Chapter 38 Exercises: Central Bank Digital Currencies

Exercise 1: CBDC Design Workshop — Building a Digital Currency for a Fictional Country

Difficulty: Intermediate | Estimated Time: 60 minutes | Bloom Level: Create

Scenario

You are a consultant advising the central bank of Verdania, a fictional middle-income country with the following characteristics:

• Population: 35 million
• GDP per capita: $9,200
• Unbanked population: 38% (13.3 million adults)
• Smartphone penetration: 62%
• Feature phone (non-smartphone) penetration: 24%
• Existing mobile money service: VerdaPay (operated by the dominant telecom company, serving 8 million users)
• Cash dependency: 70% of transactions by volume are cash
• Internet connectivity: 55% (concentrated in urban areas; rural coverage below 30%)
• Political system: Democracy with an independent judiciary, though corruption indices rank it in the 45th percentile globally
• Regional context: Three neighboring countries are exploring CBDCs; the largest trading partner has already launched one
• Banking infrastructure: 4 national banks, 12 microfinance institutions, ATMs present only in cities and large towns

The central bank has asked you to design a retail CBDC for Verdania. Your design must address the specific realities listed above.

Tasks

Part A: Architecture Decisions

For each of the following design choices, state your recommendation and provide a 3-4 sentence justification that references Verdania's specific circumstances. Do not just state a general principle — explain why that principle applies to this country.

Part B: Financial Inclusion Strategy

Write a 400-word strategy document explaining how your CBDC design would reach Verdania's 13.3 million unbanked adults. Your strategy must address:

1. How people without smartphones access the CBDC (remember: 14% of the population has neither smartphone nor feature phone)
2. How people in areas with less than 30% internet coverage make transactions
3. Whether your design competes with or complements VerdaPay
4. What identity verification you require for the lowest-tier wallet, given that many unbanked citizens lack government-issued ID

Part C: Risk Assessment

Identify the three greatest risks of launching a CBDC in Verdania and propose one mitigation strategy for each. At least one risk must be a bank disintermediation risk, and at least one must be a privacy/surveillance risk specific to Verdania's political context (remember the corruption ranking).

Evaluation Criteria

• Architecture decisions are internally consistent (the choices work together, not against each other)
• Justifications reference Verdania's specific data, not just general CBDC theory
• Financial inclusion strategy is realistic, acknowledging constraints rather than assuming them away
• Risk assessment identifies non-obvious risks, not just the three discussed most prominently in the chapter

Exercise 2: CBDC Privacy Spectrum Analysis

Difficulty: Advanced | Estimated Time: 45 minutes | Bloom Level: Evaluate

Setup

The chapter describes a spectrum of privacy designs for CBDCs, from cash-like anonymity to total surveillance. In this exercise, you will analyze five real and hypothetical CBDC designs along this spectrum and evaluate the tradeoffs each makes.

CBDC Privacy Profiles

Design A: Full Anonymity. No identity verification for any wallet tier. All transactions are private. No government agency can trace transactions. The CBDC functions exactly like digital cash.

Design B: China's e-CNY Model. Tiered identity verification. Low-value transactions are anonymous to commercial counterparties but traceable by the central bank. High-value transactions require full identity verification. The central bank has unrestricted access to all transaction data.

Design C: ECB's Proposed Digital Euro. Tiered privacy with offline cash-like anonymity for small in-person transactions. Online transactions require standard AML/KYC compliance. The central bank does not have real-time access to individual transaction data; access requires a legal process.

Design D: Zero-Knowledge CBDC. Uses zero-knowledge proofs (Chapter 37) to verify transaction validity without revealing sender, recipient, or amount. AML compliance is achieved through proof-of-compliance (the user proves they are not on a sanctions list without revealing their identity). The central bank can verify that all transactions are valid but cannot trace specific ones.

Design E: Full Surveillance CBDC. All transactions are recorded with full identity data. The central bank has real-time access to all data. Transaction data is shared with tax authorities, law enforcement, and social services. The government can freeze or restrict any wallet at any time without judicial approval.

Tasks

Part A: Spectrum Mapping

Create a visual spectrum (a simple line from "Full Privacy" to "Full Surveillance") and place each design on it. Below the spectrum, write one sentence per design explaining your placement.

Part B: Stakeholder Analysis

For each of the following stakeholders, identify which CBDC design they would prefer and explain why in 2-3 sentences:

1. A human rights activist in an authoritarian country
2. The head of a national tax authority in a developed country
3. A small business owner who deals primarily in cash
4. A central bank governor concerned about financial stability
5. A law enforcement official investigating money laundering
6. An unbanked farmer in a rural developing country

Part C: Evaluation Essay

Write a 500-word essay answering the following question: "Is it possible to design a CBDC that provides meaningful financial inclusion for the unbanked while protecting the financial privacy of all users, including those the government might wish to surveil? If so, describe the design. If not, explain why the goals are fundamentally in tension."

Your essay should reference at least two of the five CBDC designs above and at least one specific technology (e.g., zero-knowledge proofs, tiered wallets, hardware security modules) from the chapter.

