Policy Design of Retail Central Bank Digital Currencies: Embedding AML/CFT Compliance

Abstract

This paper provides a foundation on how to ensure effective and efficient Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) compliance measures in the Central Bank Digital Currency (CBDC) system, focusing particularly on the retail CBDC in a two-tiered system. By examining the existing AML/CFT practices and those implemented in newly launched CBDC projects, we build a policy framework of AML/CFT measures that should be embedded in the CBDC system to enhance compliance. The most common enforcement of AML/CFT measures associated with CBDC balances assume the form of transaction amount or holding amount limits based on the level of Know-Your-Customer (KYC) findings. In this paper, we examine practices beyond the initial KYC measures and explore the processes of onboarding and on-going customer due diligence, transaction analysis and evaluation, decision making and reporting to the Financial Investigation Unit (FIU).

Keywords: (CBDC) Central Bank Digital Currency, (AML) Anti Money Laundering, (CFT) Combating the Financing of Terrorism, (DLT) Distributed Ledger Technology, (FATF) Financial Action Task Force, regulatory compliance

JEL Classification: G20, K20