Empowering digital public infrastructure with CBDC

Transportation, water, energy, education. Public infrastructure is the foundation on which economies, societies, and communities have been built for centuries. Indeed, the quality and availability of public infrastructure strategically positions a country for advancement, competitiveness, and a higher standard of living for its citizens.

But today, with almost every aspect of our lives becoming entwined with digital technology, that core concept now needs to be updated and extended by countries around the world to enable digital public infrastructure (DPI) – with goals and expectations set high for both public goods and innovation.

DPI is seen as a game changer for any society. It has the potential to accelerate economic growth,¹ to streamline citizens’ access to social services, and to both broaden financial inclusion and dramatically extend engagement with the digital economy.²

In its essence, DPI is an assembly of interoperable digital building blocks that lay down “digital rails” by establishing some fundamentals: the unique identity of people, a scalable flow of data between institutions, and a secure infrastructure for digital payments. With such a foundation in place, commercial and public entities can create any number of applications that leverage a DPI to deliver services in areas as diverse as telemedicine, money transfers, remote education, e-commerce, and retail activities.

The three digital building blocks of DPI

Digital identity

DPI needs to support universally available digital identity, so government agencies, companies, other individuals, and (increasingly) autonomous systems can have full confidence in who they are dealing with – even when an individual is not present or has no physical documentation to back up their digital identity. Access to a legal form of identity enables a person to fully participate in society and the economy, yet 850 million people around the world do not have official proof of their identity – whether a birth certificate, passport, driver’s license, or national ID.³ The provision of a digital identity transforms lives, argues the Gates Foundation, allowing people to access a wide range of goods and services, including government benefits, bank accounts, lines of credit, supplies, and markets for microbusinesses.

Digital data exchange

DPI provides the backbone over which fundamental data can be securely shared between different institutions – with an individual’s consent and due respect for their privacy. For example, someone applying for a phone contract can digitally prove their identity; or a citizen buying a home can safely share their earnings history from a tax authority with a mortgage provider.

Digital payments

A public digital payments infrastructure allows people, businesses, and governments to instantaneously send and receive money irrespective of the bank or other financial service they use. With a sixth of the world’s population lacking access to the financial system,⁴ that component of DPI has the potential to open up economies and improve the lives of hundreds of millions of people.

Enabling digital payment rails

Payments is a critical field for DPI. For centuries, cash has fulfilled a fundamental role in societies as a public payment infrastructure. Today, the ability to send and receive money digitally has become an essential capability for individuals, societies, and economies.

Take the example of payments during the COVID-19 pandemic. As lockdowns brought economies to a standstill, government revenue authorities put their tax-gathering mechanisms into reverse to dispense funds to citizens and businesses.

It is estimated that 166 governments around the world launched cash assistance programs – with varying degrees of success. Those countries with some DPI infrastructure were able to reach over half of their populations, according to the Harvard Business Review; those at a low level of DPI maturity could only make payments to, on average, 16% of the target population.⁵ Indeed, for many countries the pandemic highlighted the stark difference between the often-discrete eGovernment systems that they have in place and the DPI that was necessary then and will be in the future.

As that point underscores, DPI is designed to make the flow of funds between different systems seamless. It aims to establish a flexible public payment infrastructure that not only promotes interoperability, but also supports opportunities for innovation by private companies at the applications layer.

When it comes to meeting such goals, only one clear option is emerging: the underpinning of DPI with central bank digital currency (CBDC).

CBDC as digital public infrastructure

The central bank of almost every country in the world is looking at the possibility of introducing digital cash in the form a retail CBDC. A recent survey by the Bank for International Settlements found that 93% of central banks are currently exploring CBDC, with predictions that up to 15 will launch retail CBDCs by 2030.⁶

There are many elements driving that adoption. CBDC would address today’s landscape of payments fragmentation, closing gaps in the existing financial ecosystem that show up in the lack of interoperability between the numerous payment schemes. “We need to ensure a seamless flow of funds between systems, and the best way to support this is with a flexible public payment infrastructure that promotes not only interoperability, but also effective competition,” says Abbas Albasha, Senior Strategy Consultant CBDC, G+D.

As a publicly issued instrument, CBDC would also allow central banks to expand financial inclusion, increase payment efficiency, reduce transaction costs dramatically, and enhance the resilience of the national payment system, among other positive public benefits. A well-designed CBDC will also be able to handle both online and offline transactions, allowing people in areas without a reliable internet service to still make and receive payments.

As an example, G+D’s CBDC solution, Filia^®, is designed with interoperability in mind and provides authorized financial intermediaries with a range of components for seamless integration with existing banking systems. The token-based solution is also capable of processing dual offline payments as well as consecutive offline payments.

Complementary roles within a CBDC ecosystem

For central banks, the focus for CBDC is on providing the core infrastructure, ensuring the integrity of the digital currency ecosystem, and setting regulation.

But any CBDC ecosystem can only thrive on strong public-private collaboration. Fintechs and established commercial banks, with their better understanding of clients’ needs, will be able to use that provided platform to create innovative products across a spectrum of channels and form factors.

CBDC would essentially be another form of money. It would sit alongside – rather than replace – existing forms of money (cash and bank balances), offering people a digital alternative to how they hold and spend their funds.

In the same way that cash instills trust in the financial and banking systems (and will continue to do so), CBDC would inspire greater trust in the ever-expanding digital economy, with the option of exchanging funds in a digital form of cash. In a highly digitalized economy, it would also enable the continuity and extension of the role of public money as a monetary anchor.

As G+D’s Albasha highlights: “CBDC is not just a new means of payment, but rather an enabler of DPI that can drive great economic value while enhancing the public welfare.”

India: Affirming the transformative power of DPI

In just a handful of years, India’s investment in digital public infrastructure (DPI) has transformed how much of the country does business and how many of its citizens interact with their government. The rapid build-up of DPI has resulted in digital identity being extended to around 95% of the population (through the Aadhaar ID system), allowing many millions to engage with financial services for the first time. Alongside this, the Unified Payments Interface (UPI), a private-public ePayments initiative, has transformed the payments landscape, especially for microbusinesses that have previously operated outside of the digital economy. Almost 50 million merchants now display QR code cards that have allowed 300 million customers to pay in real time using their phones. In the process, retail transaction patterns have changed dramatically. Since 2017, cash usage at the point of sale in the country has declined from 91% to 59%, according to GlobalData research.⁷ In January 2023 alone, 8 billion (mostly small, informal) transactions worth $200 billion were carried out via UPI,⁸ and by the end of the year several banks in the country had rolled out pilots demonstrating CBDC interoperability with the UPI.⁹

Published: 23/01/2024