Architecting a Retail CBDC

Summary Sections 15.1–15.3 This chapter introduces Retail Central Bank Digital Currencies (rCBDCs), which are digital counterparts of physical cash, tailored to meet specific national objectives like financial stability and inclusion. Their development varies across countries, with developed nations likely funding rCBDCs through central banks, and less developed ones exploring public–private partnerships. Key use cases for rCBDCs include person-to-person, business transactions, government payments, and machine-to-any interactions. Each use case requires integration with existing systems, security measures, and potentially the use of programmable money. The successful adoption of rCBDCs hinges on effectively addressing these diverse requirements and integrating them into the existing financial ecosystem. Sections 15.1–15.4 Retail Central Bank Digital Currencies (rCBDCs) are designed with 22 distinct features, focusing on enhancing digital financial transactions. Key aspects include robust security to protect against cyber threats and a range of privacy options, from full anonymity to pseudonymity, safeguarding user data. Efficient consensus mechanisms and rapid transaction processing are crucial for a smooth user experience, while scalability ensures the system can handle extensive transaction volumes. rCBDCs facilitate cost-effective cross-border payments and enable micropayments, unlocking new economic models, especially in digital spaces and the Internet of Things. Programmability features in rCBDCs, including automated transactions and smart contracts, drive financial innovation. Despite challenges, offline functionality is integrated to improve resilience and financial inclusion, particularly in less connected areas. Compliance with KYC and AML regulations is essential, requiring seamless integration with existing verification systems. Overall, these 22 features of rCBDCs aim to revolutionize the digital economy, balancing security, efficiency, and privacy. Sections 15.5–15.6 The “Platform Support/Form Factors” section discusses various technologies and devices for retail Central Bank Digital Currency implementation. It covers feature phones for basic transaction capabilities, smartphones as primary digital payment devices, wallets in laptops and desktops for e-commerce, cloud-hosted solutions with centralized web-services, smart cards for offline payments, wearables like smartwatches, and IoT and embedded devices for machine-to-machine payments. In “Technologies for Payment Initiation,” the focus is on enabling retail activities through different technologies. QR codes are emphasized for their versatility and low cost. NFC is highlighted for contactless payments, Bluetooth and BLE for their widespread availability and energy efficiency, invoice payment links for easy transaction requests, and USSD codes for facilitating payments in areas with limited internet access. Sections 15.7–15.8 The “Forms of Retail CBDC” section explores different models for implementing retail CBDCs. The synthetic model involves private-sector currency issuance backed by central bank funds. The direct model has the central bank managing all functions with rCBDC as its liability. The two-tier hybrid models involve a combination of central bank and intermediaries, with varying operational roles and the currency remaining the central bank’s liability. The chapter identifies four main CBDC architectures: centralized vs. distributed infrastructures and account/register-based vs. token/value-based systems vs. DLT-based systems. Each combination offers distinct benefits and challenges, ranging from traditional payment systems and DLT solutions to software and hardware bearer tokens, with various implications for privacy, security, and accessibility. Section “Adoption” explores an aspect, which is crucial for the success of retail CBDCs, requiring simultaneous attraction of users and merchants. Central bank staff must be trained to understand CBDC implications, and the system’s value proposition must be clear to both users and merchants. Different operational models and processes should be defined and tested with stakeholders. Incentives, legal obligations, and education can boost initial adoption, while continuous marketing and user feedback are vital for sustained growth. It’s essential to ensure significant benefits over existing solutions, involve financial sectors positively, and prepare for swift law enforcement response. A phased roll-out with constant monitoring of adoption rates is recommended. Overall, aggressive planning, comprehensive communication, and stakeholder involvement are key to achieving widespread acceptance of a CBDC system.