspects. First, we review the existing definitions and provide a universal one; we con-
textualise CBDCs as the latest in a line of key financial system’s shifts; we analyse the arguments
in favor of CBDC issuance instigated by contemporary financial events and trends requiring the
introduction of new financial instruments. In particular, we look at the discussion around CBDC
in response to the need for: a new monetary and fiscal policy tool, improvements in payment speed
and efficiency, the safeguard to CB sovereignty with heightened competition from cryptocurrencies,
the mitigation of the negative effects of declining cash usage and of increasing privacy-invasive pri-
vate sector payment systems, and, finally, the development of programmable money and payments
solutions.
Second, we examine the design space and options for CBDCs, including: their reserve or non-
reserve status as a liability, wholesale, retail, or universal availability, direct, indirect, or hybrid
provision, account or token access, and the choice of a novel DLT/blockchain or the use of the
conventional real-time gross settlement infrastructure. We argue that the choice of infrastructure
and access method are largely inconsequential. In particular, a token-based CBDC would not
necessarily facilitate anonymity/privacy and a DLT/blockchain infrastructure would not always
result in efficiency or resilience gains. We also demonstrate how, in certain cases, the opposite
might be true.
42
On the contrary, the availability and liability-nature of CBDCs are, by contract, impactful for
their monetary implications. We discuss the implications of different breadth of CBDC availability,
its eventual interest-bearing nature, the convertibility with other monies, its impact on bank con-
fidence and stability and competitivity. In particular, we note that a reasonably designed CBDC,
bearing a modest interest rate, may not necessarily lead to financial system disintermediation. In
this light, we also showcase some proposals for more conservative CBDC approaches. Finally, we
present the primary arguments against CBDC issuance and focus on discussing their potential
redundancy due to their progressively diminishing ambitious design.
In light of the literature reviews and the developed discussion, we identify several research
priorities. First, we need further empirical studies on the motivations for CBDC issuance and the
factors influencing CBDC adoption. While prior studies have employed qualitative methods, such
as questionnaires administered to CBs, these may not always provide a comprehensive understand-
ing of the underlying political and economic drivers and certainly cannot focus on the needs and
opinions of the public (see for instance Bindseil et al. (2021) and ECB (2021)). Bijlsma et al. (2021)
and Maryaningsih et al. (2022) utilize empirical methods to study the drivers of CBDC adoption
considering the characteristics of consumers and the needs of the financial system. However, these
studies can be expanded in a number of ways, for instance by considering how different CBDCs
may appeal to different consumers or different scope of use27 . The difficulty of this research ques-
tion is compounded by the inherently complex nature of CBDCs, and in certain cases, even by
the low financial literacy of the final potential users. However, the insights that can be derived by
such study can be useful to analyze the demand for CBDCs, the disintermediation potential, and
the most useful design.
Second, while some studies have attempted to predict the general CBDC demand (for instance,
Li (2022) and Burlon et al. (2022)), such studies do not exist for the majority of advanced or devel-
oping economies. Notably, the volatility of CBDC demand potential, including its determinants,
remain largely unexplored.
27
The ECB’s 2020 report on the digital euro (ECB, 2020) examines the desirable features of a CBDC by consumers;
however, it does not address the question of whether consumers can derive any utility from a CBDC in the first
place and, if so, what type.
43
Third, in terms of CBDC infrastructure, we find programmability being an important and
largely unexplored aspect (with some exception in the computer science literature). In particular,
we need to study more which new capabilities digital centralised money programmability can offer
and its implications on competition in the financial system as well as on consumer welfare. Addi-
tionally, researchers should examine the implications of CBDC programmability on environmental
or sustainable goals. For instance, as outlined in Subsection 3.2.3, the introduction of a novel
tax at the unit-level if a CBDC is spent on a carbon-intensive goods and services would influence
consumer preferences, payment choices, and welfare.
Fourth, as discussed in section 5, while the literature on the financial implications of CBDC
introduction is growing, most authors focus on its effects on commercial banks, leaving out non-
banking entities, such as eMoney and fintech providers, and stablecoin and cryptocurrency deploy-
ments. The latter may be particularly susceptible to the issuance of a CBDC, even more than
commercial banks which, as most literature recognizes, may preserve a role. Future research can
start addressing this important gap in knowledge for example by looking at how announcements
related to CBDCs developments influence the relative institutions and markets.
Fifth, in Section 5 we also underline how different CBDC schemes deployed in different com-
petitive environments might influence financial stability. The overarching consensus is that there
is a trade-off between CBDC utility and the level of financial disintermediation. The question
of whether a CBDC that is both minimally disruptive for the financial system and maximally
valuable for its users exists remains unanswered. Moreover, even if such a CBDC scheme does
not exist, there is no definitive answer as to the optimal design options that balance the various
benefits and costs.
Sixth, another potential research avenue is the study of how CBDC issuance - against other
existing CB liabilities - might influence the CB balance sheet structure and how this can reverberate
on the financial system. Importantly, to support a CBDC, especially in absence of restrictions
such as those set by Kumhof and Noone (2021), the CB might be incentivised to engage in credit
provision to support their expanded balance sheet, further increasing its role and involvement
in the financial system. How this provision of credit would work in practice, and how it would
44
influence the wider private sector is an important avenue for future research.
Seventh, as discussed in subsection 3.2.2, the widespread adoption of a CBDC may potentially
curb illegal markets and tax evasion. The extent of this curbing and its potential impacts on the
financial system and tax revenues remain an area for further research.
45
Appendix A. CBDC design space and options
CBDC design space
R1
W2 R2 U2
D3 I3 H3 D3 I3 H3 D3 I3 H3
A4 T4 A4 T4 A4 T4 A4 T4 A4 T4 A4 T4 A4 T4 A4 T4 A4 T4
B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5
CBDC design space
nR1
W2 R2 U2
D3 I3 H3 D3 I3 H3 D3 I3 H3
A4 T4 A4 T4 A4 T4 A4 T4 A4 T4 A4 T4 A4 T4 A4 T4 A4 T4
B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5 B5 D5
46
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Central Bank Digital Currencies: A Critical Review

Lambis Dionysopoulosa,∗, Miriam Marrab , Andrew Urquhartc

Electronic copy available at: https://ssrn.com/abstract=4354985

Feature Deposits eMoney Crypto P. Metals Cash Reserves CBDC

3. Motivations for issuing CBDCs

3.1. The three phases of development

3.1.1. The backdrop of persistent low inflation

3.1.2. CBDC and improvements in payment systems

3.2. Additional sophisticated arguments for CBDC issuance

3.2.1. Declining use of cash and financial inclusion

3.2.2. Privacy in payments

3.2.3. Programmability of payments and money

Another argument in favour of CBDC issuance is their facilitating of programmability of money

Figure 1: CBDC Programmability Trilemma

4. CBDC design space and options

4.1. Nature and availability of CBDCs

4.2. Direct, indirect, and hybrid CBDC provision

As outlined in Section 3, in the second exploratory phase of CBDCs motivated predominately by

4.3. CBDC Access

4.4. CBDC Infrastructure

5. CBDCs, monetary policy and financial stability

5.1. CBDCs and monetary policy

5.1.1. Interest rate considerations

5.1.3. Convertibility considerations

5.1.4. Other considerations

5.2. CBDCs and Financial Stability

Author Model Intstr. Comp. Design I Rd Rl Runs

novel features such as programmability, which remain largely unexplored in literature23 .

5.2.2. CBDC effects on bank runs and financial disintermediation

6. Arguments against CBDC issuance

7. Summary and Future Research

CBDC design space

CBDC design space

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