Article | February 2021
Growth in CBDC
In the past five years, think tanks, central banks (CBs), and private financial institutions around the world have expressed increased interest in digital currency technology. Motivated by the prospects of promoting greater inclusion, efficiency, access, and stability in domestic financial markets, governments have turned to a form of digital fiat money known as central bank digital currency (CBDC) to obtain these and other ambitions. While a number of nations have invested millions in research and development of their own CBDC initiatives, the degree of technology maturity varies widely among these jurisdictions. As illustrated in Exhibit 1 below, at least 47 regions/nations have made public their intentions to explore domestic CBDC; however, only a handful have advanced beyond the initial exploration stage.
Exhibit 1 – Jurisdictions Considering Issuing CBDC
Sources: 2020 IMF Working Papers , Cizmic Research
Notes: [i] Includes regions where initial pilots have been completed, preparations are being made for a full launch, or CBDC has been officially launched. [ii] Includes regions where CBDC is being researched, feasibility studies are underway, or small-scale pilots are being planned/executed.
Focusing on the Caribbean region, there are a total of seven nations/regions where some form of national digital financial instrument (e.g. CBDC, e-wallets, etc.) has progressed beyond a conversational/conceptual level and a total of two that are in advanced stages of CBDC deployments. The most developed implementation in the West is the Bahamian Sand Dollar CBDC which has been launched in select island of the Bahamas in late 2020. Work is underway to expand the CBDC into other parts of the nation.
Exhibit 2 – Caribbean Jurisdictions Considering CBDC
Sources: 2020 IMF Working Papers , Cizmic Research
As CBs embark upon this journey, they are faced with the critical objective of fostering a high uptake of their CBDCs so as to fulfill their national program goals. Without adequate uptake, the benefits realized from the CBDC deployment will be limited. Moreover, the substantial infrastructural, legislative, and administrative investments outlaid by governments to build, test, and support the technology would be called into question while future efforts by policymakers to propel similar digital financial innovation might thereafter be hampered. Therefore, it is in nations’ best interest to employ strategies, processes, and methods to safeguard their CBDC initiative’s success by encouraging a smooth and effective rollout with substantial user adoption.
Stakeholder Perceptions – Users
Barriers to achieving robust CBDC adoption can come in the form of resistance from various segments of the population including consumers, merchants, and financial intermediaries. The perception that each of these stakeholders have towards their government and toward the CBDC technology can be a source of mistrust and ambivalence that causes citizens to eschew or obstruct the technology. For example, consumer demographics with low technology literacy may be disinclined to using CBDC for fear that it will be too complicated, require a steep learning curve, function slower than conventional options, or be more expensive to use. If this group resides in a region with poor broadband access, the history of subpar (or nonexistent) online user experience will also reinforce beliefs that the CBDC will be unreliable, costly, and less efficient than cash or other existing alternatives. Without education, incentives, and infrastructure investments, this group will likely be slow to adopt.
Users may also be apprehensive about the security aspects of a CBDC deployment. Issues such as the privacy of user data and the insurance guarantees in the event of loss or theft are valid concerns that might make some users hesitant to jump onboard. While policymakers and pundits may generally view counterparty anonymity[a] as an acceptable or beneficial feature for CBDCs to have, complete third-party anonymity[b] is more contested as critics assert that this type of privacy restriction would run contrary to KYC strategies and could thereby facilitate illicit activities (e.g. money laundering, fraud, terrorism financing) . Still, the lack of full anonymity does give privacy advocates impetus to raise concerns over the possibility of undue government surveillance and political/religious profiling based on CBDC transaction activity.
