Interoperability is the ability of different, connected systems to exchange and make use of information that each system holds. That makes interoperability a crucial design criterion for any CBDC solution. However, it is a broad term, with both technical and regulatory aspects to consider. We need to look into the different dimensions of interoperability and what it means for various stakeholders.
Interoperability: a driver for CBDC success
The exploration of central bank digital currencies (CBDCs) has accelerated rapidly in recent years. Whilst a consensus is emerging on the importance of public and private sector collaboration, many aspects are still under discussion and have yet to be determined. Issues to be resolved include defining the roles of intermediaries, avoiding fragmentation, and ensuring interoperability across the entire CBDC ecosystem in order to realize its full potential.
For a CBDC ecosystem as a whole, interoperability would ensure a seamless flow of funds between different systems and contribute to its coexistence within the wider payments landscape. This is also important to enable flexible adaption to the changing payment needs of the future.
There is, therefore, little question about the importance of getting this right – to avoid the kind of “walled garden” fragmentation that characterizes today’s digital payment environment, and also to ensure that CBDCs are platforms that support inclusion and act as a launching pad for innovation.
Different players, different needs
Interoperability is something that needs to be properly considered in order to ensure that a CBDC becomes fully operational for a number of different purposes. These purposes may include, for example, interoperability with account-related payments within existing payment systems and real-time gross settlement (RTGS) systems for wholesale CBDC clearance and settlements. A CBDC should also work with new token-based instruments representing digital assets and in smart contracts to enable programmable use cases such as machine-to-machine (M2M) payments.
In addition, CBDCs need to work across borders if they are to deliver on their potential, as so many contracts and settlements involve parties in different jurisdictions.
It is unsurprising that different stakeholders will have different perspectives when it comes to digital currency interoperability. Financial systems touch almost every aspect of society, and different players have different needs:
- For consumers, it will be about access to digital cash, 1:1 conversion of their money, and a seamless customer experience
- For retailers, it will be about cost savings and the integration of the central bank digital currency into existing payment systems
- For large enterprises, smart programmable contracts will be key to enhance efficiency
- For financial service providers, the focus will be on their integration in trading and cross-border transactions
In the end, a CBDC will need to “compete” with other payment schemes on user experience if it is to be widely adopted. And to get there, a central bank will need to collaborate with private players to make its country’s CBDC both attractive and complementary to users’ existing options.
Partnership and collaboration
The introduction of CBDCs will have an impact on many existing business models and create new opportunities. The private sector will have a crucial role to play in this new ecosystem and will do so at many different levels.
As a recent Bank for International Settlements report noted,1 a CBDC system would likely comprise similar elements and underlying functions as traditional payment systems. Financial service providers will maintain their intermediary role, involving CBDC distribution, know-your-customer (KYC) identity verification, and wallet provision. Payment providers will play a key role in the proliferation of the digital currency by creating new value-added products and services. And, inevitably, new players may emerge with as-yet-unthought-of ways to create value using CBDCs.
To help foster this ecosystem, central banks will need to provide an infrastructure that allows interlinkages with other systems, and they will also need to create the regulatory framework for the use of CBDCs. However, this takes dialogue, collaboration, and the adoption of shared standards.
Interoperability will underpin the most important features of CBDCs, namely cash-like digital payments, competition and innovation, financial inclusion, and programmability.
To be widely adopted, CBDCs need to offer a seamless user experience. In order to make this happen, central banks need to collaborate with private players to make CBDCs an attractive addition to existing payments systems.
This public-private partnership will be crucial in any country where the goal is to create a thriving CBDC ecosystem, and it will ensure that the overall size of the market will be larger than any single stakeholder could establish alone. The result of collaboration will be a wider range of services that bring benefits to both consumers and businesses.
Whilst there is definitely space for both CBDC and private-payment offerings in this new world, it will clearly usher in major change. The impact on the financial system will be much bigger than the advent of cryptocurrencies, as the integration of CBDCs into business and society will go much further and deeper. The effects of CBDCs in retail will be profound, and private service providers are likely to see an evolution in their business models away from a reliance on pure payments and toward a wider services role.
Technical success factors
From a technology perspective, there are a number of capabilities that will drive interoperability. Crucially, the core CBDC system needs to be both highly secure and, at the same time, allow connectivity to other systems. A well-designed CBDC platform would need to work with new and existing systems, and be flexible enough to accommodate evolving needs in the future. The G+D Filia® solution provides an interoperable infrastructure to enable private-sector players to integrate with existing systems and develop new applications using software development kits. This platform enables private players to create a wide range of applications and use cases.
This sort of technology will be the underpinning of interoperable CBDCs. The more that central banks can ensure that their digital currencies are interoperable with existing accounts, payments, and contracting systems, the greater the flexibility for the citizen and business. This in turn will drive the kind of network effect that will be critical to the widespread adoption and success of any CBDC. Ultimately, it’s all about enabling everyone to participate in the digital economy. CBDC is a public good and, as such, a catalyst for economic participation, development, and growth.
Bank for International Settlements, Central bank digital currencies: system design and interoperability, September 2021
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