When it comes to CBDCs, we need public-private collaboration
- CBDCs are becoming more and more interesting to governments as an effective way to manage the digital economy. Concerns remain as most central banks have not started implementing the currency.
- A key success factor for the future of CBDC governance is the collaboration between the public and private sectors.
- Private sector participation in the development, testing and deployment of CBDCs will have many benefits and will become more important as CBDCs can play a bigger role in the future of financial systems.
This month the Digital Currency Governance Consortium held an expert roundtable on central bank digital currencies (CBDCs) to reflect on the work done so far and identify areas that need further research. The workshop brought together experts from international organizations, central banks, the private sector, academia and civil society activists.
While discussing the topic of CBDCs, experts discussed a number of issues ranging from the need to define precise objectives for issuing CBDCs, the various trade-offs in designing such CBDCs, and finally, the need for collaboration between the public and the public. mentioned. the private sector.
So far, CBDCs have attracted the attention of central banks, so much so that more than 90% of countries are researching and exploring the concept. The ramp-up in interest has tripled since 2020, however, this has not translated into an increased rollout of launches. Countries that have fully launched CBDCs include the Bahamas, Eastern Caribbean countries, and Nigeria. However, most countries are at varying levels of progress, either declared pilots, proof of concept, or simply interested in researching the need for CBDCs.
Why are countries alienated from CBDC implementation?
There are many areas of further exploration when it comes to CBDCs, including privacy, security, interoperability, financial inclusion, technology considerations, and other concerns. Given the number of outstanding areas requiring the exam, many countries are adopting a wait-and-see approach.
Several jurisdictions have expressed a desire to conduct research and experimentation on CBDCs, but hold off on a full rollout until more understanding of these questions. The implementation of a CBDC has a long-term impact on the economy, so it must be built with sufficient resources and time to recover. In addition, the choices of technology will affect the future of the financial system today. Thus, whether a Distributed Ledger Technology (DLT) solution should be used needs to be decided and if so, the type of DLT requires careful consideration. Overall, CBDC adoption will be fundamental and impacts and unintended consequences should be measured judiciously.
What does successful implementation mean?
For implementation to be successful, it is essential that CBDCs have a strong value proposition prior to implementation. These questions should already be answered: Why is a CBDC being issued? What are the policy objectives and trade-offs in achieving the above policy objectives, subject to local requirements? What design options will address the above policy objectives to the maximum extent possible?
These are some of the questions that central banks need to consider before implementing a CBDC. There are many digital currency options as well as advances in payment and financial market infrastructure that are available as another possibility to improve efficiency. Therefore, CBDCs must have tangible value and effectiveness beyond other innovations.
The adoption of CBDCs among the members of the jurisdiction is dependent on design choices. The level of adoption will reflect the success of the CBDC and undermine the purpose of adoption under subscription of the digital currency. The end user should be consulted and considered in the design process to ensure appropriate use.
Based on the current state of CBDC adoption, there is an ongoing interest in exploring, experimenting and operating CBDC solutions. Before countries are comfortable with fully rolling out CBDCs, the interim period could be used to work on multi-jurisdictional dialogue and cooperation to create regional interoperability. Another important step would be to work on a common set of standards for CBDCs, which would provide the fundamentals.
The case for public-private cooperation
One of the most important success factors that could determine future CBDC governance is multi-stakeholder engagement from the public and private sector. While central banks and governments have an important role to play for CBDCs, the private sector has several touchpoints that can enhance the CBDC ecosystem.
When analyzing countries that have launched CBDCs and pilot solutions, many have included the private sector. Central banks and governments can focus on issuing digital currency and collaborate on other aspects with private firms for which they have strong capabilities.
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Currently, CBDCs can only be developed by central banks or in close collaboration with the private sector. The latter model may differ in terms of the different roles the private sector can play in issuance, settlement, consumer protection requirements, anti-money laundering compliance and front-end enablement.
What are the benefits of public-private collaboration for CBDC implementation?
Private sector participation in the development, testing and deployment of CBDCs will have many benefits, some of which were discussed during the CBDC workshop:
1. Promoting Innovation: Public-private partnerships have been used in various sectors to promote innovation and access. While the government/regulators/central banks should enhance their monitoring and supervision capabilities, the private sector can help accelerate the rate of innovation by supporting it with compliance, suitable design choices for various combinatorial elements of a CBDC, and being an implementation partner. Is.
2. Increase Interoperability: For a CBDC to be successfully adopted and maintain a balance to avoid the pitfalls of currency substitution, it is essential that it be seamlessly integrated with existing payment systems. It will be important to involve and leverage the expertise of the private sector in creating the required standards and technology stack to ensure interoperability of CBDCs both domestically and cross-border.
3. Promoting Digital and Financial Literacy: Educating the users of CBDCs should be a top priority prior to implementation. With private sector participation, it will encourage industry players to launch digital and financial literacy campaigns across different demographic groups. Without proper education and awareness, any CBDC implementation will fail to achieve the required objectives and, most likely, will lead to more unintended consequences and risks.
The role CBDCs can play in the financial system of the future
The value of public-private collaboration in the context of CBDCs is promising. While cooperation is necessary, it can lead to challenges, including, but not limited to, concerns regarding data privacy, anti-trust regulation harmonization of cross-border rules and regulations. Discussions are ongoing and there is room for both the public and private sectors to contribute to a successful digital currency regime.
The discussion among stakeholders on the subject of CBDC will continue at the 2022 Annual Meeting on 23 May and will be livestreamed to the public. Join us in taking the conversation forward and understanding whether CBDCs can play a role in the financial system of the future.
written by
Sandra Walczek, Blockchain and Digital Assets, World Economic Forum
