DECODING

CBDC:
A PRACTICAL GUIDE TO CBDC
DESIGN AND IMPLEMENTATION
PRESENTED BY CURRENCY RESEARCH AND LIPIS ADVISORS

REPORT SERIES
PARTNER
COMPANY DESCRIPTIONS
Lipis Advisors is an international consultancy focused exclusively on the payments
industry. Based in Berlin, Germany, Lipis Advisors was founded in 2007 and has provided
consulting services to clients in 100+ countries around the world, including financial
institutions, investors, payment service providers, retailers, fintechs, payment schemes,
payment system operators, technology vendors, industry associations, and regulators.
In addition to this report, Lipis Advisors have long been recognized as thought-leaders
in the field of payments and have authored numerous whitepapers over the past two
decades that explore the changing payments landscape. To learn more, visit our website.

Currency Research’s mission is to inspire and progress industry dialogue and efficiency
across cash and payments through their core initiatives of Conferences, Consulting,
Communication and Community. CR has successfully positioned itself as the leading
global resource for central banks, their suppliers, and the related supply chain for
currency and payment systems. CR has published a number of research-driven reports
considered mandatory reading by the industry, publishes the monthly Central Bank
Payment News, and provides consulting services with a focus on strategy and policy to
central banks, regulators and commercial organizations. To learn more, visit our website.

DECODING CBDC: A PRACTICAL GUIDE TO CBDC DESIGN AND IMPLEMENTATION

AUTHOR BIOS
Since joining Lipis Advisors as a senior consultant in 2019, Bonni Brodsky has advised
clients on a variety of topics, including cross-border payments processing and the
advent of central bank digital currencies (CBDC). Bonni came to Lipis Advisors with a
strong public policy background, having previously worked as a Senior Trader at the
Federal Reserve Bank of New York and having interned at both the U.S. Department of
the Treasury and Department of State. She speaks English, French and Mandarin
Chinese.

Akria Sasaki is a managing consultant with Lipis Advisors. His focuses are payment
systems analysis and Distributed Ledger Technology (DLT) & crypto asset application in
finance.

He has been involved in multiple DLT and crypto asset projects in the company and
supported regulators, system operators, IT companies and fintechs. He holds a Master
of Public Policy from the Hertie School of Governance in Berlin and authored his master’s
thesis on the impact of DLT on the regulatory framework concerning payment services.

Gonzalo Santamaria is VP Payments and has led the payments business stream since
2015. He has honed much of his leadership skills and industry knowledge within a realm
spanning more than 36 years of technical, commercial and managerial experience in the
currency and payments sectors. He forged much of his background first in the technical,
and consequently in the commercial/ business development streams within world-class
technology companies in the industry. During these tenures, he successfully assisted in
designing and implementing state-of-the-art automated currency vault solutions, cash
management re-engineering including commercial cash processing patents, and supply
chain optimization solutions. 2.
CRYPTO SOLUTIONS FOR BUSINESS
Ripple is a crypto solutions company that transforms how
the world moves, manages and tokenizes value. Ripple’s
financial solutions are faster, more transparent, and
more cost effective — solving inefficiencies that have
long defined the status quo. And together with partners
and the larger developer community, we identify use
cases where crypto technology will inspire new business
models and create opportunity for more people. With
every solution, we’re realizing a more sustainable global
economy and planet — increasing access to inclusive
and scalable financial systems while leveraging carbon
neutral technology and a green digital asset, XRP. This is

DECODING CBDC: A PRACTICAL GUIDE TO CBDC DESIGN AND IMPLEMENTATION

how we deliver on our mission to build crypto solutions
for a world without economic borders.

Ripple’s long-term vision has remained unchanged since

our inception: to enable the Internet of Value, one where
the world moves value like information moves today.

