| Summary: | The thesis set out to determine the appropriate economic design for an Icelandic central bank digital currency (CBDC) to help the Central Bank of Iceland (CBI) best achieve its primary functions of price and financial stability. The results concluded that no CBDC design implementation is suitable for Iceland in the status quo. The CBI’s historical performance over the past decade suggests no need for significant changes to its methods or additional tools. The key interest rate successfully serves as its main policy instrument and utilizes foreign exchange trades to mitigate currency fluctuations of the króna. Assuming risk aversion of the CBI, the thesis utilized a cost-effectiveness analysis combined with a method of elimination to narrow down the design options to one. The CBDC had two base assumptions. First, it is money and serves as a medium of exchange, a store of value, and a unit of account. Second, the technological implementation of the Icelandic CBDC is such that it is scalable, fast, and efficient without compromising security and resilience. The analysis determined the best CBDC design for Iceland to have no interest rate, tiered quantitative limits on accounts, no government bond-backing, and not open to foreign ownership. This design forgoes any opportunity for using CBDC as a second monetary policy tool but minimizes the risk of financial instability. If cash were eradicated from the economy or showed steady decline signs, the best CBDC design would improve upon the new status quo by upholding competition in creating money, payment services and transaction costs, deposit rates, and affirming the sovereignty of the Icelandic króna. Therefore, the CBI should carefully monitor changes in the number of physical notes and coins in the economy before making an implementation decision. It should also study the welfare benefits of CBDC to determine if cash should be eased out of the economy by government mandate. However, the CBI should be prudent and closely follow the Central Bank of Sweden’s progress ...
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