What value can retail CBDCs bring to society?

While research around central bank digital currencies (CBDCs) has ramped up quickly, many larger economies, including the EU and the US, have yet to take a decision on whether or not to issue a retail CBDC. However, most are running experiments to understand the possibilities, as well as entering into further discussions with other players in the ecosystem.

“It’s a historic chance to build a new infrastructure,” says Wolfram Seidemann, CEO of Giesecke+Devrient (G+D) Currency Technology.

He believes that smaller and emerging economies, which have financial inclusion and payment system efficiency issues, are predetermined to go down the CBDC route. For example, G+D recently signed a contract with the Central Bank of Eswatini to explore the development of a retail CBDC.

G+D is currently working on a pilot with the Bank of Ghana (BoG), in which the central bank integrated with commercial banks and non-banks, fintechs and mobile money providers. “We created interoperability, making it possible to exchange from money in a bank account to mobile money to eCedi [the BoG's CBDC],” says Mr Seidemann.

The BoG didn’t issue an eCedi app, as was done for the eNaira in Nigeria. Instead, G+D integrated the capability to transact with eCedi into the various commercial players' apps, products and services that are already in the market. For example, a customer could choose the eCedi option on the Vodafone app, or download money from their bank account into eCedi, or exchange eCedi in mobile money that can be sent to another participant.

Mr Seidemann says: “In my opinion, that’s the right approach, because the central bank is not there to compete with the commercial sector – it is there to offer the public infrastructure that allows others to build new schemes, products and services, and then to fill in the gaps if the private players are not addressing all sectors of the market, to achieve financial inclusion.”

How can CBDCs solve for financial inclusion and add value to society? He draws an analogy to cash, as the only fully inclusive financial instrument today. “The value of cash is huge for society, because it’s the only instrument that the user can use independent of the issuer,” he says. “And we would like to carry that value into the digital space.”

All other payment schemes have not reached cash’s level of ubiquity, he argues, because they are private business models driven by profit, rather than by public interest, which omits certain market segments. In the case of CBDCs, this is where the central bank or government needs to step in, he explains.

“Legal tender has to be ubiquitous and available to all parts of society, so it can’t rely on complicated and expensive technology. It has to be simple, easy to use and accepted everywhere,” Mr Seidemann says. “As such, the platform needs to be designed in a way that it can do both complex automated smart contracts and simple person-to-person payments in an offline environment.”

In Ghana, one part of the pilot was completely off-grid in a rural environment; people were issued cards as a simple digital device. (If they had a mobile phone, they could also use it.) The merchant was given a simple device that could connect to cards. Importantly, the cards carried the central bank seal, the governor’s signature and a few security features that are typically associated with banknotes to convey the trust that people have in the currency.

“That worked really well – people immediately accepted the eCedi cards and started transacting,” according to Mr Seidemann. “Some even brought a cash bundle and asked the merchant to exchange it for eCedi on the card because it was easier to store than cash.”

The same platform used for the issuing currency and verification can also be used in smart contracts, or automated payments, where banks and fintechs can offer new products and services. For example, programmable wallets, which are restricted to special purpose payments.

“Citizens can receive wallets that allow them to access government subsidies that can only be used for education,” says Mr Seidemann. “Once the token is spent, it’s ubiquitous and universally usable again. This is where innovation kicks in and where new business models can be developed.”

Clearly, the development of digital money will have an impact on G+D’s business as a cash printer, but to what extent is still unclear. “We don’t know yet whether people will use less cash, debit cards or other payment options. Today, people try all the options and keep cash as a backup, but will this remain the same?” Mr Seidemann asks.

“As we are witnessing today, people return to the known during a crisis and cash is actually increasing in circulation,” he continues. “We have developed a strong value proposition for cash and we continue to invest in that. Additionally, we are trying to develop a CBDC that keeps the democratic value of cash in the digital age.”

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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