CBDC’s Gathering Momentum

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 is causing central banks to react.

A number of hurdles still need to be cleared for CBDC momentum to pick up pace

Enter central bank digital currencies, also known as CBDCs. Unlike volatile cryptocurrencies, CBDCs offer a means of secure digital payments with legal tender status and no bank account required.

In principle, CBDCs must be accepted everywhere and treated like physical notes, for example in restaurants and shops. It is therefore little surprise that CBDCs are gaining ground, but the road to global adoption still promises to be a bumpy ride ahead.

Start inclusion in emerging economies

Among the pioneers of CBDC are the world’s emerging economies. Momentum is growing rapidly in countries such as Nigeria and Indonesia, with a study 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 residents unable to access local banks, telephone 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 the mobile phone network goes down, digital money can be stored on a card to function offline and then used to make payments. Users also do not have to pay fees, nor will they leave a digital footprint.

However, just like 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 citizens. With CBDC compatibility for low-cost devices such as wristbands or smart cards, the Digital Ghana Agenda will be able to make significant strides in 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 CBDC will depend in part on changing 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 digital central bank currency, likely 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 essential to ensure the success of a CBDC implementation.

Interoperability in the CBDC space refers to different domains. Among the considerations for adoption will be integration with existing account-based payment instruments currently provided by commercial banks, enabling seamless exchange between deposit money and CBDCs. Also decisive will be the relationship with real-time gross settlement systems and new forms of wholesale CBDC for clearing and settlement within the banking sector.

In addition, the interoperability with new token-based instruments, such as stablecoins, digital assets or CBDCs representing other currencies, must be taken into account, while smart contracts can enable programmable use cases such as delivery versus payment and machine-to-machine payments. Legal and regulatory frameworks will also need to be assessed to ensure that cross-border payments can be facilitated.

Ensure a seamless experience

Alongside technical considerations, users need to be aware of what interoperability means for various stakeholders, including consumers, merchants, financial service providers, enterprises and monetary authorities.

While the general public is likely to be indifferent as long as the process is seamless, merchants demand that CBDC payments be easily integrated into existing POS systems without large upfront investments.

The central bank perspective will probably concern interconnections with providers of financial services and coordination of regulatory and supervisory standards. It is also crucial that both the public and private sectors work together to achieve a thriving CBDC ecosystem, so that both consumers and businesses can benefit.

An interoperable platform will be essential to underpin the introduction of a CBDC to achieve widespread adoption and efficiency for end users, as well as enable private sector actors to develop innovative products and services.

Making CBDCs fully operational

Ultimately, for CBDC momentum to really take off, there needs to be common regulation across countries to facilitate cross-border payments and focus on collaboration between the public and private sectors.

In addition, the implications of interoperability for various stakeholders need to be understood going forward, which will make it possible to adopt shared standards and establish common ground.

With interoperability helping to drive coexistence, innovation, efficiency and wider adoption, CBDCs can achieve their full potential in providing benefits to society as a whole.