Today the Bank for International Settlements (BIS) and seven central banks published three reports on retail central bank digital currencies (CBDCs).
A key message was the need for public private collaboration. In September last year, the same banks – from the U.S., Europe, England, Switzerland, Japan, Canada, and Sweden – and the BIS published an initial report. The three documents published today covered user needs, CBDC design and financial stability.
“Central banks have a responsibility to ensure that citizens have access to the safest form of money – central bank money – in the digital age,” said European Central Bank (ECB) President Christine Lagarde.
“These reports are evidence that policy makers are enhancing their domestic projects with international cooperation, sharing ideas on the best technological innovations to provide fast, easy and secure means of payment in the 21st century.”
How to attract users: make CBDC sexy
‘Sexy’ was not a word used in the CBDC reports. But it’s clear from the paper on user needs that the central banks are aware that consumers will shun any CBDC that doesn’t offer them clear benefits.
Potential selling points – another term not used – include lowering costs to consumers and merchants, the ability to pay offline, and providing greater privacy. If the central bank manages to match an unmet user need, that could lead to higher adoption rates.
At the moment, there’s no programmable money outside of cryptocurrencies. The combination of settlement finality, stability, programmability and central bank backing would undoubtedly be desirable. The topic is mentioned in the paper as a route to encourage innovation instead of an unmatched need.
There’s also an appreciation of what’s on the line. In the absence of innovation, “users may adopt other, less safe instruments or currencies, potentially leading to economic and consumer harm,” says the report.
The need for network effects was mentioned, specifically ensuring sufficient merchants accept the CBDC. Otherwise, users would not be willing to adopt it. Curiously the issue of merchants being required to accept the CBDC as legal tender isn’t mentioned.
Hence, to ensure there are enough consumers to motivate merchant adoption, it’s suggested that person to person (P2P) payments might be promoted initially. Interoperability with existing point of sale systems is encouraged to reduce frictions, which is good news for Visa and Mastercard.
It was also suggested that government departments support CBDCs by dispersing benefits and paying salaries using digital currencies, and also accepting tax payments.
The CBDC design task is not easy because central banks move comparatively slowly, and the payments landscape is evolving rapidly. Hence any CBDC system will need a ‘flexible core’ to enable it to evolve.