For over twenty years, Mobey Forum’s Member Meetings have brought the banking community together to stay ahead of the curve and explore new strategies for digital innovation.
We hold each meeting under Chatham House Rule to allow our members the freedom to talk openly and honestly about the issues and opportunities facing our industry. Last week, Mobey hosted its latest virtual Member Meeting on Central Bank Digital Currencies (CBDCs), to explore the case for national digital currencies and the implications for retail and commercial banks.
The meeting featured a stellar line-up of speakers from organisations including Consult Hyperion, European Central Bank, Giesecke+Devrient, Billion Group, and Nordea. The discussions highlighted that CBDC is no longer a concept but a tangible priority for banks worldwide.
The growing appetite for CBDCs
CBDCs are garnering interest from central banks across the globe – recent research suggested that 86% are actively engaging in some form of CBDC activity. Last week, one of the world’s oldest banks, the Bank of England, announced it is setting up a taskforce to explore the possibilities for CBDCs in the UK. In other parts of the world, research has already moved into experimentation; China has been trialling the digital yuan for several months already, with the aim of launching the currency in time for next year’s Beijing Winter Olympics. Elsewhere, after two years of pilot tests, The Bahamas has unveiled its digital currency, the Sand Dollar.
While a broader, mainstream roll-out of CBDCs might be some way off (common feedback from central banks suggests it is somewhere between the next 3-5 years, and even that may be optimistic) it is still certainly a case of when, not if.
Understanding the benefits
Defending national currencies against non-EU and private initiatives, such as Facebook’s Diem (formerly Libra), is one reason for central banks to develop their own digital currencies. Yet the motivations extend beyond sovereignty. CBDCs can help banks respond to the decline in consumer cash usage, and meet the demand for digital payment services that accelerated during the pandemic and continues to grow.
CBDCs could also provide a platform for market innovation. In Europe, for example, a digital euro could support the further digitalisation of the economy, ultimately creating more choice and means for competition. Financial inclusion is another key use case. In low-income countries, where the private sector is either unable or unwilling to offer viable payment means to the public, CBDCs could be issued directly to the public using mobile services. This is also true in developed countries, where mobile services could be used to facilitate cross-border payments or offer opportunities to people without bank accounts, such as immigrants and refugees for example.
Identifying the motivations
To date, there are many open questions surrounding the right deployment model for CBDCs. Specifically, who will be responsible for distributing them? If central banks were to issue currencies directly to consumers, they would have to comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. It is unlikely they will want to enter into this regulatory playing field, therefore a more plausible scenario is that retail banks and Payment Service Providers (PSPs) will become the distributors.
Aside from distribution, the other question comes down to motivation. Consumers already have digital payment services including Apple Pay and WeChat. It may be difficult to educate them on how CBDCs are different, and explain why they should use them.
From a retail bank perspective, we know from initiatives such as PSD2 that the widespread adoption of new technologies (to ultimately foster innovation) requires an intrinsic motivation for the key parties involved. Determining and articulating the tangible business use case is therefore a key priority for the next stage of industry discussion, and one that the European Central Bank (ECB) is investigating in phase two of its public consultation on the digital euro.
Similarly, there are a number of open questions around the role of digital identity in the future of CBDC. Considering identity sits at the heart of digital wallets, there is an opportunity to leverage existing digital ID schemes and standards to bring CBDC use cases to life.
The path forward
As with all digital technologies, a key objective of CBDC is simplicity and convenience for end-users. Central banks also want to ensure their digital currencies do not damage monetary and financial stability. The road ahead relies on collaboration across the industry to understand requirements and define interoperable solutions that can help CBDCs succeed. The Mobey community will be actively involved in the industry discussion as it progresses.
Save the date for Mobey Forum’s next virtual member meeting on Thursday 17 June: Rethinking the Customer Relationship in the Digital Banking World.