3.
PART I: CBDC DESIGN AND
TECHNOLOGY CONSIDERATIONS
Introduction
Looking at the current landscape for Central Bank Digital Currencies (CBDC), it’s easy to forget that five
years ago, only a small segment of the central bank community was actively exploring CBDC issuance. Fast
forward to today, and 87 central banks are now investigating CBDC, including the world’s largest central
banks.1 Several markets have already gone live with a retail CBDC (e.g. Bahamas, Eastern Caribbean,
Nigeria), and China is in the advanced stages of a CBDC pilot. On the wholesale side, Project Jura and
Project mBridge, developed in cooperation with the BIS, have focused on how wholesale CBDC could
improve cross-border, cross-currency settlement.2 3 With so many CBDC projects in progress, central
bankers’ questions around CBDC have shifted away from “if” and toward “when” and “how.”

With extensive experimentation in CBDC wholesale and retail design over the last several years, the
feasibility of implementing CBDC from a technical perspective has been successfully demonstrated.
Numerous types of technologies and infrastructure solutions have been tested, from account-based CBDC
solutions to token-based CBDC supported by enterprise versions of public distributed ledger technology
(DLT)-based platforms. New features and capabilities are constantly being added, and it can be difficult
for central bankers to keep up.

Choosing the right technology is an important building block for successful CBDC implementation and

DECODING CBDC: A PRACTICAL GUIDE TO CBDC DESIGN AND IMPLEMENTATION

adoption, so it is important to stay informed of how the landscape is developing. This white paper is the
first of three in a series aimed at offering practical guidance to central bankers that are in the process of
answering difficult questions related to CBDC implementation. In this first paper, we begin by first defining
the core CBDC design questions and technology issues that central banks must consider.

Thinking critically about CBDC technology and design

Designing a CBDC is a significant undertaking for any central bank. The first steps in the CBDC journey
involve defining the key design principles and public policy objectives of CBDC issuance, with input from a
range of stakeholders. Undoubtedly, the goals of a CBDC program vary depending on the market, leading
some countries to pursue retail CBDC, wholesale CBDC, or both. Local payment habits and unique market
pain points will also result in different use cases being targeted (e.g. POS, direct disbursements, cross-
border remittances, etc.). Above all, it is important for central bankers to consider the specific conditions
and requirements of the local market and to avoid simply emulating design decisions made in other
markets. Once the key goals and target use cases for CBDC issuance have been established, other core
design decisions regarding the type of system architecture, infrastructure (e.g., centralized ledger or DLT-
based), as well as the access model (token-based or account-based) can be assessed. This is part of what
the BIS has referred to as “the CBDC pyramid.”4 Furthermore, defining the innovation model that the
central bank wishes to promote can have an impact on determining whether a centralized or decentralized
solution is the right approach to a CBDC.

1
https://www.atlanticcouncil.org/cbdctracker/
2
https://www.bis.org/about/bisih/topics/cbdc/jura.htm
3
https://www.bis.org/about/bisih/topics/cbdc/mcbdc_bridge.htm
4
https://www.bis.org/publ/work880.pdf 4.
System architecture
The delegation of operational responsibilities between the central bank and financial intermediaries
regarding issuance and distribution of the new digital currency is referred to as the CBDC system
architecture. Using the taxonomy developed by the BIS, there are three models for issuance and distribution:
direct, indirect, and hybrid (often referred to as the two-tiered approach).5 Choosing an issuance model
comes down purely to the preferences of the central bank, and how they weigh the potential benefits
and drawbacks. Descriptions of each and the differences between them are summarized at a high-level in
Figure 1 below.

Figure 1: Types of CBDC architecture

Direct6 Indirect Hybrid

(also known as two-tiered
approach)
Role of central bank vs. Central bank issues Intermediaries issue CBDC Central bank issue CBDC to
end-users to end-users intermediaries, which distribute it to
intermediaries consumers

Liability holder Central bank Intermediaries Central bank

Potential benefits Lack of dependence Intermediaries take on Central bank and intermediaries
on intermediaries KYC/AML duties and can take on KYC/AML duties through
utilize existing compliance retaining a copy of ledger, allowing
frameworks and processes for greater technical resiliency than
under the indirect model

