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Insights and Expertise
The answer is yes, at least for terminals with real-time
access and provided these use existing EMV protocols,
but accepting payments without an online connection
was likely to be more problematic. This leads to the
very real question of whether offline payment is a
prerequisite for a CBDC to work. (If the objective is for
CBDC to be identical to cash, the answer is probably
yes.)
And in real life?
There is a real risk that CBDC becomes a solution
looking for a problem. Like any technology, usage will
depend on how value is perceived, and adoption will
follow a traditional pattern from rejectors to early-
adopters to late-adopters, and everything in between.
But that adoption will depend on there being a reason
to use it, and central banks are looking to build into
their models reasons for CBDC to be of interest to
consumers. Indeed, Canada has put CBDC on hold,
having not found a compelling case for it in the short
term. And the old adage, "if it ain't broke, don't fix it"
applies here too.
So, in many countries, where minimum banking
facilities are mandatory and digital payments already
widespread and relatively cheap, there is a risk that a
digital currency is an answer to a problem that doesn't
exist.
There is also the impact of a digital currency on
existing retail banking, which, while it may pay scant
attention to payments, are nevertheless happy to hold
the monies they process. All of these are reasons why
progress remains at the experimental stage, and no one
is in a hurry to upset the payments applecart.
Nevertheless, independently of policy objectives,
advantages emerge at this stage, which may encourage
adoption and which could cause the usually glacial
pace of change in payments technology to advance just
that bit faster.
• Financial inclusion: As we move away from
notes and coins, there is a risk that some people
lose out if the system relies too much on the
banking system. A CBDC could go some of the
way toward mitigating that, but there will still
be a need for some form of digital support – a
telephone, a card – which could exclude some
people.
• Innovation: The Bank of England sees a CBDC as
having the characteristics of a "general purpose
technology" that would accelerate innovation in
ways we cannot yet imagine, over time, boosting
entrepreneurship and new market models. (See
Rachel Greener, Enabling innovation through
a digital pound, Bank of England Quarterly
Bulletin, August 2023.)
• Costs: Lower overall cost of transactions through
competition and innovation.
None of these are overwhelming arguments in favor
of CBDC. They are at best optimistic, and at worst
nebulous. The innovation argument appears to be the
strongest. The pace of innovation has been relatively
slow in payments compared to other sectors, and
evolutions for users have tended to be incremental
and based on existing technologies. CBDC could be a
catalyst for innovation.
Because of the political backing that a central bank
sponsored digital currency has by definition, a CBDC
could change what is possible, and at scale, in a way
that traditional payment schemes cannot. This could
explain the European Central Bank's enthusiasm for
the topic as it seeks to develop a strategic autonomy
in transnational payments with the EU area. But once
again this brings us back as much to the realm of public
policy as it does to that of financial innovation.
Going forward
The decision to launch a CBDC is necessarily a political
one. Management of its currency – like control of its
armed forces – is a core attribute of an independent
state, and a CBDC is, in effect, a new form of a state
currency.
It is encouraging to see the effort being made to identify
what would be needed to ensure mass adoption prior
to any rollout. Conceptually, it is important to highlight
how a CBDC is fully assimilable to cash and not just
another means of payment akin to a user's payment
card. An understanding by the general public of this
essential difference could be an important factor in its
adoption, but the full implications on banking remain
to be understood.
The risk of CBDC becoming a solution in search of
a problem is a real one, as is the age-old question of
disruptive technologies – will the dogs eat the dog
food? No one has a clear answer yet to this, which is
why there appears to be a consensus among central
banks that it is important to make haste slowly.
For these reasons, CBDCs are likely to remain a topic
of interest and discussion for some time, and it is likely
to be several years before we are using digital currency
in the same way as we use cash today. But it is not too
soon to start thinking about the implications now.
Mark Dillon is solutions marketing director at Ingenico, https://
ingenico.com/us-en, a global leader in payment acceptance and
service with advanced integrated solutions and a network of part-
nerships that simplify the world of payments and bring value added
services to move commerce forward. Contact Mark on LinkedIn at
linkedin.com/in/markodillon.
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