CBDC success depends on public and private sector collaboration

Nearly 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 need to work 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 explores how to unlock the potential of this CBDC ecosystem. The report drew its analysis from extensive interviews with central banks, technology firms, traders and financial service and payment service providers.

A panel of experts unpacked the players involved in actualizing the potential benefits of a CBDC for the wider ecosystem and the practical considerations that must be overcome to achieve them. They agreed that central banks and the private sector will need to work together closely to reap the benefits of a CBDC ecosystem.

CBDC Success Linked to Use Case

Wolfram Seidemann, CEO at G+D, summarized the benefits of CBDC ecosystem participation in broader terms. He said the joint involvement of the public and private sectors to develop a CBDC through the platform approach will promote innovation that enables multiple use cases. As consumers and businesses adopt CBDCs, there may be a network effect where the value of the CBDC increases 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 payment platform managed by the Banco Central do Brasil. PIX has had a positive impact on financial inclusion, bringing around 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 panelists include programmable payments that enable improved security, privacy and more efficient cross-border payments.

Education central to convincing users to adopt CBDCs

However, the panelists also addressed obstacles that must be overcome to fully realize 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 skeptical about CBDCs. Some central banks may believe that ‘people are reluctant to use this form of cash because of surveillance’.

This issue can be addressed through simultaneous approaches. Delegating CBDC design, including the design of privacy features, to the private sector ensures user privacy from the central bank and the government. At the same time, “a huge amount of education needs to be done by central banks and the larger ecosystem” to address the myths surrounding digital currencies, said Pallavi Thakur, director of CBDC and interoperability at Swift.

The resistance of commercial banks to 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 regarding privacy, accountability, interoperability.” However, he added that this ‘can be overcome through collaborative development of CBDCs with the participation of government, central banks, regulators, financial service providers and other participants.’

Cross-border transactions

The panelists also reflected on the implications of CBDCs for cross-border payments. Pascal pointed out that one pressing obstacle in the use of CBDCs for cross-border payments is the need to solve “the scalable implementation of an operating system that uses CBDCs.” There are huge amounts of money being transacted on a daily basis, and Pascal believes it may take some time to get to the point where CBDCs can “move enormous amounts of capital when we need it”.

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

There is no immediate or clear solution for now. Distributed ledger technology and blockchain may be an option, but the panelists suggested that it is 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 summed it up neatly: ‘the changing roles that banks will have to take on as new players come on board means the ecosystem will change and not be what 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.