Designing for success
The adoption of digital payment forms is rising. Quasi-currencies like stablecoins have emerged and consumers are increasingly engaging with new, stateless forms of money. The shift has fueled interest in Central Bank Digital Currencies (CBDCs) – effectively digital versions of fiat currencies – and more than 100 central banks have announced they are exploring the novel technology.
Many questions remain unresolved, and here we explore some of the most important points. A CBDC, especially a retail CBDC, could have unintended consequences for the financial system, especially if consumers hold their accounts at the central bank. It is not just a matter of an operational headache—the consequences for the banking system could be extreme.
Whichever way these questions are resolved, key decisions must start with elected officials and be implemented by central bankers. Further stakeholders – especially private enterprise – can deliver support within any framework built by those key decision makers. Just as logistics and printing companies support the cash world, the existing digital payments ecosystem can be leveraged to support the implementation of CBDCs.
Leveraging our experience
The G7 principles for retail CBDCs, published in 2021, provided an optimal framework within which to set standards and boundaries. In a second paper, ‘Designing for success: How to build on the G7 foundational principles for retail CBDC’, the Visa Economic Empowerment Institute seeks to leverage our 60 years’ experience running cross-border digital payment infrastructure to outline the various choices open to policymakers.
There are certain G7 principles to which we are well placed to contribute, and we recognise that others should be left to governments and central banks. Four principles stand out; operational resilience and cybersecurity, competition, data privacy, and illicit finance.
Operational resilience and cybersecurity
Operational resilience and cybersecurity is the most fundamental principle, in our view. Adherence to the principle is not simply a factor for success but the starting point for all parties and services that act in a CBDC.
Indeed, the payments flow of a CBDC is an extended chain that will require resilience across multiple parties. A system’s resilience is only as strong as its weakest link, and for a retail payments mechanism, the last mile is not in the direct control of the CBDC operator. Quality of service therefore must be guaranteed not only by technical controls but also by commercial and regulatory controls, and applied to all parties in the chain.
These requirements need to be defined and clear. In the mind of a user, any failure by a third party is attributable to the whole system. Without a clear degree of transparency, a third-party failure can undermine trust and confidence in a CBDC.
Competition and collaboration
A secure system that operates well, drives adoption, and builds scale will require a level playing field for all participants. That’s why competition is the second G7 principle that we focus on in the paper. Competition obliges all parties to bring—and keep bringing—their best, and it is essential that a CBDCs support collaboration through standards and interoperability.
The acceptance step is particularly important in encouraging competition across the transaction flow. Acceptance is the transactional on-ramp - it is where consumer choice really comes into play. Strong acceptance protocols help acceptance feel safe, seamless, and familiar. That drives adoption, which in turn builds scale. Scale creates opportunities for new use cases and innovation, which builds more scale. It’s virtuous cycle, all stemming from an accessible on-ramp.
Visa acceptance has taken many years to build and is a globally recognized mark of trust, though implementation of CBDCs should seek to leverage all forms of digital acceptance, thereby reducing friction and boosting adoption. Utilising the current digital payments infrastructure in the CBDC environment would maintain the user experience and vastly reduce the cost of building bespoke CBDC acceptance. It will mean that use cases for CBDC can be established and thrive based on the merit or validity of the use case—not barriers to access the use case.
Data privacy and illicit finance
The final point I want to make covers data privacy and illicit finance, and we cover them together in the paper not because they cover the same area, but because there is a link in terms of cause and effect. Effective controls to address illicit finance are best supported by some access to personal data, so the approaches for data privacy and addressing illicit finance are coupled.
Data privacy must always be respected, and by default users should be given privacy along with appropriate choices. No system should be implemented that cannot adhere to legal standards for data use and financial control.
With that in mind, expectations that a CBDC will reflect the anonymous features of cash also need to be respected. A CBDC is not a migratory replacement of cash, rather the two will run in parallel, however it is important to design with the idea that cash could be replaced.
We take the view that anonymity is a feature that could be built as a service rather than a design principle. The anonymous service would be a masking/proxy capability. Compliance in meeting illicit finance controls can limit flows that are masked if insufficient data are provided. This could be a controversial decision point, but our intention in recommending it is to raise the need for balance and understanding.
Finding the balance
CBDCs could play an enormous role in society. Implementing them requires deep technical and economic understanding. The G7 principles are the foundation that decision makers can use to frame their approach, but they are only a starting point, and we hope our paper meaningfully moves the debate forward.
Finding the right balance between the essential foundations of security, resilience, and performance while also enabling innovation and change is hard, but by leveraging existing capabilities we can pave the way for innovation in the design and use of CBDC. If done right, those innovations could go beyond anything we have yet envisioned.
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