Retail CBDC: general purpose, inclusive, online/offline
Expectations are running high in many countries around the issuance of CBDC in the short term, with almost a quarter of central banks already piloting a retail CBDC.1 Predictions are that institutions behind major currencies, such as the European Central Bank, will introduce the general-purpose digital currency around the turn of the decade.
The introduction of a retail CBDC, to exist alongside traditional cash, would help to bridge people’s changing preferences and options for digital payments, with the benefits of a central bank-backed digital equivalent of cash.
But there are numerous other drivers, including the opportunity for central banks to maintain greater financial stability, to make the digital payment ecosystem more inclusive, to foster innovation and enhance competition in the payment sector, and to increase payment efficiencies.
In particular, financial inclusion is a key policy objective for central banks. Through the introduction of easy-to-use CBDC wallets in the form of smart cards, many unbanked or underbanked populations will gain access to the digital payment system without having to open a bank account. CBDC can then serve as an on-ramp to the broader financial system, helping to establish individual credit histories and borrowing capabilities.2
In that context, an essential design feature of a truly inclusive CBDC is an offline capability. Many groups of people have no reliable access to the internet, mobile communications, or even an electricity supply, so a CBDC that supports transactions in all circumstances is seen as a must. That is particularly important in conditions where both the payer and payee are in offline mode – what is known in the industry as dual offline transactions. Designs also need to support the possibility of re-spending amounts received offline while being still in an offline mode (known as consecutive offline transactions). Those are both key design features of G+D’s CBDC solution Filia®.
While retail CBDCs will be issued by the central bank or monetary authority, they will be distributed by commercial banks, financial service providers, and merchants – just like cash. A key objective of this two-tier distribution model is to also preserve financial stability and maintain the stability of the national payment system and its stakeholders. The anticipated level of public and private collaboration is demonstrated by the fact that nine out of 10 central banks say they are already engaging with outside stakeholders when designing proofs of concept and pilots for their CBDCs.1
A recent example of such close collaboration involved Standard Chartered Bank Hong Kong’s work with G+D on the Hong Kong Monetary Authority’s Pilot Programme for an e-HKD. The team’s tests and experience sessions included a range of real-life scenarios involving public transport, restaurants, small retailers, and a university campus, designed to explore the hypothetical e-HKD’s potential benefits. It demonstrated how a digital currency can operate without being connected to the internet while enabling real-time and secured consecutive dual offline payments.