Central Bank Digital Currency (CBDC) infrastructure requirements refer to the technological, operational, legal, and economic frameworks necessary to design, implement, and maintain a digital currency issued by a central bank. CBDCs are digital forms of a country's fiat currency, backed by the central bank, and aim to provide a secure, efficient, and accessible medium of exchange. Below are the key infrastructure requirements for a CBDC system, categorized into several critical areas:

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1. Technological Infrastructure

The backbone of a CBDC system is its technology, which must support scalability, security, and accessibility.

• Distributed Ledger Technology (DLT) or Centralized Systems:


• Many CBDCs leverage DLT (e.g., blockchain) for transparency, immutability, and decentralization (e.g., permissioned blockchain for privacy and control). Examples include China's Digital Yuan (e-CNY) or the Bahamas' Sand Dollar.


• Alternatively, a centralized database might be used for simplicity and control, but it may lack the resilience of DLT.


• Scalability and Performance:


• The system must handle a high volume of transactions per second (TPS) to support retail or wholesale use at a national or global scale. For instance, retail CBDCs require infrastructure similar to payment systems like Visa or Mastercard (thousands of TPS).


• Low latency is critical to ensure real-time transactions.


• Security:


• Robust cybersecurity measures to protect against hacking, fraud, and data breaches.


• Use of encryption, secure key management, and multi-factor authentication for user and transaction security.


• Resilience against Distributed Denial of Service (DDoS) attacks and other cyber threats.


• Interoperability:


• The CBDC system must integrate with existing financial systems, payment networks, and banking infrastructures (e.g., SWIFT, RTGS systems).


• Cross-border interoperability is crucial for international payments, requiring alignment with global standards and protocols.


• User Interface and Accessibility:


• Development of user-friendly applications or digital wallets for individuals and businesses to store, send, and receive CBDC.


• Support for offline transactions in areas with limited internet connectivity, using technologies like smart cards or Bluetooth.


• Privacy and Data Protection:


• Balancing transparency with user privacy through pseudonymity or anonymity controls (depending on the CBDC design).


• Compliance with data protection regulations (e.g., GDPR in the EU).

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2. Legal and Regulatory Framework

A clear legal structure is essential to define the status, rights, and obligations related to CBDC usage.

• Legal Tender Status:


• Legislation to recognize CBDC as legal tender, equivalent to physical cash, ensuring its acceptance for payments.


• Regulatory Compliance:


• Aligning with anti-money laundering (AML) and combating the financing of terrorism (CFT) regulations, including Know Your Customer (KYC) requirements.


• Policies to address tax evasion, illicit transactions, and financial crime in digital environments.


• Consumer Protection:


• Rules to safeguard users from fraud, loss of funds, or technical failures in the CBDC system.


• Mechanisms for dispute resolution and redress.


• Central Bank Authority:


• Legal mandate for the central bank to issue, manage, and oversee the CBDC system.


• Definition of roles between the central bank, commercial banks, and other intermediaries.

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3. Operational Infrastructure

Operational requirements ensure the effective day-to-day functioning of the CBDC system.

• Issuance and Distribution:


• Mechanisms for the central bank to issue CBDC, either directly to users (retail CBDC) or through intermediaries like commercial banks (wholesale or two-tier CBDC).


• Processes for minting and burning digital currency to manage supply and monetary policy.


• Settlement and Clearing:


• Real-time gross settlement (RTGS) or other mechanisms to finalize transactions securely and efficiently.


• Coordination with existing payment infrastructures for seamless integration.


• Monitoring and Oversight:


• Tools for the central bank to monitor transactions, ensure system stability, and detect anomalies (e.g., fraud or systemic risks).


• Audit trails for transparency and accountability.


• Disaster Recovery and Redundancy:


• Backup systems and recovery plans to ensure continuity in case of technical failures, natural disasters, or cyberattacks.

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4. Economic and Monetary Policy Considerations

The infrastructure must align with the central bank’s broader economic goals and monetary policy framework.

• Monetary Policy Tools:


• Infrastructure to support interest-bearing CBDCs (if applicable) or other monetary policy mechanisms like quantitative easing or tightening.


• Ability to track and analyze transaction data for informed policy decisions.


• Financial Stability:


• Mechanisms to prevent bank runs (e.g., by imposing holding limits or tiered interest rates on CBDC accounts).


• Safeguards to ensure CBDC issuance does not disrupt the role of commercial banks in lending and credit creation.


• Inflation and Currency Control:


• Systems to manage the money supply and prevent hyperinflation or deflation caused by CBDC issuance.

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5. User and Stakeholder Engagement

For successful adoption, the infrastructure must cater to the needs of users and stakeholders.

• Financial Inclusion:


• Accessibility for unbanked and underbanked populations through low-cost or free digital wallets and offline transaction capabilities.


• Support for multiple languages and user-friendly designs for diverse demographics.


• Public-Private Collaboration:


• Partnerships with commercial banks, fintechs, and payment service providers to distribute and support CBDC usage.


• Engagement with merchants to ensure CBDC acceptance at points of sale.


• Education and Awareness:


• Public campaigns to build trust and understanding of CBDC benefits and usage.


• Training for businesses and financial institutions on integrating CBDC into their operations.

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6. Cross-Border and International Considerations

For CBDCs to operate globally, additional infrastructure is needed.

• Cross-Border Payment Systems:


• Integration with international payment systems to enable efficient, low-cost cross-border transactions.


• Participation in initiatives like the BIS (Bank for International Settlements) Project mBridge for multi-CBDC platforms.


• Currency Exchange and Standards:


• Infrastructure to support exchange rates and conversions between different CBDCs or fiat currencies.


• Adherence to international standards (e.g., ISO 20022) for messaging and transaction protocols.


• Geopolitical and Regulatory Alignment:


• Coordination with other central banks to address geopolitical risks, sanctions compliance, and regulatory differences.

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7. Environmental and Energy Considerations

Given the energy-intensive nature of some DLT systems (e.g., public blockchains), CBDC infrastructure must address sustainability.

• Energy Efficiency:


• Use of energy-efficient consensus mechanisms (e.g., Proof of Stake instead of Proof of Work) if DLT is employed.


• Consideration of centralized systems to reduce energy consumption.


• Sustainability Goals:


• Alignment with national and international environmental policies to minimize the carbon footprint of CBDC operations.

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Examples of CBDC Infrastructure in Practice:

• China (e-CNY/Digital Yuan):


• Uses a hybrid model with a centralized core managed by the People’s Bank of China and distribution through commercial banks.


• Focuses on retail use, with high scalability and offline transaction capabilities.


• Bahamas (Sand Dollar):


• Built on a permissioned DLT platform for transparency and security.


• Emphasizes financial inclusion for remote island communities with offline access.


• European Union (Digital Euro):


• Under development with a focus on privacy, interoperability with existing systems, and compliance with strict EU regulations like GDPR.

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Challenges in Building CBDC Infrastructure:

• Balancing privacy and transparency (e.g., preventing illicit use without compromising user rights).


• Ensuring cybersecurity in a highly targeted financial environment.


• Managing costs of infrastructure development and maintenance.


• Addressing resistance from traditional financial institutions and public skepticism.

By addressing these infrastructure requirements, central banks can build resilient, efficient, and inclusive CBDC systems that meet the needs of modern economies while supporting financial stability and innovation.