DECODING CBDC: A PRACTICAL GUIDE TO CBDC DESIGN AND IMPLEMENTATION

Potential drawbacks Necessary for central CBDC holdings would Greater operational complexity than
banks to take on still represent a legal indirect model
new KYC/AML duties claim on an intermediary,
and other customer- with implications for the
facing activities; perceived risk profile
massive technology of CBDC holdings;
capabilities required implications resulting from
larger size of commercial
banks’ balance sheets

In thinking about which type of architecture to implement, it is important to highlight that each imply
varying degrees of technology capacity, operational complexity, and resource requirements. A direct
CBDC could be attractive for a small economy with a less developed banking sector, but completely
infeasible for a large, advanced economy given the massive technological and operational capabilities
that it would imply for the central bank. Moreover, a hybrid model, in which both the central bank and
its intermediaries retain a copy of the CBDC ledger, could be preferred in a market where operational
complexity is less of a concern, whereas a small central bank with less capacity may weigh the costs higher
than the benefits.

Nonetheless, each model can be supported by both centralized and DLT-based infrastructure, as well as
account-based and token-based CBDC. The decision of which type of architecture to implement should
be made independent of these technology choices.

5
https://www.bis.org/publ/arpdf/ar2021e3.htm
6
Currently, no major central banks are exploring direct CBDC. 5.
Centralized vs. DLT-based infrastructure
After determining the architectural design and the operational burden that it entails, central banks
must assess whether conventional infrastructure based around a centralized ledger, DLT-based
infrastructure, or a combination of the two, should be utilized.7 In doing so, central banks should consider
the differences in speed, scalability, resiliency, security, and cost, while acknowledging that trade-offs are
inevitable regardless of which type of infrastructure is chosen. As an example, DLT-based infrastructure
may offer greater resiliency, accessibility, and availability than a centralized ledger in some contexts, but it
may see reduced speed, scalability, and security.8

Unlike cryptocurrencies like Bitcoin, DLT-based infrastructures for CBDC are typically private,
permissioned and enterprise grade. Permissioned ledgers have much more restrictive access
than open, permissionless networks like the Bitcoin blockchain; only central banks and central
bank-authorized entities may add to and validate the ledger through the network’s consensus
mechanism. Central bankers may have concerns about how to manage data privacy and security
on this type of infrastructure as external parties could have access to account and transaction data,
though most DLT-based CBDC solutions on the market offer features to mitigate these concerns.
Various CBDC pilots and experimental efforts have utilized private, permissioned, DLT-based
networks, including those of the Royal Monetary Authority of Bhutan, the Swedish Riksbank, the

DECODING CBDC: A PRACTICAL GUIDE TO CBDC DESIGN AND IMPLEMENTATION

Reserve Bank of Australia, and the Banque de France. Examples of DLT-based infrastructure for
CBDC use include Ripple’s CBDC platform, ConsenSys Quorum, R3’s Corda platform, and IBM’s
Hyperledger Fabric among others.

Central banks are still debating the advantages and disadvantages of centrally managed versus DLT-
based platforms, assessing parameters such as security, resilience, performance, or long-term tokenization
strategy.9 Each have different strengths that may be perceived differently depending on the central bank.
Some smaller central banks may prefer more conventional infrastructure due the higher operational
complexity associated with managing a DLT-based network, while others may prefer DLT-based systems
given their potential for increased operational resiliency through the removal of a single point of failure.
Moreover, central banks in large markets may prefer centralized infrastructure for its performance and
scalability, although private, permissioned platforms are much faster and scalable than completely open,
public blockchains. In markets where cross-border remittances are a key focus, DLT-based infrastructure
may be preferred, due to its potential for greater speed and efficiency in settling cross-currency transfers.10
Programmable CBDC is often touted as a great benefit of adopting DLT-based infrastructure, but
centralized infrastructures can support programmable payments as well.11

