What exactly is the central bank digital currency framework recently proposed by the Bank for International Settlements?

The Bank for International Settlements (BIS) has published a comprehensive framework for designing retail central bank digital currencies (CBDCs), highlighting a hybrid model that combines central bank control with private sector collaboration.

The report, prepared by the Consultative Group on Innovation and the Digital Economy (CGIDE), provides a roadmap for central banks in the Americas and around the world to explore this evolving financial instrument.

The hybrid model proposed in the report enables central banks to retain management of CBDC issuance and infrastructure while delegating user-facing responsibilities to private intermediaries.

These intermediaries would handle functions such as KYC verification, wallet management, and transaction facilitation.

This model ensures efficiency and scalability while addressing issues related to user privacy and compliance.

The architecture includes four core processes: user registration, CBDC issuance (cash-in), CBDC withdrawals (cash-out), and intra-ledger transfers.

Notably, the system supports a tiered KYC mechanism, providing a basic wallet for low-value transactions with minimal identity requirements and an advanced wallet for high-value transactions that meet stricter regulatory standards.

Offline payment functionality is an important feature of the proposal, aimed at expanding access to underserved and unbanked populations.

“The hybrid model bridges the gap between centralization and decentralization, providing resilience, accessibility, and stronger privacy protection,” the report said.

The BIS report highlights the advanced features that CBDCs can bring to the financial ecosystem, including programmability through smart contracts, asset tokenization, and seamless integration with DeFi.

These features can improve liquidity, automate transactions, and create new financial arrangements, positioning CBDCs as foundational tools for the modern economy, the report said.

For example, tokenized CBDCs can simplify financial settlements through atomic transactions, eliminating the need for multi-step reconciliation processes. They can also facilitate cross-border payments, reducing costs and processing times, while promoting greater competition and efficiency.

The report highlights that a programmable CBDC platform could transform supply chain financing and support innovations such as emergency payments.

The report draws on global experience, mentioning Jamaica's JAM-DEX, China's digital yuan, and Peru's offline pilot project for rural areas.

It also addresses technical challenges, including interoperability with existing payment systems, ensuring privacy without compromising compliance, and protecting against cyber threats.  

The BIS emphasizes that the proposal is a flexible framework designed to facilitate dialogue and feedback among stakeholders.