When it comes to CBDCs, we need public-private cooperation

This month the Digital Currency Governance Consortium held an expert roundtable discussion on central bank digital currencies (CBDCs) to reflect on the work done so far and to identify areas that require further research. The workshop brought together experts from international organizations, central banks, the private sector, academia, and civil society activists.

While discussing the subject of CBDCs, the experts referred to a number of issues, ranging from the need to define precise objectives for issuing a CBDC, the various trade-offs in designing such a CBDC, and finally, the need for cooperation between public and private sector.

Until now, CBDCs have captured the attention of central banks, so much so that over 90% of countries are researching and exploring the concept. The ramp-up in interest has tripled since 2020, however, this has not translated to an increased rollout of launches. The countries that have fully launched CBDC include the Bahamas, the Eastern Caribbean nations, and Nigeria. However, most countries are at varying levels of progress, having either announced pilots, proof of concepts, or mere interest in researching the need for a CBDC.

There are several areas of further exploration when it comes to CBDCs including privacy, security, interoperability, financial inclusion, technology considerations, and other concerns. Given the number of outstanding areas that require examination, many countries are taking a wait-and-see approach.

Several jurisdictions have voiced a desire to conduct research and experimentation on CBDC, but to withhold full rollout until more of these questions are understood. The implementation of central bank digital currencies has a long-term impact on the economy, so accordingly, it should be created with sufficient resources and time to get it right. In addition, technology choices today will impact the future of the financial system. Thus, whether a distributed ledger technology (DLT) solution should be used needs to be decided and if so, the type of DLT needs to be carefully considered. Overall, the adoption of a CBDC would be foundational and the impacts and unintended consequences should be prudently measured.

For an implementation to be successful, it is imperative that a CBDC has a strong value proposition prior to implementation. These questions need to be answered beforehand: Why is a CBDC being released? What are the policy objectives and the trade-offs in achieving the aforesaid policy objectives, subject to local requirements? What design choices will address the aforesaid policy objectives to the greatest extent possible?

These are just some of the questions that central banks need to consider before embarking on implementing a central bank digital currency. There are several digital currency alternatives as well as advancements in the payments and financial market infrastructure that are available as another possibility to improve efficiencies. As such, the CBDC must have a concrete value and effectiveness beyond the other innovations.

The adoption of a CBDC among jurisdiction members is dependent on the design choices. The level of adoption will demonstrate the success of a CBDC and under subscription of the digital currency will undermine the purpose of adoption. The end-user must be consulted and considered in the design process to ensure suitable usage.

Based on the current state of CBDC adoption, there is continued interest in the exploration, experimentation, and piloting of CBDC solutions. Before countries become comfortable with fully launching a CBDC, the interim period can be used to work on multi-jurisdictional dialogues and cooperation in order to create regional interoperability. Another key step will be to work on a common set of standards for CBDC, which will provide foundational underpinnings.

Among the most important success factors that could determine the future central bank digital currencies regime is multi-stakeholder engagement from the public and private sectors. Although central banks and governments have a key role to play for CBDCs, the private sector has several touchpoints that may enhance the CBDC ecosystem.

When analyzing the countries that have launched CBDCs and piloted solutions, several have incorporated the private sector. Central banks and governments can focus on the issuance of the digital currency and cooperate with private firms on the other aspects for which they have strong competencies.

Currently, central bank digital currencies may be developed solely by the central banks or in close cooperation with the private sector. The latter model may vary in terms of the different roles that the private sector may play in issuing, settling, consumer protection requirements, anti-money laundering compliances and front-end enablement.

Participation of the private sector in developing, testing and deploying a CBDC will have several benefits, some of which were discussed during the CBDC Workshop:

1. Promote innovation: Public-private partnerships have been used in various sectors to drive innovation and accessibility. While government/regulators/central banks should increase their monitoring and supervision capabilities, the private sector can help speed up the rate of innovation by supporting with compliance, appropriate design choices for various composable elements of central bank digital currencies, and being implementation partners.

2. Increase interoperability: For a CBDC to maintain the balance between being successfully adopted and to avoid the pitfalls of currency substitution, it is necessary that it should integrate smoothly with existing payment systems. Engaging and leveraging private sector expertise in formulating necessary standards and tech stacks would be crucial in ensuring both domestic and cross-border interoperability of CBDCs.

3. Incentivise digital and financial literacy: Educating the users of CBDC should be a top priority before implementation. With private sector involvement, it will incentivize the industry players to launch digital and financial literacy campaigns across various demographic groups. Without proper education and awareness, any CBDC implementation will fail to achieve the required objectives and will most likely, create more unintended consequences and risks.

The value of public-private cooperation in the context of CBDCs is promising. While collaboration is essential, it can lead to challenges, including but not limited to concerns with respect to data privacy, anti-trust regulation harmonization of cross-border rules and regulations. The discussions are ongoing and there is room for both the public and private sectors to contribute to a successful digital currency regime.

The discussion amongst stakeholders on the topic of CBDC will continue at the Annual Meeting 2022 on May 23 and will be livestreamed to the public. Join us in taking the conversation forward and understanding whether central bank digital currencies could play a role in the future financial system.