CENTRAL BANK DIGITAL CURRENCY

1 CENTRAL BANK DIGITAL CURRENCYA Payments Perspective NOVEMBER 2021 Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedB Fast Payment Systems: Preliminary Analysis of Global Developments 2021 international Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: This volume is a product of the staff of the World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work.

2 The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. RIGHTS AND PERMISSIONSThe material in this publication is subject to copyright. Because the World Bank encourages dissemination of their knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution is , COMPETITIVENESS & INNOVATION GLOBAL PRACTICEP ayment Systems Development GroupCENTRAL BANK DIGITAL CURRENCYA Payments Perspective This Guidance Note was developed by an experts group led by Massimo Cirasino (Senior Payments Advisor and lead coauthor of this Guidance Note) and comprising lead coauthor Biagio Bossone (Senior Payments Advisor), and coauthors Holti Banka (Financial Sector Specialist), Ahmed Faragallah (Senior Financial Sector Specialist)

3 , Maria Chiara Malaguti (Senior Legal Advisor), and Gynedi Srinivas (Senior Financial Sector Specialist), all World Bank. Harish Natara-jan (Lead, Payments and Market Infrastructure, World Bank) provided overall guidance and coordination. The Guidance Note benefitted from internal World Bank peer reviewing by Jean Pesme (Global Director), Mario Guadamillas (Practice Manager), and Erik Feyen (Lead Financial Sector Economist) of the Finance, Competitiveness and Innovation Global Prac-tice; by Greta Bull (Director) and Mehmet Kerse (Consultant) of the Consultative Group to Assist the Poor; by Marcello ACKNOWLEDGMENTS Estevao (Global Director), Tito Cordella (Adviser), Anders Hjorth Agerskov (Lead Public Sector Specialist), and Mas-simo Mastruzzi (Senior Economist) of the Macroeconomics, Trade and Investments Global Practice.

4 By Stela Mocan (Lead IT Officer), Raunak Mittal (IT Officer), and Peter Zhou (IT Offi-cer) of Innovation Lab; and by Franziska Liesolette Ohnsorge (Practice Manager), Patrick Kirby (Senior Economist), and Sergiy Kasyanenko (Economist) of Prospects Group. Mahesh Uttamchandani (Practice Manager, World Bank) provided overall managerial guidance and support. External institu-tions that provided comments include the CENTRAL Bank of the Philippines, South Africa Reserve Bank, Committee on Payments and Market Infrastructures, and international Mon-etary Fund. Charles Hagner and Jamila Adbulkadir provided editorial assistance, and Naylor Design Inc.

5 Provided design and layout assistance. iiTABLE OF CONTENTSiiiAcknowledgments iiForeword vAcronyms and Abbreviations viExecutive Summary 1 Summary of Policy Recommendations under Each W Question 4 I. THE PURPOSE AND SCOPE OF THIS GUIDANCE NOTE 6 II. SETTING THE STAGE: CBDC IN THE CONTEXT OF THE NATIONAL PAYMENTS SYSTEM 60 III. REASONS FOR ISSUING CBDC (WHY?) 15A. Key Aspects for Consideration 15B. Policy Recommendations 18 IV. FEATURES THAT CBDC SHOULD HAVE (WHAT?) 24A. Key Aspects for Consideration 24B. Policy Recommendations 27 V. THE APPROPRIATE TIMING FOR CBDC (WHEN?) 31A. Key Aspects for Consideration 38B.

6 Policy Recommendations 35 VI. THE RIGHT INFRASTRUCTURE FOR CBDC (WHERE?) 38A. Key Aspects for Consideration 38B. Policy Recommendations 41 VII. DEFINING THE ROLE OF STAKEHOLDERS IN CBDC IMPLEMENTATION (WHO?) 44A. Key Aspects for Consideration 44B. Policy Recommendations 45 APPENDIX A: a short history of the Last 50 Years of National Payments System Development 48 APPENDIX B: CPMI-IOSCO Principles for Financial Market Infrastructures 50 APPENDIX C: Forms of Money in Today s World 53 APPENDIX D: How Cross-Border CBDC Can Address Existing Challenges 55 APPENDIX E: Summary of Existing Literature on Impact of CBDC on Monetary Policy and 57 Financial StabilityENDNOTES 60iv CENTRAL Bank DIGITAL CURRENCY : The Payments Perspective List of BoxesBox 1: Overview of the Other Two Notes of the World Bank Package on CBDC 8 Box 2: Components of the National Payments System 10 Box 3.

7 CENTRAL Bank DIGITAL CURRENCY : Taxonomy 12 Box 4: Trade-Offs between Privacy, Anonymity, and Financial-Integrity Risks 19 Box 5: World Bank Practical Guide for Retail Payments Stocktaking 20 Box 6: CPSS General Guidance for National Payment System Development 21 Box 7: World Bank General Guidelines for Government Payment Programs 23 Box 8: Consensus Mechanism in DLT Systems 26 Box 9: CBDC and Payment Services during Emergencies 27 Box 10: World Bank Guidelines on Balancing Cooperation and Competition 28 Box 11: The CPSS-World Bank General Principles for international Remittance Services 30 Box 12: World Bank Guidelines for Successful Regional Integration of Financial Infrastructures 47 List of FiguresFigure 1: Overview of Policy Recommendations 7 Figure 2: CBDC in the Context of the National Payments System 118 Figure 3: Comparison of CENTRAL Bank Payment Mechanisms 17 Figure 4: One-Tier and Two-Tier Models 38 Figure 5: Distribution of Activities between the CENTRAL Bank and PSPs in a Two-Tier Retail CBDC System 39 Figure 6: Options of Decentralization within Two-Tier CBDC Model 40 Figure 7: The PAFI Framework 42 Figure 8.

8 The PAFI Wheel 43vSeveral waves of innovations and accompanying reforms have, over time, regularly changed the landscape of national payments system (NPS) in virtually every country in the world. A topic now grabbing widespread attention is cryp-to-assets, investments in DIGITAL currencies , and the related concept of stablecoins, which are DIGITAL currencies whose value are pegged to an underlying national CURRENCY issued by a CENTRAL bank. These innovations are forcing us to revisit the very definition of money and CURRENCY as an exchange of value, terms we had for decades taken for granted. A few CENTRAL banks are considering or beginning the process of issuing a CENTRAL bank DIGITAL CURRENCY (CBDC).

9 From design to implementation, researchers are looking at implications for the financial system, including for policy, regulation, and oversight, plus effects on the economy more broadly. We urge policymakers to be sure in their objectives for adopting CBDC and think carefully about the potential for unintended consequences on the financial system. This Guidance Note is based on the World Bank Group s many years of experience supporting holistic NPS reforms in more than 120 countries and provides an analytical framework for CENTRAL banks and relevant public authorities to identify and navigate the various issues related to payment systems and CBDCs.

10 The Guidance Note also discusses how the right choices could help amplify the benefits and mitigate the risks of decision-making process for implementing CBDC is multidimensional, and its success requires diverse stake-holders to collaborate and chart a path forward. Decisions must be guided by the specific country context. Accord-ingly, this Guidance Note does not advocate for the adoption of CBDC. Rather, it suggests that a well-structured, inclusive decision-making process is essential for evaluating whether it is the best choice for a particular country. The technology underlying CBDC might be novel and com-plex, but the basics of what constitutes the successful adop-tion of money and payment services remains unchanged.