Central banks, private sector urge digital currency collaboration

Financial regulators in the AFI network and knowledge exchange partners from the private sector encouraged closer ties to support global growth in central bank digital currencies (CBDC) as a means of accelerating financial inclusion among last mile groups, speakers said on the second day of AFI’s Policy Leadership Dialogue on 29 September.

Key stakeholders representing a broad spectrum of financial market players – from central banks to international payment platforms – used the one-of-a-kind event to encourage continued dialogue and greater understanding of CBDCs, given the infancy of the niche market product and its enormous potential.

John Rolle, the governor of Central Bank of The Bahamas, who propelled the central bank into the history books with last year’s launch of one of the world’s first CBDCs, the sand dollar, was among the first to speak at the high-level event.

As a global pioneer in electronic money, Governor Rolle was optimistic about the benefits of adopting a digital currency – not least to its three targeted user groups: commercial, domestic and non-resident –, adding that it was expected to lower service delivery costs and increase transactional efficiency for financial services across The Bahamas.

By achieving interoperability with new and existing payments services and supporting offline functionality, Governor Rolle said that the sand dollar supported the notion that “access to mobile wallets and digital payments must be as universal as access to cash.”

As a CBDC trailblazer, participants were also eager to hear from The Bahamas in terms of early lessons and challenges. Among the key points listed was the importance of having appropriate legal frameworks and a deep understanding of unique domestic and national circumstances. Others included the need to complement CBDCs with existing financial products and services, educate potential users and tailor knowledge to different stakeholder groups, coordinate the adoption process with private sector partners and obtain government buy-in, particularly to enable legal reforms and promote widespread public use.

Governor Rolle added that while enabling logistics could prove difficult, he reassured participants that setbacks would be short-term and eased if financial institutions conducted thorough preparatory work.

Success in The Bahamas, AFI Executive Director Dr. Alfred Hannig said, provided an outstanding example for members in other jurisdictions looking to understand more or launch their own digital currencies, and underscored the value of such knowledge exchange events.

“We are committed to peer learning to advance the dialogue, including in the spirit of open dialogue. It is a precondition of success if all sector works together and not competitively,” Dr. Hannig said.

Appealing to members operating in specific jurisdictions, he advocated that CBDCs held significant potential for smaller countries with lower transaction volumes as it put them “in a good position to showcase how specific risks can be identified, mitigated and successfully managed”. He also emphasized their potential to decrease costs associated with cross-border transactions.

Digital ruble

Another AFI member making e-currency waves was Bank of Russia, which is slated to pilot a digital ruble in January 2022 with 12 banks, including with some of the country’s largest, Sberbank, VTB, Gazprombank and Alfa Bank. A prototype of the platform is expected to be ready by December 2021, with testing on the issuance of digital rubles taking place by mid-2022, beginning with businesses before expanding into government services.

The central bank’s director of projects and processes, Valeriy Kazarin, outlined the main features of the upcoming CBDC, including that it will use distributed ledger technology and that the central bank will act as sole issuer with commercial banks providing consumer services. As with the sand dollar, the digital ruble will have offline functions that allow for continued use in remote areas or those no internet coverage.

Not content with just reducing transaction costs, Kazarin said that the digital ruble will also allow for faster and more transparent spending, however, added that more work needed to be done to ensure that the developments keep up with the latest threats in cybersecurity.

A balancing act

Risks to online privacy and safety were also high on the agenda for Banco de España’s deputy governor, Margarita Delgado, who urged stakeholders to design CBDCs with secure infrastructure that builds confidence among users. Striking the right balance between privacy any anti-money laundering efforts was crucial, she said, before adding that concerns have been raised on CBDC distribution through intermediaries and the implications on identification processes and necessary infrastructure.

Despite potential setbacks, she said that implementation could yield many positives from encouraging innovation and competition to reducing transactions costs, widening financial inclusion and advancing more sustainable practices.

“CBDC’s main goal is to provide secure payments that are easy and cheap to use. We acknowledge that the use of cash has impact on environment and climate change,” she said, adding that Europe was working on developing its own digital currency – a digital Euro – with a two-year pilot.

Bringing discussions back to developing and emerging market economies was Prof. Douglas Arner, Faculty of Law at Hong Kong University, who raised questions over data protection. While CBDCs have the potential to collect large amounts of information, he noted that we must ensure that the data is used to improve financial inclusion rather than be capitalized on by private companies.

“CBDCs in the developing country context is not only about financial inclusion but also about digital inclusion,” he said. “How to do we bring the people into digital economy and how can we get to that last mile?”

Offering a potential solution was Anca Bogdana Rusu, head of strategy at Celo, who said that design was key, explaining that while there had been a lot of research on how digital currencies could be issued and managed on blockchain systems, “the only way forward for private sector, central banks the CBDC value chain is to test.”

Also pushing for greater collaboration between states and corporations was Jason Chipala, COO of Stellar, an open network for storing and moving money, who said that CBDCs offered regulators the chance to build a deeper understanding of innovative technology.

“Technology that is chosen has implications on the policy side, this cannot be done in technology agnostic way,” he said.

Country context matters

Guiding participants through an overview of the global CBDC market was Benedicte Nolens, Head of the BIS Innovation Hub Hong Kong Centre, who outlined various retail and wholesale models and their benefits. Citing the limited number of jurisdictions currently rolling out CBDCs, she said that “much of what is going on globally is in experimentation and concept phase”.

Reiterating the importance of tailoring CBDCs to meet local needs was Catherine Gu, Visa’s global CBDC lead, who said that while payments were becoming digitally integrated, building a deep understanding of CBDCs and the driving forces behind them was paramount as there is no “one-size-fits-all solution.”

“Technology for CBDC design will look different in each country,” she said.

Despite these variations, Mastercard’s Carolina Caballero, Consumer Solutions – Digital Infrastructure and FinTech, emphasized that CBDCs would still need to be compatible with each another to facilitate the global economy.

“We are going to have to find a way to make CBDCs interconnectable, not to silo them in one ecosystem, but to enable them to interact with systems that are working well,” she said.

Prof. Olayinka David-West, Associate Dean and Professor of Information Systems, Lagos Business School, Pan-Atlantic University, who moderated the day’s panel summarized the session by saying that while the power of CBDCs was at its infancy and many challenges lay ahead, if done correctly, the potential opportunities were immense.

Bringing home a key thread, she said: “the context matters in each country.”

More than 200 participants, including governors and deputy governors from AFI members in Bangladesh, Cambodia, Ecuador, Iraq, Jordan, Lesotho, Maldives, Morocco, Nigeria, Pakistan, Palestine, Philippines, Rwanda, Seychelles, Tanzania and West African States, as well as partners and private sector representatives took part in the three-day Policy Leadership Dialogue. They deliberated policies for COVID-19 economic recovery that will strengthen and protect the financial inclusion gains made over the past decade.

AFI leaders spent the first day of the high-level event discussing how sustainability of data, green finance and small businesses pose significant opportunities and challenges to regulators seeking to maintain financial inclusion gains in a post-COVID-19 recovery. Participants closed the event by reflecting how to integrate contemporary financial regulation into financial inclusion, inclusive and sustainable economic recovery, and exploring the role of central banks and regulators in addressing socioeconomic challenges and inequalities that have been exacerbated by the pandemic.