New digital payment solutions promise convenience, ease-of-use and accessibility on an unprecedented scale. However, the digital payments environment is characterised by a ‘walled garden’ of fragmentation as the number of platforms proliferates.

Many emerging systems lack interoperability. They are disconnected from the wider ecosystem, preventing the seamless flow of payments and hindering flexibility in meeting the evolving needs of the future. With central bank digital currencies offering promise as an efficient and accessible form of payment, interoperability is a crucial design criterion for any CBDC solution.

CBDCs have the potential to redefine the way we pay and create innovative opportunities in our increasingly digital world. But to be truly interoperable with the wider payments ecosystem, deployment will need to meet the expectations of various different stakeholders. Consumers expect seamless access to digital cash, while retailers want cost savings and easy integration into existing payment systems. However, these expectations are not all. Large enterprises require smart programmable contracts and financial service providers need integration with trading and cross-border transactions.

To ensure that a CBDC can thrive, central banks will need to collaborate with private businesses to make it an attractive addition to existing payments systems. To help foster the CBDC ecosystem and to benefit all its stakeholders, a CBDC should be deployed as an open infrastructure that allows interlinkages and also interfaces with other systems.

Can CBDC bridge fragmentation?

 Digital currencies can – and will – certainly overcome fragmentation, as interoperability is pivotal in ensuring the seamless flow of funds between payment systems. Functionally, interoperability underpins the most important features of CBDCs, namely cash-like digital payments, innovation, financial inclusion and programmability. The best means of supporting this process is through a flexible public payment infrastructure that not only promotes interoperability, but also stimulates real competition.

The future of the monetary system will depend on the trusted division of roles between the central bank and private financial entities. The bank will provide the open infrastructure on which the private sector can quickly innovate. By giving financial service providers the opportunity to develop and launch services on a common national standard, a CBDC reduces payment fragmentation – thereby bringing down the walled garden. If the CBDC is well-designed, it will ensure synergies with private initiatives on acceptance and use while providing a foundation for the essential interoperability that enables cross-platform services and products.

The responsibility for cross-border payments lies with different countries to devise the best solution from technological, economic and policy-based perspectives. However, it would be beneficial for central banks to consider cross-border functionalities when designing their national CBDCs. With effective design and implementation, interoperability across international systems provides the necessary support for cross-border payments and will facilitate faster, affordable and more reliable exchanges for businesses and consumers.

Foundation for a digital future

As the charge towards digitalisation gathers pace, many financial service providers are moving progressively closer to the issuance of tokenised money such as commercial bank money tokens. For CBDCs to thrive within the fast-evolving tokenised digital currency landscape, central banks should accelerate their endeavours. CBDCs also show potential to become a key component of emerging digital public infrastructures. ‘The race for the user’ is on, and central banks could transfer the mandate they currently fulfil with cash in the physical world, over and into the digital age.

Now is the time for central banks to lay the foundation for the future and its rapidly digital financial system. A system offering interoperability as a core component will drive innovation – enabling economic growth and social progress.