Making the leap from concept to reality is no easy task for central banks mulling over how and when to launch central bank digital currencies (CBDCs) — or even whether to launch them at all.
Building the technology underpinning the CBDC is one thing, replete with its own issues. Digital wallet? Direct account? What rails to use?
Governments need to sort out the technical details, along with privacy concerns, all while grappling with the ins and outs of monetary policy.
After that, usability remains a critical issue. Consumers and merchants have to be on board with embracing this new form of digital currency. That means making digital currencies easy to use, well understood and accepted the places they want to spend it.
China remains at the forefront of CBDCs, building them into any number of wholesale and retail settings, and other central banks have dipped their toes in the CBDC waters, or said they plan to. Here in the United States, we’re still waiting for the Fed to debut a long-awaited report on digital dollars.
“There are so many open questions, and it’s going to be hard to answer them just by writing papers,” Cuy Sheffield, vice president and head of crypto at Visa, told PYMNTS’ Karen Webster.
A successful launch, Sheffield said, is not a foregone conclusion: A customer centric mindset is beyond the scope of most central banks, and could make or break a CBDC’s adoption. Accomplishing this, Sheffield argues, requires policy makers to reach out to private-sector firms, including banks, FinTechs and payments networks like Visa.
A Product Approach
“Should a central bank create CBDC,” he said, “you have to start to actively test and look at it as a product — you need platforms and tools to do that.”
Sheffield said that if one was to rank the global development of CBDCs on a scale of one to 10, the U.S. would be at a one — not starting from scratch, so to speak, but there’s a lot of work to be done.
In a nod to the complexities and the varied approaches among those launches, the range of options for the central banks is a bit dizzying and certainly fragmented.
Central banks may take a cue from China, where CBDCs are being supported by dominant payments systems including Alipay and WeChat Pay. However, others may opt for direct accounts held by consumers, cutting out intermediaries entirely.
Moving into real-world applications, said Sheffield, will involve a bit of experimentation as banks look to launch small pilots over the next year or two.
The most logical approach for CBDC is to create an interoperable, competitive ecosystem of FinTechs and banks that can offer consumer-facing products, while the central bank provides the core currency and is underlying it.
“These are the experiments and the research that needs to happen over the next year before central banks can say, ‘We have to do CBDCs,’” Sheffield said. “Talking to consumers and having you can show them and get feedback is an important part of any product-development process.”
Visa and ConsenSys
Visa announced last week that it is partnering with blockchain firm ConsenSys to develop the infrastructure that will help bring CBDCs into the mainstream. The companies said they will initially work with 30 central banks to discuss how new services and CBDCs could be launched on top of that infrastructure.
Sheffield said that the most obvious use cases, and among the most immediate, would be financial inclusion and the streamlining of stimulus payments and disbursements. CBDCs can be sent across mobile devices and virtual cards into digital wallets, with defined “expiration dates” and set controls that make such payments far more efficient than paper checks.
Read more: Visa Teams with ConsenSys for Central Bank Digital Currency Pilot
In terms of the mechanics of the partnership, Visa has noted that its CBDC Payments Module will help integrate the CBDC onto existing payments networks, helping banks issue CBDC-linked payments cards or wallet credentials. The ConsenSys Quorum is an open-source version of the ethereum protocol that can help central banks issue and distribute their digital currencies.
For the consumer-facing initiatives, integrating CBDC into existing bank apps can foster an environment where transactions — leveraged to CBDC funds and payment credential — can still be done at retailers’ payment terminals at any location where Visa is accepted. Sheffield noted that familiarity breeds adoption by consumers and acceptance on the part of merchants.
Sheffield said that we’re moving toward a stage where central banks will be testing retail distribution “within” wholesale, in what might be likened to an “all in one” solution.
“That’s the model that we think makes a lot more sense, and we’re glad to see more consensus going in that direction,” he said. “Part of our core thesis is that it’s going to take a long time for every merchant, every gateway to be ready to have the infrastructure to manage CBDC.”
The Use Cases — and the Role of Stablecoins
The CBDCs could be used to streamline and speed up stimulus payments in emergencies.
Sheffield said that it’s important to examine the innovations happening with stablecoins, and the continued evolution of decentralized finance. Cross-border payments and financial inclusion are taking root with stablecoins, and so are syndicated loans.
Central banks, he said, “should be thinking about this whole range of use cases into the future, instead of just ‘you can buy your coffee’ — which is something you can do with most digital payment methods already.” In most countries, he predicted, CBDCs be used as a complement to stablecoins.
In fact, as PYMNTS’ research has shown, the private sector has been embracing digital currencies. Fifty-eight percent of multinational firms surveyed have been using crypto, and a third of them are using stablecoins.
See also: Study: 58% of Multinational Firms Use Cryptocurrencies
Sheffield said that looking ahead, launching a CBDC will be extremely difficult without the private sector’s involvement.
“That’s the role that we play,” he said of Visa, “helping determine what a CBDC would look like as a product — before central banks decide whether or not it makes sense to do this in the first place.”
As he told Webster, “It’s early days — and we’re still learning and kind of thinking through the details together.”
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