With more than half of the World’s central banks actively conceptualizing Central Bank Digital Currencies (CBDCs), it is gradually becoming the hottest topic in the financial technology industry. However, it is still unclear how these CBDCs will exactly function and the real value they will bring into the ecosystem.
The current payment landscape has been carefully built up by thousands of integrations and as such forms a complex web of interactions all providing a piece of the puzzle.
A new solution like a CBDC would require all those parties to make adaptations (to integrate this new technology) in a relatively short period of time, which is quite unlikely to happen. Clearly, questions still need to be answered, among which are the following:
1. The most important question for those CBDCs is where would individuals (and companies) hold their accounts?
2. Will every person be able to hold an account directly at the Central Bank or does the person still need to pass via a commercial bank as is today?
3. Is a Central Bank capable of handling such volumes and the added-value services on top (like currency conversion, hedging, monitoring, cash management, peer-to-peer payments, online payments, cards)? These value-added services will not be offered by the Central Banks, but by the commercial banks. This requires a good Open Banking architecture, where users can give a consent to the commercial bank to read and/or initiate payments on his behalf on his Central Bank account.
4. Would the commercial banks and even fintech not strongly lobby against this offer, as they risk losing control and important revenues (i.e. fees charged by commercial banks for money transfers)?
5. If individuals would retain accounts at the Central Banks and make payments, all the complex rules, procedures and tooling for AML and KYC will also need to be set up by the Central Banks. Do the Central Banks have the skills and technology to do this properly?
6. Can a Central Bank be able to offer the necessary customer support, in case of questions/issues?
7. What is the business case for the Central Bank? The setup of this solution will cost millions and the day-to-day operations as well.
8. If the Central Banks want to meet their objectives of reducing payment costs and increasing financial inclusion, only small fees can be charged. This means it is unlikely to be profitable, thus raising the question of who will pay the costs?
9. How would central banks ensure interoperability with existing point of sale terminals (in-store) or with digital platforms (like ecommerce or PSPs), and how would they also support offline payments?
10. With every Central Bank in the world setting up its own CBDC, there will still be a lot of integration between Central Banks required to ensure real-time international payments with CBDCs. Will every Central Bank set up a connection with any other Central Bank or will a system of hubs be required, thus complexifying the model?