7
A direct issuance model is less feasible for a DLT-based network to support given the need to operate a consensus mechanism
among the network participants, which may result in lower transaction throughput compared to centralized networks.
8
Alwazir et al. IMF Working Paper 20/104: A Survey of Research on Retail Central Bank Digital Currency. June 2020.
9
Ibid.
10
Merz, Markus. Contemporaneous financial intermediation: how DLT changes the cross-border landscape. 18 December 2020.
https://www.researchgate.net/publication/349897918_Contemporaneous_financial_intermediation_How_DLT_changes_the_
cross-border_payment_landscape
11
https://www.federalreserve.gov/econres/notes/feds-notes/what-is-programmable-money-20210623.htm 6.
For each type of infrastructure, central banks have different options in how they could achieve interoperability
of a future CBDC network with existing domestic payment systems, from the use of common messaging,
data, security, and other technical standards, to building new technical interfaces (e.g. APIs) or other
solutions to communicate across systems.12 Regardless of what approach is taken, its importance cannot
be overemphasized. Allowing for the seamless exchange of funds to and from and retail and wholesale
payment infrastructures is crucial to promoting CBDC end-user adoption and merchant acceptance, and
in preventing new types of market inefficiencies or fragmentation.

Token-based or account-based access

The last key design issue for central banks involves choosing account-based or token-based CBDC.
Account-based access is tied to a digital identity framework, such as those already used in digital payments
today. Identity verification could be centralized at the central bank level or performed by intermediaries, as
is the case currently. It is perceived to be less universally accessible and more compatible with monitoring
illicit fund flows. Token-based CBDC, when paired with a KYC solution, is secured via passwords such as
digital signatures that can be accessed anonymously; it is perceived to be more “cash-like” in nature due
to the greater anonymity that it can afford. The verification of the authenticity of the CBDC token when
making payments could also be done in a centralized manner by the central bank or by a set of authorized
parties on a permissioned DLT.

DECODING CBDC: A PRACTICAL GUIDE TO CBDC DESIGN AND IMPLEMENTATION

Source: BIS

There is no inherent advantage in choosing either account-based or token-based CBDC solutions, with
both being viable options for a central bank; however, central banks may prefer one over depending
on how they prefer to balance privacy concerns with greater transparency into illicit fund flows. Some
countries, like Sweden, are exploring a hybrid form of access, which could allow for greater anonymity for
transactions below a certain threshold.13

13
https://www.riksbank.se/globalassets/media/rapporter/e-krona/2021/e-krona-pilot-phase-1.pdf
12
https://www.bis.org/publ/othp42_system_design.pdf 7.
Regarding KYC and AML compliance, tokenized currency would require the development and
implementation of new frameworks, whereas an account-based CBDC has the benefit of utilizing existing
processes. Although more central banks today are pursuing tokenized CBDC due to its greater perceived
resemblance to cash, there are also some examples of account-based CBDC that have been implemented
or that are being piloted, such as Nigeria’s e-Naira.14

Finding the right solution for successful CBDC issuance and adoption
Once central banks have established their CBDC design requirements, they can begin to search for the
specific technology solutions that meet them. Various solutions are now on the market and should of
course be assessed according to traditional criteria such as throughput, capacity, resiliency, production
readiness, and security. But what other features should central banks consider when evaluating what is on
the market? This next section details some additional considerations for central banks as they look for the
best solutions to promote successful CBDC issuance and adoption.

Future-proofing through modular architecture

Retail payment systems today are increasingly being designed with modular and flexible “plug-and-play”
architecture. This approach has the advantage of allowing new features and functions to be designed,
tested, and added without impacting existing systems and is relevant for both conventional infrastructure-

DECODING CBDC: A PRACTICAL GUIDE TO CBDC DESIGN AND IMPLEMENTATION

based and DLT-based CBDC. Given the rapid pace of change in digital payments and financial services,
the ability to add new functionality and features to a CBDC system quickly and cost-effectively is key to
creating a future-proofed infrastructure. Hyperledger’s enterprise blockchains offer an example of a this,
allowing for plug-and-play of important components such as the consensus mechanism and membership
service.15

A layered, scalable approach to promote the development of a CBDC ecosystem

A CBDC solution that allows for a layered approach to developing a future CBDC ecosystem is crucial to
the development of a CBDC ecosystem. Under this approach, CBDC serves as the core platform, with an
overlay service layer open to a broader group of financial institutions and payment service providers in
the development and provision of new, interoperable CBDC-based services. This strategy for ecosystem
development has become increasingly popular among countries who have recently modernized or are
soon modernizing their retail payments infrastructure, including Australia (New Payments Platform), the
UK (New Payments Architecture) and the Nordics (P27). As CBDC adoption increases, CBDC networks
will have to scale not only volumes but also added functionality such as smart contracts, programmable
money, digital identity services, and fraud prevention services, among others.

