Interface of the login for CBDC
#Digital Currency Ecosystem

Success factors for CBDCs

4 Mins.

Can a central bank digital currency be a positive instrument of change in people’s lives? If these CBDCs fulfil certain requirements – if they protect privacy and promote financial inclusion, are part of a regulatory framework that is both universal and enforceable, and are resilient and sustainable – then the answer is yes.

The trend worldwide is toward more technological societies. As the pace intensifies and lives become more digitalized, it is worth taking a few moments to take stock. Is it possible that we have become so fixated on “how” – how do we make something faster, better, more user-friendly – we’ve stopped asking “why”?

It might seem to some observers that the technical feasibility of a given advancement is the only criterion for its development. Yet it is clear that we live in a place and time where resources are at a premium and people carry the burden of anxiety about the future. In order for these new technologies to be widely adopted, people must trust them to make their lives better.

Central bank digital currencies (CBDCs) are a case in point. They are of clear and present value to citizens of nations around the world. As central-bank-backed digital equivalents to cash, they foster innovation and drive financial inclusion. The conversation around CBDC is of great interest, technologically speaking; advancements such as 5G, machine-to-machine communications, or cryptography – among other factors – are driving CBDC projects forward. But it is imperative that we keep in mind why CBDCs are important.

As a recent Organisation for Economic Co-operation and Development (OECD) publication points out, it is important to “consider how they could contribute to the welfare of citizens.”1 In fact, the publication isolates citizens’ trust in their central banks as a critical factor in any rollout and in ensuring adoption of CBDC. Convenience and efficiency are very important, but there must also be a recognition that the solution furthers the user’s interests. 

As custodians of the public’s trust in their financial institutions, central banks have a particular duty to foster trust in their CBDC and the ecosystem it anchors. In effect, users must be convinced that CBDCs serve their interests.

Designing a successful CBDC

Let us consider some questions well-informed citizens might ask of a CBDC:

  • Does it promote financial inclusivity?
  • Does its legal and regulatory framework seem universal?
  • Is it resilient?
  • Is it sustainable?
  • Are privacy/user data concerns being kept in mind?
  • Does it support innovations in the payment space? 

Checking all these boxes would indicate it has been well-designed and move the needle toward widespread acceptance. This heightened sense of trust would hasten adoption of the CBDC. 

Now that we know what the design parameters are, let’s look at how they can be made to work, by examining the factors that determine whether a CBDC will have success in making people’s lives better.

Robust governance and education

A clear regulatory framework provides the steel frame that allows the financial system and its attendant payments systems to flourish. Central banks can attract interest in CBDC by laying out the ground rules and standards under which they operate. Among others, these would include those for data protection, cross-border payments, or ​​interoperability. Educating the public about these protections is material to the success of financial services built on and around CBDC.

Two women using a smartphone to pay

Programmable payments at the wallet level

Programmability is a key aspect of CBDC design. It is important here to differentiate programmability of payments from programmable money (money with built-in conditions). A well-designed CBDC places programmability in the hands of the users, with the private sector delivering it as a payment function of smart wallets. By separating the feature of programmability from the currency itself, flexibility is ensured, and the user has control over their money.

Programmability of payments (or conditional payments) at the wallet level delivers speedy and accurate transactions that benefit businesses, industry, and consumers. These automated payments are suitable across a wide range of use cases (including smart contracts): from catering to a family’s particular needs, such as personalized wallets for children, to helping a government deliver financial aid directly to specific individuals and groups. A well-designed CBDC’s ability to be tailored to an ever-growing spectrum of use cases is one of its outstanding features, which deserves to be highlighted to the users who would benefit most from it.

Accessibility and resilience through innovation

Driving financial inclusivity among the unbanked and underbanked is central to a well-designed CBDC’s mission. Ensuring barrier-free, universal access for all segments of a society, just like cash. This is supported by including the following:

  • The capability to execute secure, consecutive offline payments. This is especially important in areas that are more remote, or perhaps less developed (in terms of infrastructure). G+D’s CBDC solution, Filia®, is token-based, enabling payments where both parties are offline (dual offline payments). Offline payment is also crucial to support resilience, as power or internet outages can also occur due to unforeseen events such as earthquakes, floods, or other severe weather conditions.
  • Independence of form factor. Usage is not limited to smartphones, which may be out of reach for the very sort of user who would most benefit from a CBDC. CBDCs also work across fobs or hardware wallets (such as smart cards).

Future-proof security

There is an area – namely, security – where the conversation around CBDC should focus on tech. Stakeholders have a responsibility to secure CBDC and its ecosystem against fraud, cyber-attacks, and other operational risks. This allows the ecosystem to function to its full potential. The security considerations for a CBDC are the same as those for conventional payment systems and online banking, according to the US Federal Reserve. Using the best and most up-to-date technology, including post-quantum cryptography, and communicating that level of protection to the larger public aids adoption.

Sustainability is central

It is worth highlighting a key difference between many crypto-assets and CBDC: there is no mining required for the latter, which saves vast amounts of energy. CBDCs are issued by central banks, which follow public policy principles. Stakeholders around the world have indicated their resolve to keep environmental regulations – such as those around CO2 footprints – in mind when implementing CBDCs. 2,3

As societies become ever more focused on environmental considerations, this too needs to be communicated, so trust in CBDC grows.

Ensuring privacy

Central banks need to prevent and combat money laundering, and the financing of terrorism (AML/CFT), to protect the integrity and stability of financial markets and the financial system. A certain measure of transparency is required of any financial transaction. However, it is crucial to maintain a balance between transparency and privacy.

A CBDC is well-placed in this regard, because it can have a true separation of concerns for operational, transactional, and governance processes. Central Banks could have access to transaction data, but like today, private financial institutions would hold personal data – for example, to execute KYC processes. This promotes greater transparency and privacy for users’ personal data during transactions, making the system more secure and efficient. It safeguards privacy, while still providing necessary transparency for legitimate purposes.

Key takeaways

  1. CBDCs depend upon the provision of robust governance for their success.
  2. Offline payment functionality is essential for financial inclusion and resilience.
  3. People must trust that new technologies will make their lives better if they are to be widely adopted.
  1. Central Bank Digital Currencies (CBDC) and democratic values, Business and Finance Policy Papers, OECD Publishing, 2023

  2. Climate change and the ECB, European Central Bank, 2022

  3. Public Policy Principles for Retail Central Bank Digital Currencies (CBDCs), G7 United Kingdom, 2021

Published: 21/05/2024

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