The future of money? Barriers and benefits of CBDCs

The idea of Central Bank Digital Currency (CBDCs) as the next evolution of fiat currencies is catching on globally, particularly across APAC. Throughout the region, we’re seeing experimentation across a wide range of use cases.

In Australia, the RBA’s CBDC trial continues, with a recent landmark cattle sale using the piloted ‘eAUD’ demonstrating the potential for CBDCs to transform the Australian economy. Singapore has laid out a path for CBDC development in 2023–2024, while smaller economies, including the Republic of Palau, have launched a controlled retail pilot using a USD-backed stablecoin.

As Central Banks across APAC explore the use of CBDCs, private sector adoption seems inevitable. According to the Ripple 2023 New Value Report, 76% of global organisations surveyed were either “extremely” or “very” confident that CBDCs can meet their business needs — similar to their levels of confidence in traditional currencies. Cross-border payments (37%), consumer-to-business payments (35%) and wholesale (34%) are rated as the top three most cited use cases for both CBDCs and stablecoins.

So, what are the benefits, determining factors and barriers when it comes to the adoption of CBDCs?

Financial inclusion

According to the report, financial inclusion ranked in the top three most important considerations for CBDC use. This is important for countries where there is a lack of infrastructure and a high rural population without easy access to physical banks.

The driving force behind Palau’s CBDC pilot was mobilisation of the economy and government processes to improve financial transactions. This would enable wider use of digital value and payment methods, lowering overall transaction fees for citizens, cutting FX costs and speeding up payments — all helping empower the people of Palau to achieve greater financial success.

CBDCs offer the ability to extend even the most basic financial services to historically underserved populations by way of mobile phones and digital wallets. This gives citizens the ability to send and receive payments anytime, anywhere, even if they don’t have a traditional bank account.

Cross-border payments and interoperability

Governments, historically hesitant toward cryptocurrencies, will see CBDCs as a means to digitise fiat currency while maintaining the traditional financial system status quo. Juniper Research expects initial CBDC pilots to address domestic payment challenges first, representing approximately 92% of total CBDC transactions by 2030.

While the focus is currently on establishing local systems, interoperability with other fiat currencies and CBDCs will inevitably be a question. Currently, the payments landscape in APAC is highly fragmented with each country having its own unique currency, process and payments infrastructure. The Bank for International Settlements (BIS) identified interoperability for cross-border payments as a major priority for CBDCs in its 2021/2022 innovation program.

Central Banks can utilise existing blockchains, though many struggle with the transaction volume demanded by a successful retail CBDC. Additionally, these public ledgers lack the privacy and control essential for central banks.

The answer lies in CBDC private ledgers — a secure, controlled and adaptable method for the issuing and management of digital currencies. Private ledgers implemented using DLT technologies provide seamless settlement interoperability, safeguarding Central Banks’ monetary and technological autonomy whilst addressing existing challenges and risks in cross-border payments. The streamlined interaction regionally and globally helps to enhance the utility of CBDCs, paving the path for an innovative cross-border payment ecosystem.

Mitigating retail risk in Australia

While the ex-RBA Governor Philip Lowe gave a strong indication that the RBA is not in any rush to develop a CBDC for consumer use in Australia, a retail CBDC offering is an inevitability as regional peers explore their options. Across APAC, we are observing more pilot tests on retail CBDCs with some governments, including Hong Kong, that are optimistic about retail use cases.

According to the Economic considerations for a retail CBDC in Singapore paper published by BIS, with appropriate regulatory safeguards, the risks posed by retail CBDCs — including higher-funding costs and liquidity risks for the banking system, as well as risks to domestic credit creation and financial stability — can be reduced when managed properly. Measures including hard limits to prevent excessive CBDC holdings as well as restrictions on the use of CBDCs by non-residents are steps governments can take to minimise risk for retail CBDCs.

These risks could be tempered further by innovative design and technological solutions built into a new digital currency. CBDCs built on DLT technology introduce new toolsets and options that regulators can use to solve previous trade-offs and implement proactive safeguards aligned to policies and regulations. Such safeguards can ensure that retail CBDCs serve primarily as a medium of exchange and not a major store of value.

It is imperative to encourage and support the introduction of legislation that includes clear and fair definitions for all digital assets and delineates jurisdiction among regulatory bodies. Regulation provides a credible framework for crypto to safely innovate, grow and build confidence in its utility.

Safeguarding privacy

Lastly, privacy is and should be a key consideration for the implementation of CBDCs — as is the case with any government or public sector project involving the personal information of citizens. Similar to existing financial systems, ensuring privacy is a comprehensive and legally challenging process that balances functionality with consumer privacy and the prevention of illicit activity.

Central Banks will need to prioritise broad access and ease of use to ensure their currencies are adaptive and scalable, if not, they risk losing control of the infrastructure for global digitised services. CBDCs should not be designed to give governments access to all consumer data. Responsible design choices, including implementing messaging layers for example, will give the government the tools it needs to balance security and functionality.

While the challenges of CBDCs remain — adoption trends are promising. We have seen many use cases of CBDCs across the APAC region that point towards the possibilities of a centralised digital currency system. With the right technology in place, central banks can ensure privacy and cybersecurity are embedded into the design of CBDCs. At the same time, ensuring interoperability and implementing safeguards to mitigate risks will ensure we can all realise the benefits of CBDCs — from faster, more cost-effective transitions to increased financial inclusion.

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