While industry experts and central bankers publish reports on CBDC designs, social media is filled with tweets and videos claiming that it is the greatest threat to our financial freedom, intended to control and manipulate society.
The belief that central banks will store money and open accounts for individuals is a significant misunderstanding. Central Bank Currency, similar to cash, is only going to be ‘minted’ by the central bank. The CBDC will be distributed through the financial sector. Banks and non-bank providers will be able to integrate with the digital currency ledger of the central bank and offer digital services to end-users, such as account opening. In the CBDC world, the account holders’ names and details will only be available to the providers that they select.
Contrary to some opinions, the CBDC initiatives are not the result of power regimes that seek to control people’s lives. Central banks do not wish to regulate how people spend their money. CBDC offers programmability, but programmable money and programmable payments should not be confused.
Both the ECB and The Bank of England have recently confirmed that programmable money – defined as money with specific rules or restrictions attached (for example, you can only spend it on particular goods or in particular stores, similar to food stamps), is not within the scope of their research. This, however, does not exclude programmable payments, which offer organisations and individuals a world of new potential.
With programmable CBDC, users can trigger the payment based on the proof of task execution and receive their payment faster. Employers will no longer have to spend days on internal validations and other steps that are needed to execute a transaction, meaning funds can be moved faster, which contributes to global circuit of money. These solutions will significantly increase efficiency and cut payment processing costs. Ultimately, the programmability of payments enabled by CBDC rails will result in more financial inclusion and security for recipients, particularly those in the gig economy.
Another common misperception is that CBDCs will disrupt the financial system. Disruptive innovation is a change that has a significant influence on the market or business models and has been used in the past to characterise a variety of new breakthroughs, including blockchain. Despite its many advantages and potential, blockchain (outside of the crypto space) has not yet taken the world by storm. In contrast, as it matures and develops, blockchain proves to be a foundational technology that will impact and enable further breakthroughs, such as new types of digital currencies, utility non-fungible tokens (NFT) and programmable payments.
In the past decade, for example, we have seen several game-changing innovations, including the move from batch processing to real-time payments. The number of mobile and electronic wallet users is growing faster than accounts at traditional financial institutions. The financial services industry is moving towards Banking-as-a-Service (BaaS) and embedded finance, in which fintech technologies complement bank offerings and enable the generation of greater value at a lower cost. These trends will influence the entire ecosystem, and CBDCs will play an important role in this change, facilitating innovation but on a foundational rather than disruptive level.
Dominika Duziak is Head of Product and Strategy at OneStep Financial, a member of The Payments Association.
The Payments Association is a community for all companies in payments, whatever their size, capability, location, or regulatory status. Its purpose is to empower the most influential community in payments, where the connections, collaboration, and learning shape an industry that works for all. Through its comprehensive programme of activities and with guidance from an independent Advisory Board of leading payments CEOs, The Payments Association facilitates the connections and builds the bridges that join the ecosystem together and make it stronger.
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