Central bank digital currencies (CBDCs) have emerged at the forefront of financial innovation with striking and transformative momentum in recent years, having the potential to transform our perception of and interaction with money. For many of the world’s central banks, discussion around CBDCs has shifted from “if” they will be developed to “when” they will be introduced and widely used.
James Wallis is Ripple's Vice President of central bank engagements and central bank digital currencies (CBDCs).
Developing a CBDC is a complex undertaking, given the interdependencies between policy and technology, as well as potential market impacts. If designed prudently, CBDCs can offer more resilience, enhanced security, increased access and lower costs compared to traditional forms of money.
Towards this end, the success of a CBDC is anchored by three core pillars of design: technology, policy and usability, with user privacy as an underlying consideration for each.
The first is technology. For CBDCs to move from experimentation to real-world implementation, they must have a resilient, secure technical infrastructure with the ability to onboard, authenticate and support users on a massive scale. It must offer boundless horizontal scalability capabilities to cope with an ever-increasing throughput of transactions.
Moreover, since it is unlikely that different countries will decide on the same infrastructure, a CBDC should be capable of interoperating across different technical infrastructures in order to reap the benefits of frictionless cross-border transactions.
The second pillar is policy, or the rules and guardrails established by the central bank and governments that underpin the entire ecosystem. This is, perhaps, the most time-consuming area for consideration, given the specific priorities and regulatory frameworks of each country and its central bank.
While enthusiasm from users and financial institutions is a significant factor for successful adoption, there are situations where CBDCs might still be introduced despite initial skepticism. Political motivations and policy objectives can play a crucial role in justifying the implementation of CBDCs.
The payments industry will need to adapt to the changing landscape such as adjusting operations and infrastructure to accommodate CBDCs. Collaboration, therefore, between commercial banks, retailers and central banks is essential to ensure a smooth transition and effective integration of CBDCs into the broader financial ecosystem.
Even with the technology and policy pillars in place, the key to sustainable real-world CBDC application ultimately hinges upon usability, the third design pillar of a well-functioning CBDC.
As with any new solution, driving early adoption is going to be one of the most important and challenging tasks that central banks will face should they decide to adopt a CBDC. A user-centric approach is therefore critical to help ensure that people and businesses can use CBDC easily and intuitively. Without a smooth, frictionless end-user wallet experience, the technology-driven newness may pose a barrier to adoption for many.
Central banks and the private sector should offer benefits to make users and financial institutions excited about CBDCs. These benefits include providing a user-friendly experience, ensuring enhanced security and privacy, highlighting cost savings and efficiency, promoting financial inclusion and accessibility, enabling interoperability and cross-border use, fostering innovation and partnership opportunities and establishing regulatory clarity and stability.
See also: If Money Is Speech, CBDCs Should Be Tools for Freedom | Opinion
For a digital currency to have any utility to people and businesses, it needs to coexist and interact with other payment schemes in that domestic market. The next level of interoperability for CBDCs is the ability to work for global transactions. Without seamless cross-border functionality, most CBDC projects could significantly underachieve their potential.
When discussing CBDC solutions in theory, one topic that inevitably arises is privacy. But maintaining individuals’ right to privacy will not be as challenging in practice due to the role that commercial banks will play in the CBDC ecosystem. Especially for retail CBDCs, commercial banks will very likely hold users’ wallets — and because those institutions already follow responsible user design through their extensive know-your-customer/anti-money laundering, or KYC/AML, processes, they will be well equipped to help maintain high standards of user privacy while also preventing illicit activity. A trusted third party maintaining custody of retail wallets could also offer additional user confidence, thereby benefiting adoption as well.
The opportunities of CBDCs are nearly limitless but ultimately, mainstream adoption hinges upon their usability by both individuals and businesses. Even with the “technology” and “policy” pillars in place, CBDC success in retail or wholesale will depend upon its real world usability and user adoption.
While challenges exist, it is important to recognize that challenges and problems are a natural part of any technological development — the key lies in addressing these challenges effectively. Now is the time for central banks to explore these issues, and along with the private sector, develop common solutions and ensure that the next evolution of money benefits more people and businesses and makes the world better.