Central banks have been discussing the introduction of a retail central bank digital currency (rCBDC) for some time. However, potential obstacles to its adoption by consumers and retailers remain largely unexplored in the academic and policy literature.
An ECB paper 1 surveys the key elements involved in the adoption of any new means of payment and discusses failed and ongoing initiatives with public digital money.
It concludes that ensuring the desired level of adoption of rCBDCs may impose significant constraints on central bank design choices and policy goals. In fact, in some settings, central banks may find themselves on the horns of a dilemma in seeking to balance the needs to (i) preserve the central bank’s hierarchy of policy goals, (ii) increase the chances of adoption and use of rCBDCs by consumers and retailers, and (iii) avoid any adverse economic effects.
The next phase of the Central Bank of the Republic of Turkey (CBRT) research into issuing a CBDC will explore integrating a CBDC with the national digital identity scheme and Turkey’s instant payment service, FAST. It will test using a CBDC for payments and for wholesale banking transactions.
CBRT started its research in September 2021 with a limited closed-circuit test and is now moving to an advanced phase that reflects broader participation.
The Reserve Bank of Australia (RBA) and the Digital Financial Cooperative Research Centre (DFCRC) have issued a white paper on CBDCs. This describes the objectives and design of the new currency and invites proposals for user cases that could improve the functioning of Australia’s economy and financial system.
The pilot should complete mid-2023, allowing the RBA, and regulators such as the Australian Securities and Investments Commission and Australian Transaction Reports and Analysis Centre to understand technological, legal and regulatory aspects of issuing a CBDC.
The Bank of Thailand (BoT) will take more time to develop its retail CBDC. BoT wants to understand whether a CBDC will add benefits over and above those already provided by the national digital payment system, Promptpay. To date the BoT is not clear on these.
BoT is working with three financial institutions and about 10,000 retail users on limited-scale CBDC tests in real-life applications. At the end of this year the pilot will move on to cash-like payment transactions. The work will also look at new use cases.
BoT expects it to take at least five years to be ready to issue a retail CBDC. In parallel, it is doing extensive work on wholesale CBDCs and cross-border payments.
A recent article by Cointelegraph reports on four countries that stopped their CBDC work.
Denmark, whose population use little cash, expressed interest in 2016 in CBDCs but after a year stopped work as it already had a ‘secure and effective’ payments infrastructure. In June 2022, the central bank said, ‘it is not clear how retail CBDCs will create significant added value relative to the existing solutions in Denmark.’ It continues to monitor CBDC developments.
Japan. The Bank of Japan (BOJ) released an initial report on CBDCs in October 2020 and started a proof-of-concept CBDC in early 2021. In July 2022 BOJ said it had no plans to issue a CBDC. It also said a CBDC, as a public good, ‘must complement and coexist’ with private payment services to achieve secure and efficient payment and settlement systems.
Ecuador. The Banco Central Del Ecuador (BCE) launched an electronic currency, the dinero electrónico (DE) in 2014. At its peak 500,000 people out of a population of about 17 million used the system, but in 2018 the system was stopped. Whether it was a true CBDC is debatable, but payments were put back to the private sector and the BCE is sceptical about CBDCs.
Finland. In the 1990s Finland created its Avant smart card system. As with Ecuador, not quite a CBDC but the project essentially represented a token-based retail CBDC, albeit based on cards. It was abandoned in 2006 because debit cards offered a cheaper alternative. Interestingly fees were introduced for Avant cards, and this noticeably reduced its popularity. Transactions were anonymous.
Cointelegraph is, perhaps, stretching the boundaries including Ecuador and Finland, but it is interesting to read about previous central bank interventions offering payment services. The inclusion of Japan is strange given that the BOJ continues to work on CBDCs.
The Bank of International Settlements has launched a project involving its Innovation Hubs in Europe, Singapore and Switzerland working with the central banks of France, Singapore and Switzerland. Project Marianna explores automated market makers (AMM) for cross-border exchanges of hypothetical Swiss, euro and Singapore wholesale CBDCs. The aim is to complete the proof of concept by mid-2023.
The project looks to borrow a solution developed to determine the price of two or more tokenised assets. Decentralised Finance, DeFi, uses public blockchains and smart protocols to automate the market for digital assets. AMM combines pooled liquidity with algorithms to establish the price and the BIS wants to explore whether this could be used to facilitate cross-border exchanges of CBDCs.
The Bank of Korea (BOK) has now published the results of its simulations of a retail CBDC. The CBDC appears to have worked well offline and for cross border remittances, but the BOK highlighted the Ethereum-based blockchain technology did not scale as hoped. The performance of the blockchain would create realtime processing limitations during peak times for transactions. One of its tests simulated peak demand by sustaining 4,200 transactions per second (TPS) for 30 minutes. At that activity level, users could have to wait up to a minute for a response.
A second performance challenge related to zero knowledge proofs (ZKP). This technology allows ownership to be established without exposing identity data. BOK found that using ZKP took up to 14 seconds per transaction.
BOK is now working with 14 commercial banks and the Korea Financial Telecommunications & Clearings Institute (KFTC). It wants to explore the ability to integrate the simulation system with the banks’ internal systems and performance onboarding large numbers of users.
BOK is also looking at possible user cases and may broaden its work to include credit card and securities companies.
1 - Ensuring adoption of central bank digital currencies – An easy task or a Gordian knot? (europa.eu)
