Blog Article

Understanding CBDCs: A Guidebook for Regulators and Policymakers


Caroline Young

Publishing date



In December 2021, SDF testified before the House Committee on Financial Services on digital assets and the future of finance, signaling the increasing interest the public sector is paying towards blockchain technology. Regulators, public agencies, and regulated financial entities are looking into blockchain’s capabilities, determining whether a central bank digital currency (CBDC) can improve financial inclusion and foster innovation and competition, while ensuring security, certainty, and control over a digital asset that serves as legal tender. Advanced economies like the UK and US are debating whether there’s a need for CBDCs at all. Meanwhile, technology-forward governments around the world are launching pilots and examining what would be the best way to go about designing a CBDC.

We discussed in our last blog post on CBDCs what features of Stellar specifically make the blockchain ideal for issuing CBDCs. This policy-focused guidebook discusses how individuals and Micro, Small, and Medium Enterprises (MSMEs) would benefit from CBDCs, why CBDCs should be built on open blockchains, and the policy and regulatory considerations to keep in mind when issuing a CBDC. This blog post contains excerpts/selections from our CBDC Guidebook for Policymakers – access the full text here.

How digital money can benefit the world as a central bank public good

While information has made the full leap forward into digitization, money hasn’t quite gotten there. Many individuals and MSMEs worldwide still rely on physical cash, unable to use and accept digital payments due to exorbitant transaction fees. However, this reliance also presents a problem – businesses that primarily use cash are at higher risk of theft and loss while being unable to provide a more convenient and seamless experience for their users. These MSMEs also often find themselves unable to access essential financial services like lending, preventing them from further investing in and growing their businesses.

CBDCs have the potential to address the aforementioned problems. A CBDC as a form of public money can be inexpensive, easy to use, secure, and fast. If central banks were to harness CBDCs, they could use this technology as the foundation for a financial system that is truly inclusive of individuals and MSMEs, and helps technology providers enable access to financial services such as building credit history and accepting B2B, P2P, and merchant payments in both local and foreign currencies.

So what would a CBDC look like? There are three CBDC design models: a public CBDC, a synthetic CBDC, and a public-private partnership CBDC. Out of these three options, the public-private partnership CBDC is the most ideal and preferred. Central banks would be responsible for the currency by governing and controlling the monetary aspect of a CBDC, while the private sector would be responsible for making sure their technological efforts meet compliance obligations. This ensures that users reap the benefits of both an efficient and compliant technology that is expertly and sustainably designed.

How an open blockchain spurs innovation

An open network could provide the infrastructure to build a public-private partnership CBDC option. Since anyone can participate in an open network, this fosters a competitive environment that allows innovation to thrive and encourages a diverse set of talent to participate. Open network CBDCs create a multi-stakeholder system, possessing potential for an ecosystem to develop where regulators, policymakers, financial entities, developers, monetary policies, governance strategies, and reward systems all interact to foster innovation.

The decentralized nature of an open blockchain reduces the need for intermediaries and centralized processes when it comes to offering financial services. No one authority has total control over a decentralized system, which reduces risk of the system shutting down completely due to internal (e.g. malfunction) or external (e.g. cyberattack) events. With varying degrees of decentralization, central banks can still maintain monetary control of the CBDC, but those who wish to innovate upon the technology and offer CBDC-related products and services are allowed to participate freely.

How CBDCs can be designed with policy and regulation in mind

As policymakers and regulators consider how CBDCs should be designed, they do so with security, compliance, and privacy in mind.

Despite misconceptions, open networks are very robust, as a central bank can choose which financial entities that it trusts join and participate in the system as validators. This dramatically reduces the likelihood of a central authority or malicious actor tampering with the system at will, as well as increases the difficulty of attacking a public-private partnership CBDC due to the sophistication and scale of a central bank’s chosen validators. Additionally, networks like Stellar enable asset issuers to create digital currencies with a feature enabling “clawback” or reversal of transactions in case of fraud or errors.

CBDCs can be designed to include elements of programmability that enforce policies such as specific fees, taxation, facilities for emergency cash transfers, and lending to small businesses. Traditional payment systems do not have the technical capability to integrate this function into payment processes. While direct debits or standing orders can carry out simple forms of programmable payments, these functions address only limited use cases. Blockchain innovation in CBDCs can support the objectives of central banks and governments toward improved utility and programmability of payment instruments.

An open network can also ensure compliance thanks to built-in capabilities of the specific blockchain used. For example, to strengthen Anti-Money Laundering and Counter Financing Terrorism (AML/CFT) controls, central banks can use the Stellar network to set an “Authorization Required” flag on the CBDC – meaning that the financial entity issuing the CBDC must approve an account before the owner of that account can hold that asset. Thus, central banks can require regulated financial entities integrated with the open network to conduct customer due diligence and Know Your Customer (KYC)requirements when it comes to AML and CFT. Central banks can also make use of blockchain analytics to identify behavior patterns, since blockchains offer an in-depth view of information to authorities for monetary policy purposes and to mitigate AML/CFT risks.

However, with this wealth of data available on an open blockchain, policymakers and regulators also have to consider how to design a CBDC that protects the privacy of users while maintaining visibility and transparency into the transactions. On an open network, all personally identifiable information (PII) could potentially be stored in a private database so that only the financial entities building solutions and offering financial services, such as commercial banks or digital wallets, or external KYC providers could access this data – a model that traditional banks commonly use. One can also configure the CBDC so that further intermediaries only have permission to access information related to the portion of the program that they administer. Thus, while the transactional data on balances and payment amounts are public, they are not associated with any PII.


Want to learn more about what role CBDCs can play in expanding the access and usage of world currencies? How can CBDCs be leveraged as a public good, leading to greater financial inclusion than ever? Access “Understanding CBDCs: A Guidebook for Regulators and Policymakers” here.