Notes: [a] Counterparty anonymity – the payer’s identity is concealed from the recipient. [b] Third-party anonymity – payer’s identity is hidden from all parties including the recipient and the PSP 
Stakeholder Perceptions – Merchants
Pushback from merchants could stem from concerns about the associated costs of facilitating transactions in CBDC. In today’s current electronic card payment system, merchants are currently charged processing fees for each debit and credit card transaction. This consists of a flat rate component (to cover payment service providers’ [PSPs] fixed costs) and a percentage component (which covers PSPs’ financial risks) (typically ranging between 1% and 3.5%) . As with cards, merchants might expect to bear some of the financial burden of a new CBDC system; however, the exact proportion in many cases remains unclear. This comes in addition to concerns about one-time costs involved with possibly having to upgrade their in-store or online payment platforms with CBDC-compatible hardware and/or software along with training team members adequately for safe and effective CBDC payment introduction. With these business impact costs unknown, companies operating under thin margins are inclined to take a cautious or even resistant approach to CBDC adoption in favor of continuing with the functioning status quo.
Stakeholder Perceptions – PSPs
In addition to users and merchants, PSPs may also present obstacles to mass CBDC adoption. This group consists of financial intermediaries such as commercial banks, fintech companies, and telecommunications companies whose infrastructure could play a key role in the distribution, access, and facilitation of a CBDC. Unlike other stakeholders, some of these organizations might view CBDC implementation as a threat to their viability. Considering these private sector entities already offer their own payment products, a CBDC that allows users to store and transact currency using a separate platform from the ones offered by the PSP could be seen as direct competition. Furthermore, for deposit-taking institutions, a CBDC brings with it the risk of disintermediation whereby bank account holders choose to store a smaller proportion of cash in banks’ checking or savings accounts and instead opt to store CBDC in their free digital wallet or other offline CBDC devices. Unlike physical cash, the effort and risks associated with personally storing large sums of money in the form of CBDC is reduced since that money is all maintained in a low friction, digitally secure environment (as opposed to in one’s home). Banks worry that CBDC could thus erode the relevance of their core products and deprive them of an existing source of easy revenue. This concern becomes even more acute when factoring economic crises such as pandemics, wars, or recessions in which individuals generally flock towards low-risk assets such as precious metals, cash, and bonds. In such scenarios, demand for CBDC (i.e. digital cash) would surge causing bank runs . However, unlike in typical bank runs where customers are forced to form long queues at ATMs, in a CBDC society, access to cash becomes much easier; therefore, the speed and intensity of the financial insolvency is accelerated.
Strategies to Spur Adoption
Interactive Design Process
The path toward achieving strong CBDC adoption starts as early as in the design phase of the solution. Policymakers should involve key stakeholders at the beginning of the development to garner a comprehensive understanding of the project’s societal needs. Initial discussions with financial intermediaries can help inform governments about existing private sector IT infrastructure, digital payments expertise, and processing capabilities . Meanwhile, interaction with merchants and users can provide helpful insight on the nature and scale of the current digital payments landscape. This might include information on the usage of existing mobile payments (e.g. Venmo, PayPal, CashApp, AliPay, etc…) and the usage of private digital currencies (Bitcoin, Ethereum, Libra etc., airline or telco royalty points, etc…) . Armed with such knowledge, CBs can get a better feel for the appropriate CBDC operating model to implement to achieve program goals most effectively. They will also be better equipped to anticipate and mitigate possible threats such as the threat of users preferring to use private digital currencies over a deployed CBDC.
An agile development process will also aid CBs during the testing phase when critical system performance data can be collected. Anonymized and aggregate data regarding users’ bank deposit holdings, conversions to CBDC, daily balances, CBDC transaction volumes, CBDC transaction values, user characteristics (demographics, banked vs. unbanked), and results from customized surveys will all be invaluable metrics for gauging the reception of the solution under initial trials  and understanding the niches that can be met through CBDC. For example, data from the 6-month pilot of the Uruguayan e-Peso in 2017 and 2018 indicated a predominant use case being person to person transactions between users. Furthermore, data suggested demand among users that were concerned with the cost of existing digital money options  . While Uruguay has not yet outlined a full rollout plan, the insights garnered from the study highlight key market segments that the CB of Uruguay can target in its implementation to heighten the adoption rate.
