CBDC success depends on public and private sector collaboration

Overcoming the hurdles in ecosystem development and adoption

Almost 70% of central bank respondents to OMFIF’s 2023 Future of payments survey expect to issue a central bank digital currency within the next decade. But central banks are not expected to work alone. Instead, they will have to collaborate with a range of stakeholders to develop and deploy a CBDC. This model is known as the ‘platform approach’, where the central bank provides the core ledger while ecosystem players innovate to provide the service to end-users.

A new report by OMFIF’s Digital Monetary Institute and Giesecke+Devrient examines how to unlock the potential of this CBDC ecosystem. The report drew its analysis from extensive interviews with central banks, technology firms, merchants and financial service and payments service providers.

A panel of experts unpacked the players involved in actualising the potential benefits of a CBDC for the broader ecosystem and the practical considerations that need to be overcome to achieve this. They agreed that central banks and the private sector will need to collaborate closely to reap the benefits of a CBDC ecosystem.

CBDC success linked to use case

Wolfram Seidemann, chief executive officer at G+D, summarised the benefits of CBDC ecosystem participation in broader terms. He said the joint engagement of the public and private sector to develop a CBDC through the platform approach will foster innovation that will enable multiple use cases. As consumers and businesses adopt CBDCs, there may be a network effect where the value of the CBDC goes up as the number of users increases.

The success of a CBDC is intrinsically linked to its use case. Seidemann gave the examples of CBDCs being used to promote financial literacy or users tracking their carbon footprint through the programmability of green wallets.

Rodrigo Mulinari, chief information officer at Banco do Brasil, highlighted the success of PIX, an instant payments platform run by the Banco Central do Brasil. PIX has had a positive impact on financial inclusion, bringing about 71m new customers to the system in 2023. DREX, a project by Banco do Brasil, also aims to improve financial inclusion by ‘offering customers a gateway to the tokenised economy’.

Other benefits of CBDCs observed by the panellists included programmable payments enabling enhanced security, privacy and more efficient cross-border payments.

Education central to convincing users to adopt CBDCs

However, the panellists also addressed hurdles that need to be overcome to fully realise the benefits of a CBDC ecosystem.

Eric Pascal, global head of digital currencies, cash management at Standard Chartered Bank, pointed out that citizens may be sceptical of CBDCs. Some central banks may believe that ‘people are reluctant to use this form of cash as a result of surveillance’.

This issue could be addressed through concurrent approaches. Delegating CBDC design, including the design of privacy features, to the private sector assures the user privacy from the central bank and the state. At the same time, ‘a huge piece of education needs to be done by central banks and the greater ecosystem’ to address the myths around digital currencies, stated Pallavi Thakur, director of CBDC and interoperability at Swift.

The resistance of commercial banks towards CBDCs may also stem from the doubts of end users. Mulinari pointed out that ‘there are too many uncertainties and gaps on how to regulate and supervise CBDCs, especially in relation to privacy, liability, interoperability’. However, he added that these ‘can be overcome by collaborative development of CBDCs with participation of the government, central banks, regulators, financial service providers and other participants.’

Cross-border transactions

The panellists also reflected on the implications of CBDCs for cross-border payments. Pascal pointed out that one pressing hurdle in using CBDCs for cross-border payments is the need to solve ‘the scalable implement of an operating system using CBDCs.’ There are huge volumes of money being transacted daily, and Pascal believes that it may take a while to get to the point where CBDCs can ‘move enormous sums of capital when we need it’.

Many CBDC pilots are also bilateral projects, which may risk fragmentation and affect scalability. Pallavi reflected on the need for projects to avoid fragmentation – perhaps through approaches such as the hub-and-spoke model – and highlighted the importance of organisations like Swift to ‘provide instant frictionless payments’.

There is no immediate or clear solution for now. Distributed ledger technology and blockchain could be an option, but the panellists suggested that it’s not a necessary solution to guarantee CBDC success.

Ultimately, the message from the panel was that overcoming CBDC hurdles relies on collaboration and adaptation among players. Pallavi neatly summarised this: ‘the changing roles that banks will have to adopt as new players come on onboard means the ecosystem will change and not be as it is today’.

Katerina Liu is Research Analyst, Digital Monetary Institute, OMFIF.

Download ‘Unlocking the potential of a CBDC ecosystem’. Watch the launch panel discussion on demand.

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