The issuance of a CBDC is a direct response to the concern about unbacked cryptocurrencies undermining a central bank’s monetary policy because:

• Maintains monetary control: A CBDC allows the central bank to provide a digital alternative to cryptocurrencies, ensuring that domestic transactions remain within the regulated monetary framework.
• Reduces reliance on unbacked crypto assets: By offering a secure, stable, and widely accepted digital currency, a CBDC can diminish the use of unbacked cryptocurrencies for transactions, thereby reinforcing the central bank’s control over the money supply and interest rates.
• Supports monetary policy transmission: A CBDC ensures that the central bank retains its ability to influence economic activity through monetary tools, as transactions remain linked to the official currency.

A is incorrect: Pegging a national currency to a cryptocurrency could amplify monetary instability, as cryptocurrencies are highly volatile. This approach could further undermine the central bank’s ability to use traditional monetary tools effectively.

C is incorrect: Capping transaction sizes might reduce the volume of cryptocurrency usage temporarily, but it does not address the root cause of the central bank’s concern: the loss of monetary control. It could also push transactions to decentralized or unregulated platforms, making oversight harder.

D is incorrect: Although capping transactions might reduce the use of unbacked crypto assets temporarily, it would be challenging to enforce effectively and could drive transactions underground. This does not directly restore the central bank’s ability to implement monetary policy.