Today, money exists in two forms. Public money is issued by a central bank via banknotes and central bank reserves, while private money is issued by commercial banks in the form of deposits and non-bank financial institutions in the form of electronic money (e-money). Banknotes are the only form of public money available to the general public. Banks, in contrast, also have access to public money in electronic form, via central bank reserves.

The only digital money to which the general public currently has access is issued by commercial banks or e-money issuers. As a liability on their balance sheets, such money carries the credit risk of its issuer. In contrast, central bank digital currencies (CBDCs) are a direct liability of the central bank and as such do not carry any credit risk.

There are two types of CBDC. Retail CBDCs (rCBDCs) are intended for the general public, aiming to provide a risk-free and digital means of payment for everyday transactions. Wholesale CBDCs (wCBDCs), on the other hand, are designed for use among financial intermediaries and operate like central bank reserves but with added functionalities enabled by tokenisation.¹

A risk-free, digital and programmable means of payment can offer a range of benefits:

Introducing rCBDCs may come with challenges. Key among those are the following:

Approaches to mitigating these risks include caps to CBDC holdings, remuneration policies that imply a premium for commercial bank money and robust data governance regimes.

Introducing CBDCs requires an adjusted division of labour between the central bank and providers of private money in respect of execution and recording of payments and client servicing. In that regard, three models have emerged:

Assessing the merits of each approach is an area of ongoing research. A key design choice is whether a CBDC should rely on a trusted central authority to maintain the transactions ledger, or whether it should be based on a platform with decentralised governance as provided by distributed ledger technology (DLT).³

International cooperation is required to allow for the cross-border use of CBDCs. A challenge in that regard is the use of a digital identity (digital ID) outside the country of origin. Overcoming this challenge by working towards a supranational digital ID does not appear to be realistic. Instead, international efforts towards mutually recognising national ID credentials are a more promising approach.⁴

This approach includes work on (i) strengthening KYC rules and sharing information on identity across borders; (ii) reviewing the interaction between data frameworks and cross-border payments; and (iii) reflecting cross-border usage in CBDC designs. A way to achieve these objectives is through multi-CBDC (mCBDC) arrangements, which coordinate national CBDCs. Three models for mCBDC arrangements have been identified:

¹       Tokenisation is the process of representing claims, eg for money, digitally on a programmable platform. As tokenised assets, CBDCs could be programmed for automatic transfer if certain conditions are met. See the BIS AER 2023 for more on tokenisation.

²       This is referred to as atomic settlement because the legs of a transaction cannot be split.

³       DLT enables nodes in a network to securely propose, validate and record changes or updates to a synchronised ledger that is distributed across the network's nodes.

⁴       See the G20 roadmap for enhancing cross-border payments.

This Executive Summary and related tutorials are also available in FSI Connect, the online learning tool of the Bank for International Settlements.