Evaluation Criteria

• Spectrum placement is defensible and internally consistent
• Stakeholder analysis demonstrates the ability to adopt multiple perspectives, not just the student's own
• Essay engages with the genuine tension rather than resolving it superficially
• Technical references are accurate, not just name-dropped

Exercise 3: Bank Disintermediation Modeling

Difficulty: Intermediate | Estimated Time: 45 minutes | Bloom Level: Analyze

Scenario

You are an analyst at the central bank of a medium-sized European country. The country is preparing to launch a retail CBDC. The commercial banking sector has 800 billion euros in total deposits, of which:

• Current/checking accounts: 200 billion euros (25%)
• Savings accounts (below 100K per depositor): 350 billion euros (43.75%)
• Savings accounts (above 100K per depositor): 150 billion euros (18.75%)
• Term deposits/CDs: 100 billion euros (12.5%)

The central bank is evaluating three CBDC holding limit options:

• Option 1: 3,000-euro holding limit per person (the ECB's initial proposal)
• Option 2: 10,000-euro holding limit per person
• Option 3: No holding limit

The country has 12 million adult residents. Assume the following about adoption and deposit migration:

• Under Option 1: 40% of adults create CBDC wallets; average holding of 1,500 euros among users
• Under Option 2: 50% of adults create CBDC wallets; average holding of 5,000 euros among users
• Under Option 3: 55% of adults create CBDC wallets; average holding of 12,000 euros among users

Tasks

Part A: Deposit Migration Calculation

For each option, calculate: 1. Total CBDC in circulation (number of wallet holders x average holding) 2. Total deposit reduction (assume CBDC holdings come proportionally from the four deposit categories, weighted by their current share) 3. Percentage reduction in total bank deposits 4. Percentage reduction in each deposit category

Present your results in a table.

Part B: Impact Assessment

For each option, write a 200-word assessment of the impact on: 1. Bank lending capacity (banks typically lend 80-90% of deposits; if deposits shrink by X%, lending capacity shrinks proportionally) 2. Bank profitability (checking accounts earn banks approximately 2% net interest margin; savings accounts earn approximately 1.5%; term deposits earn approximately 0.5%) 3. Financial stability (what happens during a financial crisis when people rush to convert bank deposits to CBDC?)

Part C: Recommendation

Write a 300-word recommendation to the central bank governor. Which holding limit would you recommend, and why? Your recommendation should balance the CBDC's policy objectives (financial inclusion, payment modernization) against the banking stability risks you calculated in Parts A and B.

Evaluation Criteria

• Calculations are correct and clearly presented
• Impact assessment demonstrates understanding of fractional reserve banking mechanics
• Recommendation is defensible, acknowledges tradeoffs, and does not pretend there is a cost-free option

Exercise 4: Comparative Policy Analysis — Three Countries, Three Approaches

Difficulty: Advanced | Estimated Time: 60 minutes | Bloom Level: Evaluate

Setup

Three countries have taken fundamentally different approaches to digital currency:

• China: Active retail CBDC (e-CNY) in advanced pilot, with programmability and government transaction visibility
• United States: No retail CBDC; pursuing regulated private stablecoins and FedNow as alternatives
• European Union: Digital euro in preparation phase, with privacy-by-design and holding limits

Tasks

Part A: Motivation Comparison

Create a matrix comparing the three approaches across each of the four CBDC motivations discussed in the chapter. Rate each motivation as "Primary," "Secondary," or "Not applicable" for each country, and provide a brief justification.

Part B: Risk Comparison

For each approach, identify the single greatest risk and the single greatest advantage relative to the other two approaches. Present your analysis in a structured format:

Part C: Ten-Year Scenario

Write a 500-word scenario set in 2035. Choose one of the following premises:

• Scenario A: China's CBDC has achieved dominant adoption domestically and significant use in international trade. How has this affected the global financial system, US dollar hegemony, and financial privacy norms worldwide?
• Scenario B: The US stablecoin approach has succeeded, with regulated dollar stablecoins becoming the dominant form of digital money globally. What does this mean for government monetary sovereignty and for the 1.4 billion unbanked?
• Scenario C: The digital euro has launched and achieved high adoption in the eurozone, with privacy protections intact. What pressures does this create on other countries to match its privacy standards, and has it changed the balance between government and citizen in financial surveillance?

Your scenario should be plausible (grounded in trends discussed in this chapter), specific (include concrete details, not just vague assertions), and balanced (acknowledge both positive and negative consequences of the premise).

Evaluation Criteria

• Motivation matrix demonstrates understanding of each country's specific circumstances, not just generic CBDC theory
• Risk/advantage analysis is comparative — each entry explains why the risk or advantage is distinctive to that approach
• Ten-year scenario is plausible, specific, and demonstrates understanding of second-order effects (not just "China's CBDC succeeded, so China wins")

Exercise 5: The Philosophical Debate — Preparation and Position Paper

Difficulty: Advanced | Estimated Time: 75 minutes | Bloom Level: Evaluate

Debate Proposition

"Resolved: The development of CBDCs represents a greater threat to individual financial freedom than the problems CBDCs are designed to solve."

Tasks

Part A: Position Paper (FOR or AGAINST — assigned by instructor, or choose FOR)

Write an 800-word position paper defending your assigned side. Your paper must:

1. State your thesis clearly in the opening paragraph
2. Present three arguments supported by evidence from this chapter, from Chapter 4 (The Money Question), and from Chapter 29 (Crypto Regulation)
3. Acknowledge the two strongest counterarguments to your position and explain why your arguments are more compelling despite those counterarguments
4. Conclude with a statement about what safeguards would need to exist for the opposing position to be correct

Part B: Steelman the Other Side

In 300 words, present the strongest possible case for the position opposite to the one you argued in Part A. You must argue this position as if you believed it. The test of intellectual honesty is whether a reader could tell which side you actually hold.

Part C: Synthesis

In 200 words, state what you actually believe after having argued both sides. Has the exercise of arguing the opposite position changed your view? If so, how? If not, what about the other side's arguments failed to persuade you?

Evaluation Criteria

• Position paper is persuasive, well-structured, and evidence-based
• Steelman is genuinely strong — a weak steelman suggests the student has not engaged with the opposing view
• Synthesis demonstrates intellectual honesty and reflective thinking
• Cross-chapter references are substantive, not superficial