CBDC: what you (still) need to know

In an earlier article, we reported on the myths and fallacies that surround central bank digital currencies (CBDCs). Technological breakthroughs in exciting new fields are usually accompanied by misconceptions. Some of those misassumptions have fallen by the wayside, while others still persist. 

In the intervening time, CBDCs have continued to evolve and add new use cases. Central banks around the world are moving from research to the pilot stage, and have a common understanding of key design criteria. With that in mind, let’s run through a quick refresher on what CBDCs are, and what they’re designed to do.

1. CBDC transfers the values of cash into the digital age

A well-designed CBDC mirrors the benefits of cash, in that it is accessible, protective of the user’s privacy, and resilient. Think of it as cash’s digital twin, with all its attributes, except it exists in electronic form, in your digital wallet or on a smart card. It provides a secure, user-friendly digital payment method to all segments of the population, including the unbanked or underserved communities with limited internet connectivity.

2. CBDC is more than just another digital payment option

Yes, the digital payment field is a crowded one, with plenty of efficient options that users will be familiar with. However, CBDCs are designed to fill gaps in that market. Among other things:

• CBDCs are issued as a public good, by a nation’s central bank, and can be used by all segments of society . By contrast, all other digital payment schemes are private sector initiatives driven by commercial interest.
• CBDCs can reduce fragmentation within payment systems, leading to cost savings for merchants and consumers.

A CBDC makes the digital transfer of money easier. No more having to exchange bank details, no need for an internet connection, etc. With a CBDC based on G+D’s Filia^® solution, for instance, you simply have to hold your phone close to the other person’s device to transfer the money.

3. CBDCs protect your data and privacy

Private digital payment formats can require the user to sign a contract that requires the user to be of a certain age, have a minimum income, and possess a bank account. Some use personal or transaction data for marketing purposes. With CBDC, however, just as with cash, your anonymity and privacy are protected. No personal data has to be provided as part of additional customer contracts. 

Further, CBDCs can be designed with a true separation of concerns for operational, transactional, and governance processes. This means they can be designed to exclude personal data of end users, such as identity information for transactional and operational purposes. Privacy is, and remains, a key consideration for central banks.

4. CBDC and cash will exist side-by-side

Central banks around the world have expressed that CBDCs are a digital complement to cash, and not a replacement. There will be no obligation for people to use them. People will be free to choose cash, CBDC, or both, or any other form of payment.

What is important is that both cash and its digital equivalent have the backing of that nation’s central bank. All things being equal in the future, there is every likelihood that CBDC would be legal tender as well. According to a recent release by the European Union that discussed the digital euro: “Like cash, the digital euro would be issued directly by (and is a liability of) the European Central Bank (ECB) and the National Central Banks of EU Member States. This means that it would be public money or central bank money. The digital euro would have legal tender status, which means that it would be available to all European citizens and residents and will be accepted anywhere in the euro area. This is not the case for existing electronic means of payments provided by commercial banks.”¹

5. CBDC can act as a springboard for enterprise innovation

Having a common digital platform allows private players to design offerings specifically tailored for particular use cases. These include the rapidly expanding Internet of Things (IoT), machine-to-machine (M2M) payments, eGovernment services, etc.

Programmable payments are a huge area of growth, spurred on by increasing adoption of smartphones, because smartphones can have smart wallets on them. Governments can make direct-to-person payments, including for functions like energy subsidies, child support, emergency help, etc. In the IoT realm, smart cars can be set up to pay directly at e-charging stations. Machines in an industrial process can be set up to order and pay for their own supplies when informed they’re running low. The possibilities are evolving as quickly as the technology itself. Being public infrastructure, CBDC can function as a platform for innovation, effectively enhancing the digital economy.

6. Well-designed CBDCs are resilient and work offline

A CBDC should work anywhere, at any time. G+D’s CBDC solution Filia^® is designed to enable consecutive offline payments, and works securely and reliably even in the absence of internet and electricity. It supports Bluetooth, near field communication (NFC), etc., across smart cards, wearables, and the secure elements of your smartphones.

Offline capability is also a key design criterion for many central banks for fostering financial inclusion.

7. CBDCs extend financial inclusion

One major reason for the development of CBDCs is the pressing need to bring financial inclusion to underbanked populations around the world. Well-designed CBDCs can offer access to financial services and the digital economy to populations that may not be digitally native.

• 1.4 billion adults globally remain unbanked, says the World Bank.² That means they lack access to financial services or bank accounts. With CBDC, that population gains access to a digital payment method, without having to open bank accounts first.  
• Many of these populations have no reliable access to the internet, a mobile phone, or even electricity. Bringing them into the digital economy is front-of-mind for their central bankers. As we’ve seen, CBDCs provide an efficient, reliable digital payment solution in precisely these situations.
• CBDC can ease the lives of migrant workers. Sending money across borders to friends and relatives in emerging countries can be challenging, because many of these workers are under- or unbanked. And sending money comes with long waits, high fees, and trouble with different banks that lack interoperability. Cross-border retail CBDCs can be a solution to those problems.

8. CBDCs don’t require you to have an account at your nation’s central bank

CBDC is minted by the central bank, but would be made available through the usual banking channels or other authorized entities. This could be commercial banks, financial service providers, or merchants. Wherever they get their cash, really: remember, a CBDC is cash’s digital equivalent, or twin. 

In conclusion, it is fair to say that a well-designed CBDC, like G+D’s Filia^® solution, can play a foundational role for economic and social advances. However, it is worth keeping in mind that there is no “one-size-fits-all” CBDC: the CBDC’s design must match the requirements of the country in question. This is key when it comes to how – and whether – the CBDC will succeed in any given set of circumstances.

Published: 26/10/2023