As currency becomes increasingly digitized, more end users are able to reap its benefits, in turn feeding an underlying network effect of increased market participants and inclusion.
“There are many technical benefits you have with a digital currency that you just can’t do with traditional money,” James Wallis, vice president of central bank engagement at enterprise crypto solutions provider Ripple, told PYMNTS. “Things can move more quickly, with more certainty.”
“You have the ability to do what I would call the ‘last mile,’” he added. “If you want to send something across border to a relative in another country, you have to go sign up with a payment provider or bank, use their mechanism [to conduct the payment], and then another payout mechanism at the end (the last mile).”
Digital currencies make that process much simpler and more effective by reducing unnecessary intermediaries.
And as the world increasingly embraces digital transactions, the notion of a sovereign digital currency has gained traction, with central bank digital currencies (CBDCs) in particular emerging as a promising solution to legacy payment bottlenecks and frictions across both retail and cross-border payments.
Wallis explains that underlying the attraction is the fact that CBDCs enable pure, peer-to-peer (P2P) payments, cutting out risks and allowing for quicker transactions — making them well-suited for cross-border remittances, as they can significantly streamline the process.
Additionally, the decentralized nature of blockchain technology, which underpins CBDCs, provides a compelling balance between the much-needed security and trust of central banks and the innovative advantages and synergies of decentralization.
“One of the absolute key reasons to do blockchain is the ability to add additional functions and capabilities, relatively easily, on top of the core infrastructure… The list is almost as big as the imagination,” Wallis said. “It allows the private sector to really get in and start adding more use cases.
“If you wanted to allow a third party to add capability to your private system, it’s really hard technically to do that with a traditional system,” he added.
As alternative payment vehicles continue to ride the wave of digitization, solutions like CBDCs and the Ripple CBDC Platform are transforming the retail and cross-border payments landscape by providing a secure and efficient method that can work in tandem with traditional systems.
But the spear tip of innovation, no matter how groundbreaking, is ill-advised to make a clean break from preexisting systems.
“A retail CBDC has to interoperate with the existing world and existing payment schemes,” Wallis said. “If you want to go and buy coffee, the merchant has to be able to accept the CBDC the same way as if you went in to pay with cash or with a credit card. … You’ve got the old world and the new world sort of coming together.”
Interoperability is a crucial factor for the success of retail CBDCs, particularly within cross-border transactions.
“If you have one organization or one country using one protocol and another one using a different protocol, to what level can you actually move assets from one ledger to another?” Wallis asked. “At the end of the day, [CBDC] adoption will be based upon how useful it is.”
And the technology behind a digital currency must be fast, efficient and cost-effective, supporting local policy and allowing for creation and distribution in a seamless manner.
“Each CBDC use case has to offer something that’s better than the way things happen today,” Wallis said. “For example, I would use a CBDC rather than cash or something else because it is faster. Or for a cross-border payment because it is less expensive … In some markets, a 10-20% fee from one country to another for remittances is not unheard of. But with CBDCs, it could be a fraction of a percent, and then the volume will go up — there will be more volume, but a lower fee per transaction.”
Wallis explained that the number of people using CBDCs, the volume of transactions, and the number of use cases are three crucial growth flywheels required for any payment vehicle to scale.
“The bottleneck there really goes back to this question of how each use case can offer some value. It needs to be faster, or cheaper, or you can do something that you couldn’t do before,” he said. “The basic tenets of payment success are speed, low cost, security, certainty and a great user experience.
“Cross-border has always been the highest friction, highest cost of any form of payments. So the benefits there, I think, are going to be greater than you would see domestically,” he said.
The way Wallis envisions the future of retail CBDCs playing out, there will be “multiple networks sort of stitched together. That gets you to massive scalability, you know, way, way beyond anything that anyone can see today, as well as gives you more redundancy in the system.
“There’s an ecosystem of different participants and players, where the central bank is obviously the catalyst,” he added.
As for what Wallis thinks the future holds?
“I think there will be thousands of different use cases that leverage a digital currency like a CBDC,” he said. “It won’t happen without collaboration between the public sector and the private sector. … But cross-border payments, financial inclusion and remittances are all within reach to make significant improvements.”
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