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Disintermediation for some or an opportunity to play a central role in the new payments paradigm? VIXIO discusses the increasingly real prospect of central bank digital currencies (CBDCs) with the three winners of the recent Singapore CBDC Global Challenge.
CBDCs have switched from being on the fringes of the central banking agenda to what appears to be front and centre.
Their existence has been touted as an opportunity to solve everything from sovereignty to financial inclusion, to fixing cross-border transactions.
However, they have also been a cause for anxiety among the world’s financial institutions, who fear issues such as bank runs being triggered as businesses and consumers move their money to more secure accounts directly linked to the central bank.
"Disintermediation is the number one risk. We see a lot of discussion on this topic but aren't seeing a scientific approach,” said Raoul Herborg, business lead for digital currency at Giesecke+Devrient, a German technology company that has partnered with the Bank of Ghana to provide a CBDC solution.
However, Herborg was also keen to point out that central banks are taking this issue seriously and see it as a priority.
So far, central banks have suggested moves such as capping interest rates, as well as the amount of CBDC cash that a citizen can hold, as a way to prevent this from happening.
The likes of the Bank of England and the European Central Bank have also reached out to the private sector to seek input on their developments in this field.
Some believe that the threat may never come to fruition.
"Commercial banks don't have to feel threatened, as this is simply a digital form of cash,” said Bertrand Foing, London-based founder of Secretarium, a cloud and data platform, pointing out that instead of disrupting payment services, it could make them smoother.
For Herborg, change can be a threat but also a chance, invoking the Steve Jobs quote: “Innovation is the ability to see change as an opportunity, not a threat.”
CBDCs could change the payments ecosystem, he speculated, continuing that some might lose out, yet some might not. “The role of cash is still vital, and a CBDC won't replace cash or e-money solutions.”
“It depends on individual payments institutions to see a chance for new business or look to defend the current business,” he said.
The private sector can provide not only the underlying infrastructure of CBDCs, leveraging open source infrastructure like Ethereum, but also build overlay products and services on top of CBDCs, agreed Shailee Adinolfi, director of strategic sales at ConsenSys, which is working with the Bank of Thailand and the Bank of Korea on CBDC projects.
“Existing payment networks, such as Visa and Mastercard, are already testing the use of stablecoins and CBDCs, and preparing for digital currencies to be ubiquitous,” she continued, pointing out that regulations are still catching up to the innovation that is happening in the digital currency space.
For Adinolfi, just as payment networks are becoming more decentralised, the underlying institutions will also become more decentralised. “The power structures and dynamics of today’s more centralised financial system will be more decentralised,” she predicted.
The Global CBDC Challenge
Giesecke+Devrient, ConsenSys and Secretarium all played a part in the three winning teams for Singapore’s Global CBDC Challenge.
With a judging panel including representatives from the International Monetary Fund, the World Bank and the Bank for International Settlements, the competition got participants to solve problem statements relating to issues including data privacy, accessibility and functionality.
Giesecke+Devrient’s solution for the challenge was a token-based CBDC, which could be used offline and without a mobile.
Meanwhile, Secretarium teamed up with Criteo, a technology company, as well as Intel, to present the "Atomic CBDC". This entrant had a focus on new computing architecture for CBDCs, leveraging a secure-enclave distributed ledger technology (SDLT) developed by Secretarium, providing a new level of scalability, security and application extensibility.
ConsenSys, on the other hand, partnered with Visa for its entry, CBDCgo. This created a retail CBDC that can be used within the existing Visa payments system, while using ConsenSys blockchain infrastructure.
Sooner or later?
With Nigeria having launched its CBDC in the autumn, as well as China’s CBDC pilot making leaps and bounds — considering 140m people have now opened wallets for use — it seems like the global usage of CBDCs may be closer than we think.
"There has been a dramatic shift in a year from questions about whether any country will to which countries won't,” said Herborg.
A lot of questions are being looked at like technology initiatives, and we see a few countries shifting from experimentation to pilot, he continued. “Surprisingly, the countries that began first aren't the ones issuing first. Many thought the Riksbank would be among the first, but lately, it has quietly got around it.”
Rather, instead of developed economies like Sweden, attention has shifted to the emerging markets as a place most likely to see the first signs of impact being made.
"Especially for countries with a less developed financial sector, we see big benefits as it is very simple if you don't have a bank account, nor a card, you are unable to participate in the digital world,” agreed Herborg.
The global unbanked is estimated to be 1bn, with statistics showing that countries such as Morocco, Nigeria, Vietnam and the Philippines all have more than 60 percent of citizens unbanked.
Yet, mobile phone usage is often much higher. In the Philippines, for example, only 34 percent of the population have a bank account, but for every person, there are 1.59 mobile phones.
"In emerging markets, where most people do not have a bank account, this type of transition is game-changing,” said Foing. “It is an opportunity to leapfrog to digital cash”.
