How to Issue a Central Bank Digital Currency

TL;DR

This paper proposes a practical, privacy-preserving, and regulation-compliant token-based system for central bank digital currency that mimics physical cash without relying on distributed ledger technology.

Contribution

It introduces a novel, software-only CBDC design that enhances privacy, regulatory compliance, and quantum resistance without impacting monetary policy or financial stability.

Findings

Improved transaction privacy and regulatory compliance.

Quantum-resistant protection for CBDC.

Replication of physical cash properties.

Abstract

With the emergence of Bitcoin and recently proposed stablecoins from BigTechs, such as Diem (formerly Libra), central banks face growing competition from private actors offering their own digital alternative to physical cash. We do not address the normative question whether a central bank should issue a central bank digital currency (CBDC) or not. Instead, we contribute to the current research debate by showing how a central bank could do so, if desired. We propose a token-based system without distributed ledger technology and show how earlier-deployed, software-only electronic cash can be improved upon to preserve transaction privacy, meet regulatory requirements in a compelling way, and offer a level of quantum-resistant protection against systemic privacy risk. Neither monetary policy nor financial stability would be materially affected because a CBDC with this design would replicate physical cash rather than bank deposits.