Visa released a paper on central bank digital currencies (CBDC) exploring the common challenges, their solutions, and questions policymakers should consider. Consumer adoption of a retail CBDC is one of the biggest hurdles.
The payments company’s survey showed that 49% of respondents in developed markets were aware of CBDC, while the figure was 70% in emerging markets. However, when it comes to payments, only 20% of consumers in emerging markets would prefer to use a CBDC and the figure is even lower in developed markets at 13%.
Other CBDC challenges
The report explores other potential challenges, such as the need to support the offline use of CBDC. Secure point-to-point payments are essential when users have no access to the internet. In a December 2020 paper, Visa proposed an offline payment system (OPS) protocol operating without any payment intermediaries or the internet.
Cybersecurity risks must be addressed when designing the architecture and hardware of CBDC. The paper distinguishes between risk management programs for the payments tier operated by intermediaries outside the central bank’s control and the infrastructure tier involving CBDC within the bank’s control. Although there are risks in both tiers, threats to the core infrastructure should be given the most attention.
Another point of discussion was cross-border payments. Visa explores the need for agreements on interoperable global standards with international organizations. Their research from a September 2021 paper proposes a set of standards and techniques through interoperable cross-border CBDC payment routes called Universal Payment Channels (UPC).
Central bank considerations
Visa came up with a series of questions that policymakers should consider re CBDC. The most notable ones are:
- How will intermediaries be compensated, given they will incur compliance and due diligence costs?
- Governments may have records of all transactions, so how will the government balance privacy risks against law enforcement and will they re-examine anti-money laundering laws?
- Given the anonymity of physical cash, how can central banks balance privacy with crime prevention?
Meanwhile, Visa was one of three winners announced in November 2021 for the Global CBDC Challenge initiated by the Monetary Authority of Singapore. In March 2022, Visa also had success with Brazil’s Real Digital Lift Challenge, as one of 9 applicants chosen from the 47 proposals.