Approaches in retail central bank digital currency: Aligning technology with policy

Increased digitalization is transforming the payments landscape. The advent of private sector digital currencies, and their growing acceptance, combined with the reduction in everyday use of physical cash in parts of the world, opens up new opportunities and risks for central banks and financial institutions. Over 85 countries, representing over 90% of global GDP, are researching the possibility of launching a retail central bank digital currency (CBDC). However, as central banks evaluate the pros and cons of CBDCs, they are considering different approaches and designs to address the variety of needs and situations of each country.

Amazon Web Services (AWS) works with central banks across the globe to support innovation. Through working with our customers as they design secure, resilient, and scalable digital currency networks, we understand the need to align technology solutions to their policy visions. To advance understanding in this space, AWS worked with the Oliver Wyman Forum on a whitepaper, Retail Central Bank Digital Currency: From Vision to Design, which outlines a framework that can help support policymakers in evaluating the interdependencies between policy and technology choices. While this paper assumes a central bank has decided to investigate a CBDC, AWS does not make any recommendation as to whether a central bank should introduce a CBDC or which solution to adopt if it does.

In this blog post, we summarize key principles outlined in the Retail Central Bank Digital Currency: From Vision to Design framework.

Figure 1. The CBDC strategy framework starts with a central bank’s policy goals and aligns those to design principles to create awareness of potential policy trade-offs. Then, the solution exploration phase aligns technology considerations to those principles, and competitive dynamics from the design are considered. Results from experimentation then feed back into design principles to make sure the technical solution aligns to policy goals. Source: Oliver Wyman Forum and AWS analysis.

1. Aligning CBDC objectives with design principles

According to the whitepaper, working backwards from a clear vision is paramount. This vision for developing a CBDC should encompass a holistic view of the financial system and consider the full range of issues related to payments, stablecoins, other types of digital assets or currencies, and surrounding economic and social circumstances, like the level of digital and financial literacy amongst the target population. Within that vision, clear and prioritized objectives for a CBDC system are set. At each step of the journey, central banks can return to their vision and the related CBDC objectives, and assess whether the system as designed meets that vision.

Once clear objectives are set, solution design principles can then be developed to help guide any associated technology trade-offs. Key design principles include the system’s approach to privacy and individual protections, mechanisms to manage CBDC adoption, and the division of roles and responsibilities between the public and private sector.

2. Aligning CBDC design principles with technical design choices

After setting design principles with an understanding of potential trade-offs, technical design choices are made to align form to function. Shaping the role of the distributor is at the heart of technical design choices. Assuming a “two-tier” CBDC in which the central bank relies on private sector participants to act as intermediaries, we define distributors as those serving as the gateway between individual users of CBDC and the CBDC system itself. The main technical design choices that can impact the distributor role fall under three main categories: system management, wallet and access management, and identity management (Figure 2).

System management includes how the core ledger and processing infrastructure runs. System management has two interrelated functions – transaction processing and data handling and storage – that can be configured along a spectrum to shift CBDC system functionality, from highly distributed control across a set of distributors to highly centralized control by the central bank.
Wallet and account management includes how end-user accounts are created and how end users interact with their funds. Wallet and account management has three interrelated functions: custody of funds, level of accounts (whether balances are stored at the individual or distributor level), and reporting of individual ownership of funds if distributor level accounts are chosen. A CBDC system can be configured along a spectrum between offering high individual control of funds to high reliance on a distributor.
Identity management includes the information about individuals that is collected and made available, and to whom. Identity management has two interrelated levels of privacy: privacy from the central bank – or the CBDC system – and privacy from any required distributor. A CBDC system can be configured along a spectrum of privacy between offering high individual privacy to high provision of centralized identity-based services.

Figure 2. The components of technical design choices for a CBDC system – system management, wallet and account management, and identity management – and the related spectrums of end-user or distributor-based control that these systems can operate along. Source: Oliver Wyman Forum and AWS analysis.

Depending on the CBDC system’s defined design principles, the system’s placement along the spectrums of these three technical design choice categories will vary. No combination is better than another; optimization of these technical levers can help align a CBDC system’s design back to its objectives and the overall vision of the central bank.

3. Evaluating market impact of technical design choices

The CBDC system’s policy and technology choices will structure what roles are available to public and private sector entities should they choose to participate in distributing or offering services based on a CBDC. These choices also affect how information like user data, transaction data, and more can flow, and how payment service providers can connect to the CBDC system. Consequently, once initial technical design choices are made, it is important to assess whether market incentives and competitive dynamics are shaped to support the overall vision. The private sector can help play a role in this assessment and in analyzing which designs have the potential to create the conditions for innovation and competition in financial services, while enabling the system’s maintenance, resilience, and continued enhancement.

Early engagement and communication with stakeholders, such as banks, merchants, and payment services providers, can best achieve alignment when there is a shared understanding of the various roles an organization serving as a distributor may have. A simplified set of roles in the following Figure 3 illustrates the relationship between the distributor role and competitive dynamics.

Figure 3. Decisions around system management and wallet and account management can create four broad potential roles for the distributor including gateway, custodian, wholesale processor, and processing agents. Read more about these roles in the whitepaper. Source: Oliver Wyman Forum and AWS analysis.

Dive deep into the CBDC strategy framework

The journey from CBDC discovery, to evaluation, through to a potential launch is a multi-year effort that requires close collaboration between policymakers and technology teams at central banks and private sector organizations. Throughout this journey, countries may decide to continue, or not, toward a CBDC launch. Research, experimentation, and collaboration along the way can make sure that if a central bank decides to launch, they will have a well-designed, policy-driven CBDC system.

Read the full whitepaper for an in-depth analysis on the CBDC strategy framework that guides the evaluation of how a central bank’s own CBDC vision can underpin design principles that guide technical design decisions to support meeting policy goals.

Do you have questions about how AWS works with central banks? Reach out to us directly.

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