VoxEU Column Monetary Policy Financial Regulation and Banking

The conflict between CBDC goals and design choices

There is growing interest by central banks on the launch of digital currencies accessible to everyone. The main goal is to produce a more resilient, efficient and inclusive payment system. This column argues that central bank digital currency alone will not achieve those goals unless central banks are willing to engage in all the steps of the payment system or complement their digital currency with a broad set of regulatory changes to ensure competition and interoperability of payments.

In response to new developments in the area of digital money and payments, an increasing number of central banks are exploring the possibility of creating their own version of digital money, typically referred to as central bank digital currency, or CBDC (Auer et al. 2020, Niepelt 2020).

The motivations of central banks to launch CBDC are diverse but they start with the principle that we need a public option for payments (Boar et al. 2020). In some sense this just means maintaining the status quo. Currently, physical currency, issued by central banks, runs parallel to private digital payments. But as the role of physical currency is diminishing, we might need a digital replacement controlled by the central bank. In the words of the ECB (2020), CBDC is the “natural transition from currency” and it will “give people more choices about how to pay”.

But what are the economic arguments that justify the need for a public option running in parallel to private systems of payments? Fundamentally, the existence of a public payment option can be seen as central to the trust in the currency and its role as the unit of account (Söderberg 2019). Today, €10 in a bank account can be redeemed by withdrawing a €10 note. This process creates a connection between the value of the bank account deposit and the unit of account managed by the central bank. In the absence of physical currency, that link would disappear.1

But beyond trust in the currency most central banks tend to emphasize operational benefits of CBDC such as promoting a resilient, inclusive and efficient payment system (BIS 2020). For example, the ECB sees the value of resilience to “cushion the impact of extreme events when traditional payment services may no longer function” (ECB 2020). And the Riksbank specifically brings up both the importance of promoting competition and the need to provide access to individuals struggling with digital payments (Söderberg 2019). 

In summary, central banks are looking for improved resilience, financial inclusion and increasing competition. But these three goals can only be achieved if CBDC can effectively compete with private versions of digital money. This requires that CBDC offers a competitive payment technology, and it might require that the central bank controls many or all of the steps of the payment system, something that goes beyond the current CBDC designs being discussed. In order to understand the issue, we first need to recognise that digital money is a lot more complex than cash. With cash the issuance of the asset also represents the creation of the (physical) payment technology. But when it comes to digital money, there is a separation between the asset (the digital repository of value) and the payment technology. And digital payment technologies are complex and composed of many layers controlled by different private actors. An account at the central bank will always be a digital record of value but this does not guarantee that it will be accepted for payments everywhere of that it will be as efficient as alternative forms of payments. If CBDC is not competitive with private alternatives it will be challenging to achieve the stated goals. 

Design of CBDC: It’s all in the details

When it comes to the design of CBDC there are three main possibilities being considered (Auer and Böhme 2020):

  1. Direct CBDC. Accounts are opened directly at the central bank. The central bank controls the ledger and is involved in the execution of retail payments. The central bank acts like a regular bank. 
  2. Hybrid or intermediated CBDC. The accounts also represent a liability on the central bank balance sheet, but private intermediaries handle retail payments (and possibly account opening). The difference between the hybrid and intermediated model is in whether or not the central bank keeps a central ledger of all transactions. 
  3. Synthetic CBDC. Accounts are not on the balance sheet of central banks and, for this reason, many argue that this is not true CBDC. Intermediaries hold the liability but are required to deposit 100% of the customers’ accounts at the central bank.2  

Central banks are mostly focusing on the first two options, where CBDC becomes a liability on their balance sheet. But the success of CBDC depends on the details on how payments will be executed. In fact, in all cases above, even in the case of direct CBDC, private sector intermediaries are likely to be involved in a transaction. Today when making a payment using a bank account, it is likely that additional intermediaries are part of the process: a credit card company (e.g. Visa or Mastercard) or the company managing the infrastructure of payments (e.g. Stripe or PayPal). 

Central banks are reluctant to become payment providers and, for that reason, current projects (e.g. in China, Sweden, and the euro area) are all using a hybrid model. Their reluctance comes from the fact that they do not want to “provide end user-facing services such as customer identification and support” and, in addition, “a parallel infrastructure would also run counter to the aim of issuing a digital euro in order to improve the cost and environmental footprint of payments” (ECB (020). 

But achieving resilience when a large part of the infrastructure is controlled by the private sector will not be obvious. As an example, when the Wirecard scandal broke out in September 2020, the Monetary Authority of Singapore ordered Wirecard to stop their payment services in Singapore. As a result, many merchants lost their ability to accept regular credit card payments until a new provider was found. 

Similarly, how do you achieve financial inclusion if CBDC is not accepted as a means of payment everywhere? Central banks aim for CBDC to be as accepted as cash. But how do you achieve this goal given that today, this is not even the case for existing forms of private digital money?  

Finally, and possibly the most important issue, increasing competition requires much more than the existence of CBDC as an asset. In fact, the creation of CBDC could reduce competition in payments. The Diem association (formerly known as Libra) very much welcomes the creation of CBDCs as they could facilitate the launch of its private currency by becoming the digital assets backing the issuance of the Diem currency (Diem Association 2020). What really matters for competition are issues such as the potential network effects of ecosystems dominated by BigTech companies or the interoperability of alternative payment systems. One can argue that CBDC can help by streamlining and redesigning the back-office payment infrastructure. This is correct, but it is also true that many central banks have already been working hard at this with the creation of instant payment technologies and open banking, without the need to create a CBDC. 

In summary, achieving the stated CBDC goals requires a lot more than creating an asset at the central bank balance sheet. Issues around acceptance of CBDC as a means of payment, regulation and interoperability of payment systems seem to be much more important. There is no doubt that CBDC could be part of a comprehensive strategy to improve the digital infrastructure of payments, but it cannot be seen as the ultimate solution. 


Auer, R, G Cornelli, and J Frost, (2020), “Central bank digital currencies: Drivers, approaches, and technologies”,, 28 October.

Auer, R and R Böhme (2020), “CBDC architectures, the financial system, and the central bank of the future”,, 29 October.

BIS (2020), “Central bank digital currencies: foundational principles and core features”, Report No.1, Bank for International Settlements.

Boar, C, H Holden and A Wadsworth (2020), “Impending arrival: a sequel to the survey on central bank digital currency”, BIS Papers No. 107. 

Diem Association (2020), White Paper 2.0, April.

ECB (2020), Report on a digital euro, October.

Niepelt, D (2020), “Digital money and central bank digital currency: An executive summary for policymakers”,, 3 February.

Söderberg, G (2019), “The e-krona – now and for the future”, Sveriges Riksbank Economic Commentaries No 8, October.


1 From Söderberg (2019): “There is a risk of basic trust in the Swedish krona and the monetary system being undermined when it is no longer possible for the general public to change their banks deposits into state money”.

2 This design is in fact not different from some current forms of private digital money. In China, WeChat pay or Alipay are required to maintain customers’ funds at the central bank. The ECB, among other central banks, is clearly against this design arguing that the digital Euro “should be designed in such a way as to preserve the nature of the digital euro as a central bank liability” (ECB 2020).

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