From Practice to Implementation: what is the next step for CBDCs?

FT LIVE Crypto & Digital Assets Summit 2024 – London

The month of May marks the beginning of event season in Europe, and as a member of the Financial Times NED Network, I had the privilege of attending one of the most anticipated summits: Crypto and Digital Assets.

Although the panels and speakers were highly esteemed, I opted to attend a workshop with Jurgen Schaaf, a member of the European Central Bank (ECB), to delve deeper into the topic of Central Bank Digital Currencies (CBDCs).

The ongoing debate over central bank digital currencies (CBDCs) and cryptocurrencies is a pivotal aspect of the evolving financial landscape. This session were exploring the role of central banks in issuing digital currencies, the potential benefits and concerns, and the emergence of digital currencies in emerging economies. Discussions also cover the distinctions between wholesale and retail CBDCs, the possible adoption of digital Euros, and the trade-offs between privacy and convenience. Additionally, the impact of digital currencies on credit card usage is examined, highlighting the complexities and challenges of implementing digital currencies and their potential benefits to the financial sector.

Central Bank Digital Currencies: A Global Perspective

CBDCs and Their Technological Divergences:

Central bank digital currencies share common goals of improving payment systems, enhancing financial inclusion, and maintaining monetary sovereignty. However, the technology underlying these currencies can vary significantly. Some countries are leveraging blockchain technology, while others are exploring different forms of digital ledger technology (DLT). These technological choices influence the speed, security, and scalability of CBDCs, which in turn affects their adoption and integration into existing financial systems.

Political Influences on Digital Currency Adoption:

The timeline for adopting digital currencies, such as the digital pound in the UK, is significantly influenced by political considerations. While some countries are rapidly progressing towards implementing CBDCs, others are taking a more cautious approach due to potential political and economic implications. Political considerations could delay digital currency adoption in certain regions, as different countries navigate their unique socio-economic landscapes.

Privacy Concerns and Programmable Money:

Privacy remains a critical issue with programmable money. Concerns about government oversight and the extent to which privacy can be maintained underscore the need for robust privacy-preserving technologies and regulatory frameworks. Programmable money, which allows conditions to be set for transactions, introduces additional privacy challenges that need to be addressed to gain public trust.

The Digital Euro: Privacy, Convenience, and Adoption

Addressing Privacy in the Digital Euro:

Privacy concerns are paramount for the digital Euro. Anonymised data solutions can enhance privacy by ensuring that personal data is protected while maintaining the functionality and benefits of the digital currency. Ensuring privacy while meeting regulatory requirements is a complex challenge that requires innovative solutions.

Wholesale CBDCs and Cross-Border Payments:

Wholesale CBDCs, used for interbank transactions, have the potential to improve cross-border payments by interlinking existing financial systems. This could facilitate faster and more efficient international transactions, reducing the costs and delays associated with traditional cross-border payments.

Balancing Privacy with Convenience:

There is a trust disparity between big tech and government institutions regarding privacy and convenience. While consumers often favour the convenience offered by big tech, there is a growing need to establish trust in government-issued digital currencies. Convenience often drives the adoption of new technologies, even when privacy concerns exist.

Instant Payments and Programmability

Merchant Acceptance and Legal Tender Status:

The digital Euro’s success hinges on merchant acceptance and its status as legal tender. Ensuring that merchants can seamlessly accept digital Euros is crucial for widespread adoption. Legal tender status would mandate that merchants accept the digital Euro, which could accelerate its integration into the economy.

Programmability of CBDCs:

Programmability in CBDCs allows conditions to be set for transferring assets, ensuring the fungibility of the digital Euro. This could unlock new financial services and enhance existing ones, providing more flexible and efficient transaction options.

Challenges in the Payments Industry:

Potential contradictions between traditional payment systems and CBDCs could shape the future landscape of digital payments. Harmonising these systems to work together or transitioning smoothly from one to another is a significant challenge for central banks and financial institutions.

The Role of Central Banks and Innovation

Central Banks and Payment Providers:

Central banks might not issue digital currency directly but will enable payment providers to innovate using CBDCs. This could lead to new payment solutions and services driven by private sector innovation. The role of central banks might focus on regulatory oversight and ensuring the stability of the financial system.

Mobility and Innovation in Payments:

Innovations such as escrow accounts and other mobility solutions will likely come from payment providers rather than central banks. This highlights the collaborative nature of the future payments ecosystem, where various stakeholders contribute to developing and implementing new technologies.

Coexistence with Cryptocurrencies:

Banks are predicted to coexist with cryptocurrencies, providing essential services like distribution and KYC (Know Your Customer) compliance. This symbiotic relationship could bridge traditional banking and the emerging digital economy, allowing both systems to benefit from each other’s strengths.

Cash vs. Digital Payments

The Value of Cash:

Despite the rise of digital payments, cash remains valued for its tangibility and convenience. Maintaining currency value over providing interest on cash ensures that physical money retains its significance. Cash provides a level of financial privacy and security that digital payments currently cannot match.

Financial Inclusion and the Digital Euro:

Central banks prioritise financial inclusion in developing digital currencies. Digital cash could reduce physical cash use, particularly in countries with advanced digital infrastructure, but its impact varies based on the level of development. Ensuring that everyone, including the unbanked and underbanked, can access and use digital currencies is a key goal.

Mitigating Banking Sector Disruption:

To avoid disrupting the banking sector, central banks aim to integrate the digital Euro smoothly. This involves balancing innovation with stability, ensuring that the transition to digital currencies supports the broader financial ecosystem. While digital cash could reduce physical cash use, its implementation must be carefully managed to prevent negative impacts on the banking sector.