Central Banking magazine recently published its first survey of central bank digital currencies (CBDC). It explored numerous design features and found that a token-based model is the most popular (58%) where the currency would be stored in a digital wallet. That’s in contrast to an account-based design.
One of the respondents noted that their selection of token-based was because they wanted the CBDC to resemble cash rather than a bank deposit. A key issue with CBDC design is that in each country the local policy requirements will drive the design.
Some central banks seek to address the already reduced cash usage and broaden payment options currently concentrated with a few private players. On the flip side, some want to encourage less dependence on cash because of cost or physical distribution challenges such as in the Caribbean islands. Together these were motivations for just 17% of those surveyed, but still the biggest driver.
Three purposes had equal second highest scores: financial inclusion, to drive innovation and payments efficiency. As a result of the different policy objectives, very few CBDCs will look alike. The BIS recently published a paper about some of the design considerations.
Tokenized money is very useful for on-chain blockchain payments. While the volumes of blockchain transactions are still relatively low, some of the major blockchain projects being implemented by financial institutions are eyeing the use of central bank money. That would require a wholesale digital currency as opposed to a consumer focused retail one. The survey found that the current emphasis was on retail digital currency (70%).
Tokenization is well suited to distributed ledger technology (DLT), but as China has shown, it’s quite feasible to issue a tokenized CBDC without using DLT. The survey distinguished between DLT and blockchain, where we believe they mean public blockchain (we use the terms interchangeably). 71% said they would consider using DLT. Only one said they’d consider blockchain.
In terms of concerns, the top worry by far was security and privacy at 30%, followed by disintermediation of commercial banks (20%). On a similar tangent, regulatory issues are the biggest barrier to adoption, followed by unproven technology.
As many as 65% of the banks surveyed are exploring CBDC, but most were at the initial research phase (57%). Some (25% of those exploring) have developed proofs of concept and roughly 13% have proceeded to pilots. It’s unclear whether these are the same 13% that said CBDC is a top five strategic priority in the next two years.
It’s important to note that the survey was conducted in February, when the COVID-19 outbreak was still concentrated in the East. The survey covered 46 central banks across the globe, with the largest regional representation from Europe with 19 respondents.