Digital currency for everyone, everywhere

CATALINA TOBAR

Approximately 90 per cent of central banks around the world are exploring central bank digital currency (CBDC) – a new digital form of money that has the potential to provide central banks the possibility to offer consumers and merchants access to central bank money in much the same way cash does today but in an entirely digital experience.

This may be particularly valuable in countries where the infrastructure for distributing cash may be unavailable or limited.

Worldwide interest in CBDC remains strong, as this digital currency is essentially viewed as a potential mechanism to help drive financial inclusion, boost economic efficiency, enhance the stability of financial systems, and make public-money movement more efficient, fast, traceable and secure.

As the momentum for CBDC is increasing, we have also seen that certain central banks are starting to look both at retail as well as wholesale CBDC models. As opposed to retail CBDCs – where central banks intend to leverage electronic forms of fiat money to provide financial services to the public – wholesale CBDCs are designed for larger and low-volume transactions, such as settlement of wholesale interbank transactions.

Wholesale CBDCs can help improve the efficiency and speed of inter-bank settlements by reducing the need for intermediaries in the settlement process.

These efficiencies could also translate into lower costs and could also reduce the risk of liquidity shortages and ultimately contribute to the strength of the financial system overall.

On the other hand, retail CBDCs could be used by the public in much the same way as cash, only in digital form, to help provide fast and secure electronic payments. Amongst its benefits are that it is generally less expensive to manage than physical cash, and since it’s traceable, retail CBDCs are considered more secure and less susceptible to risks like loss or counterfeiting.

As central banks continue to dig deeper into retail CBDCs, however, questions on adoption, widespread acceptance and usage are becoming top-of-mind.

In fact, recent research from Visa’s Innovation Centre – gauging Latin America and Caribbean (LAC) customers and merchants’ desirability and sentiments around CBDC – revealed that ensuring interoperability between existing platforms and new forms of money will be a critical element to help drive widespread acceptance of CBDC and ensure people and businesses can use it easily and intuitively from day one.

Participants in the research reported they would mostly use CBDC if it were accepted everywhere, and merchants would only accept CBDC if there were enough consumers paying with them, in addition to expressing concerns on making significant operational investments to accept CBDCs.

So we believe that before retail CBDCs can be widely accepted for everyone, everywhere in the region, a cross-chain interoperability mechanism is necessary to help connect networks with existing financial payment systems and real-time payments (RTP) networks, to enable CBDC transactions to flow domestically and across borders in a seamless, decentralised, and frictionless way.

To help foster this ecosystem, at Visa we believe that public-private partnerships and a strong focus on the end-user experience are vital to help make digital currencies and blockchain networks interoperable. The good news is that cross-sector collaboration is under way globally and in LAC.

Cross-chain interoperability is a real challenge, for both retail and wholesale CBDCs. As the number of digital currency networks increases, each with unique design characteristics, the likelihood that consumers, businesses, and merchants are transacting on the same network and using the same type of digital currency decreases.

To help solve this, Visa’s research and product teams are researching the development of a “universal payment channel (UPC)” which is designed to act like a hub, interconnecting multiple blockchain networks and allowing for secure transfer of digital currencies.

Visa’s UPC would act as a universal adapter among blockchains, enabling central banks, businesses, and consumers to exchange value, irrespective of the currency’s form factor.

In Brazil, we worked with the Central Bank on the Brazil LIFT challenge for CBDC. Visa was selected amongst the group of finalists for a project to design a functional prototype based on UPC that could enable instant transfer of global funds for Brazilian small and midsized businesses across CBDC ledgers in a scalable and interoperable way.

There are also new policies promoting regulatory interoperability such as the digital economy agreements in Singapore, Australia, New Zealand and Chile.

Peru has also issued a new regulation mandating the interoperability among all financial institutions, including digital wallets and standardisation of QR payments.

It's becoming clearer that interoperability is a key driver to help pave the way for CBDCs’ success and will underpin the creation of seamless, flexible, and broadly accepted money movement experiences. It will also help bring opportunities for merchants of all sizes to offer greater access to funding and global markets, reduce operating costs for e-commerce and B2B cross border solutions and reduce the administrative burden of managing different currencies and volatility.

Ensuring CBDC interoperability is an important step that will help shape the future of money movement as more ways to pay and be paid are emerging than ever before. CBDC represents a significant step in the evolution of public money, and we are excited to help bridge CBDC networks with existing payment rails to help drive innovation and social impact at scale for everyone, everywhere in the region

Catalina Tobar is the head of crypto solutions for Visa Latin America and the Caribbean.