In addition, pilot tests may alert project teams to system gaps or inadequacies that if left unaddressed, would inhibit mass adoption . Similarly, tests may indicate that the adoption targets are not likely to be achieved given an observed lack of demand. With an agile approach, insights from experiments can be rapidly leveraged to iteratively arrive at a robust final CBDC system design that is optimized for maximum adoption.
Postal Service Partnerships
If financial inclusion is a primary objective of the CBDC, the CB can look to partner with domestic postal services to form an agent network with penetration into remote regions to support adoption. In many countries, postal services already operate as public entities that boast a large geographical footprint. As a result, they present a strategic opportunity for CBs to cost-effectively reach the unbanked using existing infrastructure. Working directly with the CBs, the postal service could facilitate public awareness campaigns where the CB is able to educate the local population on the benefits and function of the CBDC. This could be assisted by a trained team of local post office staff. Information could be disseminated by a multitude of means including :
- Brochures available at post office centers
- Road shows and information sessions
- Local consumer help centers or hotlines
- Electronic media: TV, web, radio
One added benefit to this grassroots approach is that information can be tailored to specific sub-groups in local areas allowing for customized, relevant messaging. Furthermore, by working with financial intermediaries, the post office centers could be used as agent banking extensions for major PSPs supporting the CBDC system. Users in isolated areas with poor access to broadband and digital technology could stop by their local post office to conduct CBDC activities such as cash conversions, transfers, purchases, setup, and more. For example, in Malaysia, the domestic postal service Pos Malaysia collaborated with Maybank and RHB Bank to grant banking service to rural areas since 2010. RHB bank deployed “Easy-by-RHB” kiosks at post office outlets where customers can conduct everyday banking operations. The commercial banks provide ongoing training to local Pos Malaysia personnel who facilitate the provision of banking services at their outlets. According to the governor of the Central Bank of Malaysia (Bank Negara Malaysia), Datuk Seri Muhammad Ibrahim, this type of agent banking has been a boon to both banks and consumers in Malaysia; saving banks 80% of the cost formerly required to build local branches and cutting rural consumers’ travel time to nearest banks from what used to be up to 14km (or a 3 hour journey) .
Giveaways and Lotteries
User incentives such as giveaways and lotteries can also be helpful tools in catalyzing early adoption of a CBDC. Lessons can be learned from China’s centuries-old red envelope tradition which over the past seven years has been an auspicious avenue for popularizing the use of digital wallets in China. It is common in China to send packets of money in red envelopes to relatives and friends during weddings and the Chinese Lunar New Year. In 2014, Tencent first allowed users of its popular social media app WeChat to send digital red envelopes to friends by connecting their profiles to their bank accounts. Users were also allowed to participate in a gamified lottery in which they were able to give and receive funds pooled from among friends through a first-come first-serve competition. The feature was a wide success facilitating 16 million digital red envelopes that year . Over the following years, Alibaba and others launched their own similar efforts to attract users to their platforms through digital payments. This included games such as Alibaba’s “Lucky Card Collection” whereby users could share red envelopes and earn cash prizes. Companies also partnered with New Year’s TV show sponsors to offer prizes to users who participated in games on their platforms during the live broadcasts.
Fast forward to 2020 and the People’s Bank of China (PBOC, Chinese central bank) has now deployed a similar strategy to gain traction as it conducts pilot testing for its CBDC. In October 2020, the PBOC collaborated with the government in Shenzhen to distribute 10 million yuan (about US$1.5 million) in CBDC red packets to residents through a lottery giveaway. Residents registered online and were awarded 200 yuan (about US$30) through a random draw. Recipients signed up for the CBDC digital wallet app to claim their prize and were allowed to spend their funds in more than 3,000 CBDC-compatible local shops over the course of the week-long trial. The results showed that 1.9 million residents applied and 8.8 million yuan (out of 10 million) was spent in 62,000+ transactions indicating a high uptake of the system and success as a means of payment for goods and services . Similar lottery style tests have taken place in other Chinese cities in which PBOC evaluated the system’s offline capabilities and use for online purchases.
