Joining forces to unlock the potential of CBDCs

Central bank digital currencies are emerging worldwide, bringing new capabilities and opportunities to financial systems.

Joining forces to unlock the potential of CBDCs

Although central banks are the driving force behind CBDCs, the development of a coherent ecosystem in cooperation with private stakeholders is also essential for success.

A new report, published by Giesecke+Devrient and OMFIF, sheds important new light on how to create a thriving CBDC ecosystem.

When considering CBDC, the key  question is not whether monetary authorities will issue a CBDC, but how they will do so.

Data from the Bank for International Settlements show that, of the central banks  which have outlined their CBDC design, the vast majority are exploring a hybrid (platform) model, where they will work with intermediaries to facilitate payments, design  wallets and provide other services to users.

One key motivation for central banks to work within an  ecosystem – or network of organisations – rather than  individually on their CBDC plans is to foster innovation.

The Bank of England’s Quarterly Bulletin 2023 stated, ‘the goal of the platform model is to enable a diverse range  of organisations to join the digital pound ecosystem to  provide innovative services to consumers and households’.

In that sense, central banks would not have to veer into uncharted territory, such as designing wallets and offering new payments solutions. They would instead leave this to  private entities with more experience and incentives to do so.

To understand how this could work, consider the iPhone. Apple provides the hardware and the operating system but various third parties develop applications and offer new innovations to users.

These applications range from health checks to ordering groceries to facilitating  transactions. CBDCs can work in a similar manner.

Central banks can provide the core system on which third parties can build to offer services. This may include programmable payments, tokenising assets and easier cross-border connectivity.

It could also lead to completely new business models.

The report delves into the CBDC ecosystem to unpack what organisations will feature, what benefits this network can offer and the practical challenges that need to be overcome to actualise these advantages.

The report is informed by interviews with 10 organisations made up of: four central banks, two technology firms, two merchants, one commercial bank and one payment service provider.

he report is split into three chapters.

Chapter 1 explores the different players that could participate in a CBDC ecosystem, the roles each of them perform and how they interact.

In Chapter 2, the report elaborates on the opportunities a CBDC offers to the broader ecosystem. As an example, programmable payments unlock several new functionalities that should open up new business models and give the industry, merchant and financial players new tools, which improves outcomes for the whole ecosystem.

Chapter 3 investigates the practical challenges to  overcome to ensure the ecosystem transitions from theory to practice.

These include addressing the concerns of  various stakeholders to ensure they are convinced of the  benefits of a CBDC and building an effectively integrated  platform that is attractive to users.

Overall, the CBDC ecosystem comprises many players  who could deliver great benefits to payment systems, including innovations around programmability, enhanced  security and more efficient cross-border transfers.

But both central banks and the private sector will need to collaborate closely to reap these benefits by coordinating on CBDC design, compensation models and encouraging public adoption.

Key findings:

• Central banks will operate the core system while private sector intermediaries provide new services to facilitate payments and conduct compliance.
• Industrial and real economy players, along with individual end users and merchants, stand to benefit significantly from the new ecosystem.
• CBDCs can deliver programmable payments, which should unlock valuable benefits for businesses, citizens and governments.
• CBDCs can play an important role in facilitating the settlement of digital assets, supporting the growth of the digital asset ecosystem.
• Ensuring interoperability among CBDCs and existing payment systems will require a collaborative effort between technical service providers and regulators.
• All ecosystem players will need to participate in the communication effort to educate end users.