How CBDCs can operate seamlessly with existing networks – and why they should

Mastercard’s Raj Dhamodharan agrees that CBDCs could work alongside existing schemes such as RTP to enable central banks to focus on CBDC minting and issuance while banks and PSPs focus on payment processing and distribution through existing channels

Many believe we are at a moment of an inflection where we face two options for modernising payments. On one path, payment providers have an existing payments infrastructure that moves money efficiently with the potential for far more efficiencies through upgrades to real-time payments, as many countries are pursuing.

On the other path, we have distributed ledger and digital asset technologies that promise to usher in superior experiences for the payments’ world. Policymakers and regulators everywhere are exploring central bank digital currencies, or CBDCs, which offer many of the same capabilities as real-time payments – real-time tracking and tracing, immediate settlement and enhanced programmability of money – while offering consumers and businesses a new way to pay.

If the two paths remain separate, people could find themselves in a confusing and cumbersome situation where money cannot flow quickly or smoothly – like a consumer who receives a check but has no bank account in which to deposit it.

The good news is that we need not choose. The two options can live in concert with each other, and this will provide the best and most seamless consumer experience. They can be interwoven, leveraging the existing systems and bringing in newly-formed digital assets that provide instant settlement and real-time visibility. The payments community can realise greater customer satisfaction and cost savings and mitigate unnecessary complexity for all ecosystem users.

As central banks explore CBDCs use cases — identifying benefit, market impact, and adoption strategies — they must consider how a new monetary instrument will operate and interact with the existing payment infrastructure and payment endpoints. A CBDC operating in a separate ecosystem with new rails and user interfaces will create complexity for users, require significant up-front investment to create ubiquity, and slow down adoption. Instead, CBDCs need to be interchangeable between ecosystems to simplify usage and facilitate mass consumer adoption.

Paying with CBDCs

A direct-to-consumer CBDC, without the participation of existing financial institutions, will struggle with customer experience and protections. But CBDCs that work alongside existing schemes such as real-time payment (RTP) could enable central banks to focus on CBDC minting and issuance while banks and payment service providers (PSPs) focus on payment processing and distribution through existing channels.

In most countries, RTP networks provide a scalable platform that can enable CBDC payment transfers and offer a seamless experience for consumers and businesses. To enable a CBDC-initiated payment or credit an account in CBDC, the existing RTP infrastructure can be used with only a few significant upgrades to the scheme, such as 24/7 settlement. Sending and receiving banks and Payment Service Providers could exchange funds via the RTP scheme just as they do today. Once communicated, the transaction is mapped to the appropriate account crediting the consumer in CBDC. Both institutions would settle as they do today.

Reaching the most consumers and businesses is only possible with a currency that can cross a multitude of private networks. Here is how it could work in practice: A person initiates payments at checkout. Transaction information is routed by a payments processor to the card issuer to verify balance and authorise the transaction, finally debiting the appropriate amount from the individual’s balance. All this occurs without any changes to the existing infrastructure across the transaction value chain. Loyalty and fraud detection programs continue to run on this mechanism. Clearing and settlement between issuers and acquirers take place as they occur today through a settlement network with no need for upgrades. Depending on the adoption of CBDCs, network participants may settle in commercial bank money or directly in CBDCs.

Central banks can test this out for themselves – we recently announced a virtual testing environment with our proprietary permissioned blockchain platform to simulate the issuance, distribution, and exchange of CBDCs between banks, financial service providers and consumers, validating use cases and evaluating interoperability with existing payment rails.

Since our announcement, we have engaged with a dozen central banks, assisting policymakers and regulators to determine which CBDC technology design and use cases might be the most valuable and feasible in market, and evaluate technical build, security and early testing of the design and operations.

Paving a path to success through integration

A CBDC fully integrated with an existing payments infrastructure, leveraging the role of banks and licensed wallet providers, will promote competition and accessibility and will enable CBDCs to leverage continued innovation from the private sector.

CBDCs are an exciting tool, but that does not mean they are the right tool to fix every problem – a real-time payment system, for example, may be a better fit. That’s why we continue to invest in innovative approaches to payment infrastructure and services, including the use of blockchain.

For any payment system, trust is at the heart of what we do and ensuring strong consumer protection, including privacy and security of the consumers’ information and transactions is paramount. A level playing field encourages the collaboration among providers that will bring the most innovative products to the market. Interoperability has always been and must continue to be an integral part of the payment ecosystem. It weaves capabilities, networks, and trust together to support the evolution of payment networks. The existing rules and network effects will become integral to the evolving payments landscapes.

Technology itself is only a tool – we need open competition and the free market of providers to bring it to people in the smartest and most seamless way possible, particularly in today’s fast-changing world.

About Raj Dhamodharan

Raj Dhamodharan is EVP Digital Asset/Blockchain Products & Partnerships. In this role Raj is responsible for managing Mastercard’s global strategy, products & partnerships in the blockchain and digital assets space. Previously Raj held various leadership roles in Mastercard including managing global digital partnerships, managing Click to Pay standards and leading Mastercard’s digital payment products and Labs group in Asia Pacific.

Prior to joining Mastercard in 2010, Raj had worked in payment and telecom industries for 14 years in various product and technology leadership roles including co-founding Think Business Networks, a telecom software company in Silicon Valley that built products for MNOs across the world.

About Mastercard

Mastercard is a global technology company in the payments industry. Our mission is to connect and power an inclusive, digital economy that benefits everyone, everywhere by making transactions safe, simple, smart and accessible. Using secure data and networks, partnerships and passion, our innovations and solutions help individuals, financial institutions, governments, and businesses realise their greatest potential. Our decency quotient, or DQ, drives our culture and everything we do inside and outside of our company. With connections across more than 210 countries and territories, we are building a sustainable world that unlocks priceless possibilities for all.  

In case you missed the latest instalment of our Central Bank Digital Currency series, on the potential these projects hold to build the future of money (and humanity), check out Mirela Ciobanu’s, Senior Editor at The Paypers article here.

Still new to the topic of Central Bank Digital Currencies? We recommend reading Central Bank Digital Currencies for dummies – a quick guide into CBDCs from the Dutch Central Bank, an educational piece written by Harro Boven, Policy Advisor at the Dutch Central Bank.