CBDC Use Within Government
Considering the common ownership and mutual interests of a nation’s public sector organizations, countries could choose to target their own government entities first as a means of spurring CBDC usage and building a critical mass of users. To begin with, government employees could start receiving some fraction of their salaries and benefits in CBDC (e.g. flexible health spending funds, retirement accounts funds, and education reimbursements). This policy could be phased in over a period of time or remain voluntary, allowing staff to opt in risk free and opt out if so desired. In order for such CBDC funds to be useful to these employees, they will need to have a wide selection of organizations with whom they can transact in CBDC. To build this selection, governments can start by transitioning public services over into accepting CBDC as payment for expenses such as lights, water, trash pickup, vehicle registrations, fees, and taxes. Given the possible cost-savings that this digitization of public services payments may produce, governments could choose to then pass the savings back onto the users through some form of financial or time savings incentives. For example, in Thailand, the Revenue Department partnered with digital payment service PromptPay to allow citizens to receive tax refunds faster than the standard three days if they register for PromptPay. This is possible because the PromptPay system grants the Revenue Department a tangible savings by allowing them to issue refunds directly into individuals’ accounts rather than having to mail checks. As a result, Thailand is able to encourage adoption of digital payments .
With public utilities accepting CBDC, non-government employees will then be attracted to the technology as more citizens move to capitalize on the added perquisites. Overtime, the presence of a large and growing CBDC user base, will then stimulate non-government merchants into the space as businesses look to cater to the change in consumer payment preferences. Effectively, what started out as a means for government employees to pay for government services ends up setting in motion the entrance of non-government users and merchants thereby triggering general CBDC adoption.
Lower the Comparative Cost of CBDC
CBs can steer citizens towards CBDC adoption by reducing the costs of CBDC transactions relative to alternative payment options. CBs could achieve this by passing on subsidies to users of CBDC or passing on fees/obstacles to users of traditional paper-based payment methods (cash and checks). A 2013 report by Tuft University showed that the cost of cash to households, businesses, and government in the US was estimated at US$200 billion combined . This included costs associated with creation, transportation, handling, storage, thefts, and foregone tax revenues. Meanwhile, a study published by Moody’s Analytics in 2016 showed that from 2011 through 2015, the growth of electronic payments (specifically card payments) contributed a cumulative US$296 billion in global real GDP over the five-year period for the 70 economies included in the study . These results indicate that there are significant financial implications for perpetuating high paper-based payments usage in an economy. Simultaneously, there are also appreciable growth advantages for markets that promote digital payments growth.
Considering the economic impact data, judicious policymakers will find strong justification in taking obstructive measures to curtail cash and check usage. These measures could include steps such as raising fees charged for processing checks, permitting cash refusal at retail stores, and reducing the number of ATMs available. These policies can be coupled with enabling measures such as providing tax credits for consumer spending performed with CBDC, offering free real-time CBDC P2P transfers, and granting subsidies for merchants that offer loyalty rewards points to customers paying with CBDC. Together these actions can effectively render CBDC a cheaper means of payment than cash or check, thereby encouraging CBDC adoption.
The multitude of CBDC endeavors around the globe is a testament to the technology’s promise. To realize this promise, leaders will need to design CBDCs with all stakeholders in mind and deploy the technology in a strategic way so as to maximize adoption and societal benefit. As time goes by and competing digital payments evolve and improve to meet changing demands, CBs must remain proactive in maintaining and upgrading associated CBDC technologies and legislation to sustain CBDC’s relevance and utility.
About the Author: Cizmic is a multinational technology consulting firm and advisor to CBs, telecommunications firms, and financial institutions around the world. We remain on the frontier of the digital currency revolution and are actively involved in shaping the CBDC landscape in the Caribbean.
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