The Era of Central Bank Digital Currencies Is Within Reach

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“CBDC, not bitcoin” is the new “blockchain, not bitcoin.”

Since 2014 , discussions of a publicly accessible digital payment
vehicle issued by a central bank have matured significantly.
Central bank digital currencies (CBDCs) have been the center of
many high-level discussions, notably at the Bank for International
Settlements (BIS) and the International Monetary Fund (IMF).
The breadth of reports from experienced central bankers validates
blockchain technology in a way that crypto-anarchists, armchair
blockchain economists, and even millennials that got smoked by
buying cryptocurrencies last Thanksgiving (2017), can collectively
be proud of.

However, the cruel reality is that consumer adoption of new retail
payment innovations is often difficult – whether that innovation is
magic internet money or new Sacagawea U.S. dollar coins.
Further, just as payment habits with physical cash, credit card, or
cell phone use varies from country to country, different regional
consumer preferences regarding anonymity, fees or interest
payments would persist with a digital manifestation of “physical
cash.”
New technologies are cool, but the road to adoption is treacherous
– history is littered with the decomposed debris of failed payment
innovations that did not provide what consumers wanted.

Approaches in Brazil
Successful and wide-scale CBDC implementation would require
architects to consider consumer demand, payment habits, and
preferences within a particular country – possibly resulting in
idiosyncratic design decisions.

Adding to the growing discourse on the topic, in a recent research
report for R3, JP Koning evaluates what a CBDC might look like if
it were to be issued by the central bank of Brazil, the world’s
eighth largest economy.
While this paper anchors the analysis through specific treatment of
the Brazilian market, many of the design decisions that central
banks (or private sector companies on behalf of central banks)
would have to make can be generalized to other economies as
well.

Building on his earlier work , JP questions whether CBDCs should
be in bearer form or account-based, whether they should be
private like physical cash or have identities tied to transactions
(and to what extent), and whether CBDCs should pay interest or
not.
He presents three potential high-level archetypes for a CBDC: a
cash-like digital bearer instrument; an account at the central
bank; or a hybrid approach that combines features of cash and
accounts.

Thinking innovatively
Thus far, central bank innovation teams have done incredible work
with blockchain technology.
Project Jasper’s Phase 3 white paper , a collaborative effort
between Payments Canada, the Bank of Canada, TMX Group,
Accenture and R3, required coordination amongst many different
stakeholders –the breadth of analysis and innovative thinking
shows in the end result.
The recent report on creative approaches to cross-border
settlement systems by the Monetary Authority of Singapore (MAS),
the Bank of England, and the Bank of Canada is a must-read for
payment nerds. A report on decentralized liquidity savings
mechanisms , a result of a Project Ubin prototype built for the MAS,
shows the promise of decentralized netting.

The focus on wholesale, or interbank payments, thus far, is
entirely merited as these projects are more contained in scope and
may provide more concrete benefits to market participants, at
least in the short term.
Yet while progress with wholesale payments is great, retail, or
consumer, payments are also ripe for innovation.

CBDCs for the people
Despite the persistence of and even increases in the amount of
physical cash in some regions, consumers globally are trending
towards digital payment use.
Building digital solutions on top of existing financial market
infrastructure may only enable private sector-led retail-level
payment innovations to get so far.
Existing underlying payment infrastructures in several regions can
lead to interoperability and access limitations and complexities.
Future innovation with platforms backed by central bank-issued
money, if done with a responsible and careful architecture, has the
potential to better serve payment niches that are either currently
poorly addressed by the private sector, or fill the future gap left by
paper’s inevitable decline in the wake of more digital payment
volume.

A “big bang” move to cryptocurrencies may be (nearly) impossible,
but a premeditated and deliberate phased rollout of a CBDC is not
only possible, but it may be what certain types of consumers in
certain types of regions need.

Source : https://www.coindesk.com