Maximizing financial inclusion

One of the bigger drivers of financial inclusion over the past decade has been the rise of financial services
from outside the banking sector, such as remittances providers and digital wallets. These services are
pioneering new offerings and alternative experiences for traditional banking users. Current fiat currency
capabilities limit the effectiveness of monetary digitization and may compel end-users to transact in the
private cryptocurrencies that central banks often view as a threat to financial stability. CBDCs will help

14
https://enaira.com/download/eNaira_Design_Paper.pdf
15
https://www.hyperledger.org/wp-content/uploads/2018/02/The-Hyperledger-Vision-8.pdf 8.
retain those users, while boosting financial inclusion and enabling governments to make direct payments
to citizens effectively, especially the unbanked. This will require central banks to provide non-bank
participants with greater access to core payment systems and infrastructure than they currently offer. They
will also have to start understanding the potential impact of this change on the role of commercial banks
as gatekeepers to retail customers to ensure the continuing stability of the entire financial system.

Enabling future cross-border interoperability

The G20 initiative recently highlighted interoperability between domestic CBDCs as an important avenue
through which to improve the speed and efficiency of cross-currency fund transfers and as an area that
central banks should focus on.16 In the early stages of CBDC implementation, it is true that this may seem
more aspirational than practical. There are still many open questions, and further cooperation to establish
standards in this area that must occur. In addition to establishing common technical standards, differences
in the national regulatory schemes may prove a significant obstacle and require significant work to
overcome in the future. But if each country develops CBDC without regard to common global standards,
cross-border settlement will not be possible without an intermediary. In such a scenario, cross-border
settlement based on CBDCs would involve many of the same problems facing cross-border payments
today, including KYC / AML and risk management.

Minimizing the carbon footprint through energy efficiency

DECODING CBDC: A PRACTICAL GUIDE TO CBDC DESIGN AND IMPLEMENTATION

Evaluating the impact of payment systems such as CBDC on sustainability has been an important
consideration for many central banks as of late. For example, the European Central Bank has stated
that one of its design requirements for a digital euro should be based on “technological solutions that
minimize its ecological footprint and improve that of the current payment ecosystem.”17 Traditionally,
the issue of sustainability has been a bigger concern for DLT-based networks such as Bitcoin, which have
extremely high resource consumption.18 Permissioned blockchain solutions, which have only a select few
of network participants and therefore require less resources to achieve consensus, typically use far less
energy than traditional proof-of-work (POW) consensus blockchains. Ripple’s XRP and XRPL in comparison
are natively low carbon technologies, originally designed to be more efficient - and energy efficient - than
Bitcoin and other POW protocols.19 That said, differences in resource requirements and energy efficiency
across networks still exist and should be an important consideration for central banks when choosing the
right solution.

Conclusion
Choosing the right CBDC solution is key to CBDC successful implementation and is an important building
block paving the way for widescale adoption. In this white paper, we thought critically about the key core
design decisions for CBDC and considered some of the unique features that central banks look for when
searching for a CBDC solution compared to other payment systems. In the next white paper, we aim to
catalogue a list of representative CBDC infrastructure solutions being offered in the market and provide a
comparative analysis of the different offerings.

16
https://www.fsb.org/wp-content/uploads/P131021-1.pdf
17
https://www.ecb.europa.eu/pub/pdf/other/Report_on_a_digital_euro~4d7268b458.en.pdf
18
https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210714~d99198ea23.en.html
19
https://ripple.com/insights/bhutan-advances-financial-inclusion-and-sustainability-with-ripples-cbdc-solution/ 9.