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Insights and Expertise

Central bank digital currency: promise,

challenges, unanswered questions – Part 2

vices such as a wallet and the means of acceptance/
authorization.
• Model 2: The central bank provides the network
infrastructure and a basic wallet for end users, and
intermediaries provide all other end-user services.
• Model 3: A regulated entity provides the network
infrastructure, and intermediaries provide end-user
services.

Canada's work is noteworthy because it recognizes the
need for practical uses and an ecosystem that benefits
everyone. "[T]he chosen model must deliver value to all
participants of the ecosystem: end users should find it
worthwhile to adopt and use it, intermediaries should
find it profitable to participate in the ecosystem, and the
central bank should be able to advance its chosen public
By Mark Dillon policy objectives."
Ingenico • End users should find the CBDC convenient and

his is the second in a two-part series on central beneficial to adopt.
bank digital currency (CBDC). Part 1 explored • Intermediaries should see a return on their invest-
its purpose and benefits; this article explores its ment as an incentive to participate.
T real-world feasibility and how CBDC can work • Central banks should be able to advance public pol-
in practice. Various attempts to model how a CBDC could icy objectives, such as cost control, risk management
operate in the real world have been made by central banks and financial inclusion.
such as those of Canada and the UK.
This last point is crucial. Central banks will not want
Many people associate CBDC erroneously with crypto to issue digital currency just for the sake of it, and their
and blockchain as if they were the same thing. While objectives are multiple. (See Youming Liu, Francisco
using a distributed ledger (blockchain) is one possibility, Rivadeneyra, Edona Reshidi, Oleksandr Shcherbakov
the alternative – and for many in the payments world the and André Stenzel, Ecosystem Models for a Central Bank
more likely and more realistic model – is to allow the core Digital Currency: Analysis Framework and Potential
ledger, the platform that stores the currency securely, to Models, Bank of Canada, Staff Discussion Paper 2024-13,
be provided and maintained by the central bank itself or a P.2.)
regulated entity under its control.
The European Central Bank is very active in the area of
So, the dream for some of a decentralized currency may CBDC and has published numerous studies and position
well end up back in the center (even if it does repose on papers on the topic, seeing it as a way of ensuring the euro
some form of distributed ledger technology). It's not for "continues to play a key role" in Europeans' lives, promoting
nothing that it is called a central bank digital currency, financial inclusion and, most consequentially, as the
and the fact that it is the central bank that issues and foundation for a European "scheme" as an alternative to
maintains the currency is fundamental.
Visa and MasterCard. The objective is to propose an open
framework that will encourage innovation and enable the
Central banks are there to control the money supply, and it fintech sector to allow use cases to emerge over time.
is unlikely they will want to leave the management of that
to others. But after that, everything is up for grabs.
The Bank of England commissioned a study that was
even more operationally focused. It examined whether
Canada posited three models which should be taken as existing POS terminals could accept payments of a digital
examples rather than an exhaustive list: currency. (See Bank of England, Point-of-sale proof of
• Model 1: The central bank provides the network concept, Digital Pound Experiment report, May 2024
infrastructure. Intermediaries provide end-user ser- [Consult Hyperion])

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