In the past few years, a growing number of central banks have begun exploring new financial technologies and how they might enhance the stability, resiliency and efficiency of financial systems. Now more than ever, governments around the world are focused on mechanisms for jumpstarting growth and providing financial relief to people, businesses and communities. In this context, interest in Central Bank Digital Currency, or CBDC, has accelerated.
CBDC represents a new form of money issued by a country’s central bank directly to its citizens. But unlike traditional paper currencies, such as the U.S. dollar or euro, CBDC would exist exclusively in digital form. Many central banks see CBDC as a way to provide a “digital version of cash,” meaning that you would be able to receive and spend it directly, for example via a digital wallet on your phone or tablet. This would be particularly valuable in countries where the infrastructure for distributing cash is unavailable or limited, a factor that can hinder central banks’ efforts to bring people into the formal financial system. Nevertheless, while several countries have taken concrete steps to advance a CBDC framework, most central banks are still in the exploratory phase.
Unlocking the economic potential
For many, the appeal of central bank-backed “digital cash” may seem vague, given the array of digital tools available for managing all aspects of our financial lives. We tap a card to buy groceries, receive our paychecks electronically and pay our bills online. So what benefits, then, could CBDC offer a consumer who is already spending and receiving dollars digitally?
It depends on the person, their payment and banking needs and the context in which they work, live and transact. There is no ‘one-size-fits-all’ in payments and banking. Traditional currencies and the ecosystems built around them serve people and businesses, safely and efficiently, in economies around the globe. However, there are particular contexts and use cases where CBDC might offer distinct advantages.
For example, thanks to the cash-like and digital nature of CBDC, governments would be able to rapidly transfer funds to targeted groups of individuals and businesses, when and where they’re needed most and in parts of the world where traditional banking services are not universally used.
The motivations driving central banks to explore CBDC are varied, but one objective that many seem to share is expanding financial inclusion, or helping unbanked individuals gain access to useful financial products and services. While central banks differ on how to broaden financial inclusion with CBDC, the technology has the potential to more easily and securely connect someone to a vibrant ecosystem of accessible Fintechs and other financial products.
Tackling design hurdles
As central banks consider frameworks for reaping the benefits of CBDC, some common design challenges have emerged. For example, how might digital currencies be exchanged in person, when neither the buyer nor the seller has a connection to the internet? Today the only reliable, real-time medium of exchange in an offline context is physical cash. For CBDC to have utility as an alternative to physical cash, it must be useable for face-to-face transactions occurring offline.
Today Visa published a technical paper that outlines a novel approach for offline point-to-point payments between two devices. The protocol allows digital money to be directly downloaded onto a personal device, such as a smartphone or tablet. The money is stored on a secure hardware embedded in that device and managed by a wallet provider (e.g. a bank). CBDC can be transacted from one device to another device directly without any intermediaries such as banks, payment networks, or payment processors. Examples of the underlying technology that can support point-to-point payments include Bluetooth and Near Field Communication (NFC).
The offline payment system, put simply, creates an experience similar to physical cash. But instead of paper in your wallet, it’s bits and bytes in your phone. You can imagine this functionality being useful where internet connectivity is intermittent and a user may only gain full connectivity periodically, say by visiting a local internet café.
Making CBDC work for everyone, everywhere
For any technology to gain widespread adoption, it has to work for people in variety of locales and contexts. CBDC is no different. The challenges that central banks face in launching CBDC are vast and complex. Implementing new technologies is an iterative process, requiring input from diverse stakeholders, and we want to contribute our expertise and thinking as crucial design decisions are being shaped.
At Visa, we’ve been developing new products and capabilities, investing in and partnering with leading digital currency wallets and infrastructure providers, conducting our own primary research and analyzing the policy and economic impacts of CBDC through our work with partner organizations such as the World Economic Forum and the Visa Economic Empowerment Institute.
We look forward to working with central banks at this important moment in time to create secure, convenient, and reliable CBDC that can seamlessly integrate with the existing payments ecosystem.