How to design a CBDC? Insights from Bhutan mission

Okt 13, 2023 | CBDC, Digital Euro

My recent CBDC mission to Bhutan has greatly broadened my perspectives on central bank digital currencies (CBDCs) – also when it comes to the digital euro. This experience has led me to several conclusions when it comes to CBDC design:

1️⃣ A CBDC must always align with the preferences of the citizens. For instance, if privacy in payments is not a major concern for the public, and there’s a high level of trust in the government sector, there may be no need for the CBDC to offer cash-like privacy features. Failing to recognize these preferences of citizens leads to a misguided approach.

2️⃣ Tailoring a CBDC to suit the unique characteristics of a country’s economy and financial sector is essential. Different nations have varying monetary systems in place. In Bhutan, for instance, currency flow measures are enforced, which significantly impact the functionality and flow of wholesale CBDCs (wCBDCs). Moreover, with the Ngultrum being pegged to the Indian Rupee, interest rates are not a tool for monetary policy. Therefore, a one-size-fits-all CBDC design does not exist. So, one cannot simply use a CBDC design and apply it 1:1 to other jurisdictions.

3️⃣ Adopting a structured approach to determine whether a CBDC benefits a country is crucial. Central banks can embark on a well-defined CBDC journey using resources like the World Economic Forum’s CBDC Policy-Maker Toolkit: Personally, I’m still searching for a compelling value proposition of the digital euro for end-users. It must address a clear problem to solve. If there’s no such problem, introducing a CBDC may not be desirable.

4️⃣ It’s a valid strategy to introduce a CBDC in preparation for a digitized future, where permissionless DLTs and tokenization will play pivotal roles. This can be achieved by a CBDC design that ensures interoperability between the CBDC and permissionless DLTs, e.g., related to cryptocurrencies. When piloting a CBDC, it’s not necessary to have a “northstar” use case that addresses all payment system challenges. Instead, it can focus on solving specific but well-defined problems, such as facilitating tourist payments or providing a robust payment system in remote areas.

What are your thoughts?

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