Over the past few years, Central Bank Digital Currencies (CBDCs) have become a core component of the monetary innovation agenda for many of the world’s central banks. There were a series of papers published by scholars and academicians from the World Economic Forum, International Monetary Fund and other banks such as the Bank of Italy and universities such as Berkeley University to understand the scope of these assets.
Recently, the Bank of Nigeria published a paper to evaluate and analyze the adoption of CBDC by African countries. An important point highlighted was that only 4 African countries have a robust payment system infrastructure to support the system, while 70 per cent of African countries have not shown interest in CBDCs. There are similar other evaluation and survey processes ongoing in different countries to understand the impact of CBDCs in the financial system.
According to PwC’s Global CBDC Index and Stablecoin Overview 2022 report there are currently at least 68 central banks engaged in CBDC development, with the central banks of Mainland China and Hong Kong ranked among the most mature in terms of deploying CBDCs in retail and wholesale contexts.
PwC and Standard Chartered recently published a white paper titled “Cocreating the future ecosystem of banking with Central Bank Digital Currencies” to evaluate and assess the future of CBDCs in the Greater Bay Area. It is important to note that the Greater Bay Area (GBA) comprises jurisdictions with different systems and currencies. Thus, with its fast-growing economy, the GBA could be a launch pad to test the potential of CBDC use cases in domestic and cross-border contexts.
The paper aims to encourage the financial services industry to participate in CBDC ecosystem discussions and development, and to explore the rollout of innovative and practical use cases in the GBA. It concluded that recent advances in payment ecosystems have led to many private and public digital wallets and payment solutions becoming the go-to payment methods for consumers domestically.
Further, they offer convenience in both online and in-store retail and peer-to-peer payments. However, connecting such solutions across jurisdictions remains a challenge, with international money transfers relying on the services of various financial and payment institutions.
It highlighted that cryptocurrencies and stablecoins are disrupting the market by offering decentralized payment and real-time settlement that extends beyond individual jurisdictions and is based on self-executing conditions. The financial stability implications of these new payment solutions remain a concern for regulators, particularly the need to design comprehensive oversight mechanisms that provide effective protection for consumers and businesses.
Central banks are therefore exploring CBDCs and their potential to combine the merits of different payment solutions and digital currencies for widespread adoption, domestically and cross-border, leveraging the trust established by the central banks.
Apart from being a tool for digital payments, CBDCs could also unlock the potential of programmability in banking services, thus disrupting the market and offering a new approach to cross-industry innovation.
Such a technological advance will introduce a paradigm shift in the roles and responsibilities of banks and other participants, such as payment service providers, merchants, central banks and regulators, and could reshape how they serve their customers and deliver new values.
It examines how existing retail customer loyalty models and supply chain finance solutions could
be transformed by CBDCs. The findings from research and industry interviews suggest that the programmability of CBDCs could be applied to retail scenarios with relatively little complexity, while applications in trade and supply chain financing may require a more radical change in technology and global collaboration.
The paper underlines that the successful rollout of these use cases could be the catalyst for a new era of programmable banking, where technologies such as smart contracts connect banks and industry participants to create new service propositions. For this to happen, participants must collaborate in shaping the future of CBDCs together, testing and pioneering disruptive new use cases.