The gathering momentum of CBDCs
Cash remains the most widely used payment method in the world, but the proliferation of privately issued digital currencies such as Bitcoin and other emerging cryptocurrencies are causing central banks to respond.
Enter central bank digital currencies, otherwise known as CBDCs. Unlike volatile cryptocurrencies, CBDCs offer a means for secure digital payments with legal tender status, and no bank account is required.
In principle, CBDCs must be accepted everywhere and treated like physical banknotes, such as in restaurants and shops. It’s little surprise therefore that CBDCs are gaining traction, but the pathway to global adoption still promises a bumpy ride ahead.
Initiating inclusion in emerging economies
Among the pioneers of CBDCs are the world’s emerging economies. Momentum is growing rapidly in countries such as Nigeria and Indonesia, with a study conducted by G+D and OMFIF finding that 90% and 60% of citizens respectively would use such a payment method.
This is likely due to the more limited availability of modern infrastructure in some of these regions, with some citizens unable to access local banks, phone networks or an internet connection to complete transactions. However, this interest is also a result of educating consumers and raising awareness of CBDCs as an inclusive means of payment.
With a well-designed CBDC, even if the local power supply fails or cell phone network goes down, digital money can be stored on a card to work offline and then used to make payments. Users will also not need to pay any fees, nor will they leave a digital footprint.
It remains the case, however, that in the same way as physical banknotes, the strictest security requirements are still required to ensure that counterfeiters, criminals or cyber-attackers cannot take advantage.
The ability to leverage zero transaction fees is critical for banks such as The Bank of Ghana, which is one of the first African central banks to announce its commitment to a national digital currency for its citizens. With CBDC compatibility for low-cost devices such as wristbands or smartcards, the Digital Ghana Agenda will be able to make significant strides over the coming years to stimulate growth and innovation in the West African country.
Accounting for interoperability
With much of the momentum taking place in emerging countries, global adoption of CBDCs will partly hinge on transforming attitudes in developed countries. Less than a quarter of US citizens (24%) and only 14% of those in Germany are currently open to the idea of a central bank digital currency, which is likely to be due to the established availability of other digital payment methods and available infrastructure. Interoperability, with a seamless flow of funds between existing payment systems, will be crucial to ensure the success of a CBDC implementation.
Interoperability in the CBDC space refers to various domains. Among the considerations for adoption will be integration with existing account-based payment instruments currently provided by commercial banks, enabling seamless exchanges between deposit money and CBDCs. Also crucial will be the relationship with real-time gross settlement systems and new forms of wholesale CBDCs for clearing and settlement within the banking sector.
Additionally, the interoperability with new token-based instruments, such as stablecoins, digital assets or CBDCs representing other currencies, will need to be taken into account, while smart contracts could enable programmable use cases such as delivery versus payment and machine-to-machine payments. Legal and regulatory frameworks will also need to be considered to ensure that cross-border payments can be facilitated.
Ensuring a seamless experience
Alongside technical considerations, adopters must be aware of what interoperability means to different stakeholders, including consumers, merchants, financial service providers, enterprises and monetary authorities.
While the general public are likely to be indifferent as long as the process is seamless, merchants require CBDC payments to be easily integrated into existing POS systems without hefty upfront investments.
The central bank perspective is likely to revolve around interlinkages with financial service providers and aligning regulatory and supervisory standards. It’s also crucial that both the public and private sector collaborate to achieve a thriving CBDC ecosystem, allowing consumers and businesses to both benefit.
An interoperable platform will be vital to underpin the introduction of a CBDC to achieve widespread adoption and efficiency for end-users, as well as enabling private sector players to develop innovative products and services.
Making CBDCs fully operational
Ultimately, for the CBDC momentum to really gather pace, there needs to be common regulation across countries to facilitate cross-border payments and focus on collaboration between the public and private sector.
Additionally, the implications of interoperability for different stakeholders need to be understood moving forward, which will enable shared standards to be adopted and common ground to be established.
With interoperability helping to drive co-existence, innovation, efficiency and wider adoption, CBDCs can achieve their full potential in providing benefits to all of society.