The future of payments: Digital currencies for a digital future

While neither the ECB nor the Bank of England have outlined a final decision on pursuing a CBDC, the central banks are actively researching the digital currency proposition and public discourse tends to suggest that CBDC is inevitable in one form or another. In the US, regulators have historically been loudly critical of digital currencies, however the tone of dialogue seems to have shifted toward a clearer distinction between the threat of unregulated cryptocurrencies, and the potential that a regulated digital Dollar could offer.

In its June 2021 update, the BoE stated that the feedback it received is encouraging for the Bank to continue examining the case for a CBDC, however, the Bank also received clear feedback that the use case for a CBDC, which might justify its introduction, needs further research, refinement and articulation to inform a comprehensive assessment of the pros and cons of what would be a major decision. “Additionally, some respondents expressed doubt that a CBDC was needed at all, given they considered that the intended benefits could be achieved through other forms of payments innovation.”

CBDC and open finance – the ultimate partnership?

Citi’s McLaughlin says the underlying question around CBDC remains based on what it really takes to bring the banking and financial system into the 21st century. “That means that you must prepare a digital platform for the financial system which is always on and always instant. The mega trend here is about the financial system being brought up to modern technological standards - open finance is part of this via APIs, and CBDC is relevant in terms of tokenisation and the potential use of blockchain technology.”

He furthers that by stripping away the perhaps hyped crypto aspects, it is important to address whether people and businesses should have the ability to hold bank accounts at the central bank – is that the purpose of the central bank? Do we do we really want to nationalise the financial system?

Arguably, he adds, it isn’t really the role of the central bank to be competing with private companies: “I think CBDC will have to be very, very finely calibrated, and the first concept we will see is something that will be dubbed the CBDC ‘Goldilocks zone’, which refers to CBDCs having to be big enough that they matter from a policy perspective, but not so big that they nationalise the financial system.”

McLaughlin believes that if CBDCs one day form part of the future “digital payments stack”, it is vital to consider how it would fit together with open banking, with digital identity, with instant payments, with SWIFT next generation?

Trying to optimise this web of ongoing digital initiatives is raised by Ainsworth, who laments the fragmentation UK financial services are currently experiencing.

“There's no strategic alignment across the payments landscape. My ideal scenario would be a place where future payments in the UK are based around open banking payments, which if done well, could reduce the requirement of building brand new infrastructure, because we could leverage what already exists for a more considered way of implementing open banking throughout the UK.”

From a high-level perspective, Pitts encourages the view that CBDCs really make clear that for digital financial services, money, and information have become inseparable from each other. In fact, he argues, money is actually just information: “for the last 100 years, we've enjoyed a world where information moves faster or at the same speed as money. Historically, when transferring money, the wire information would arrive sooner than the actual money itself. While removing this lag is the target of significant investment around instant rails, it has been advantageous in fraud prevention.”

Therefore, when combining CBDCs with real time rails, the possibility of a world where money moves faster than this information could potentially increase risk, unless the infrastructure to move this information tied to the CBDCs is as robust and as fast as the fund transfers across multiple complex networks.