Core Focus: The core design choices for CBDCs and the fundamental trade-offs they present: privacy vs. traceability, financial stability vs. competition, and monetary policy transmission vs. banking system stability.

In-Depth Notes:
The design of a CBDC is not a technical detail but a set of fundamental policy choices that will determine its impact on privacy, financial stability, monetary policy, and the structure of the financial system. The design choices carry significant consequences for society and the economy .

Privacy vs. Traceability:
This is perhaps the most contested design trade-off. Users desire the same level of anonymity they have with cash . Evidence from randomised survey experiments shows that strong privacy safeguards raise adoption willingness by up to 60%, underscoring that privacy is not merely a civil liberty concern but a prerequisite for widespread CBDC success . On the other hand, public authorities need to be able to trace transactions to prevent illicit activities like money laundering and terrorism financing . This creates a fundamental tension: a fully anonymous CBDC would present extreme financial integrity risks, while a fully traceable system raises significant privacy concerns. The solution often involves a multi-layered approach: pseudonymisation and encryption for online transactions, offline cash-like anonymity for small-value payments, and restrictions on access to individual transaction data. In some schemes, central banks only have access to pseudonymous data unless in possession of a court order .

Financial Stability vs. Payment Competition:
A widely available retail CBDC represents a direct substitute for commercial bank deposits. In periods of financial stress, a CBDC could accelerate deposit flight at a speed and scale that conventional deposit insurance and central bank liquidity facilities may not be designed to address . This risk of bank disintermediation is the primary financial stability concern. To mitigate this risk, all ongoing CBDC projects are designed to be non-interest-bearing and to have limits on the amount of CBDC that an individual can hold . Conversely, a CBDC could also improve competition in payments through pricing discipline, quality improvements, and broader access. The design must balance these competing objectives: a CBDC that is too attractive could destabilise the banking system; one that is too restrictive may fail to generate user adoption and payment innovation.

Monetary Policy Transmission vs. Banking System Stability:
An interest-bearing CBDC would give the central bank the ability to influence monetary policy transmission directly to households and businesses, without passing through the commercial banking system. It could also potentially reduce the effective lower bound on policy rates, enabling negative rate policies. However, an interest-bearing CBDC would also accelerate disintermediation by making CBDC a more attractive alternative to bank deposits. The policy choices are therefore decisive: macroeconomic effects frequently arise not from the introduction of CBDC per se, but from assumptions about accompanying policy choices, such as the remuneration of CBDC and the regulatory treatment of bank deposits relative to central bank credit facilities .