Right now, there’s a lot of attention surrounding the Central Bank Digital Currencies (CBDCs). It’s not a huge surprise. According to Mastercard’s recent New Payments Index study 93% of people surveyed have heard of cryptocurrencies. Digital assets like Bitcoin and even NFTs are becoming just another part of the financial landscape. So, it’s no wonder that governments are looking into how they can play a role. Indeed, 86% of central banks report that they are actually weighing the merits of a CBDC.
But it’s important that governments keep in mind that CBDCs are not always going to be the right solution. Fear of missing out isn’t the best reason for a central bank to invest in a massive undertaking like creating a digital currency. Instead, central banks need to ask themselves: What problem are we trying to solve with a CBDC?
So, for example, if the problem is that people don’t have enough access to their country’s central bank, then CBDCs may be an answer. But if the problem is one of, say, getting aid to people faster in the case of a disaster, something like a real-time payments system might make more sense as a solution.
As governments continue to evaluate whether they should create CBDCs, it’s important that all initiatives adhere to four principles that will help serve the needs of consumers, preserve the health of the financial system and ensure that consumers continue to have access to a robust and innovative array of payment options. Mastercard outlined these principals in a recent white paper on CBDCs.
Right tool for the job: Policy makers should compare the suitability of a CBDC with other forms of new payment infrastructures to find the approach that best fits their unique payment needs and lays the groundwork for future priorities.
Interoperable and open acceptance: CBDCs will be most impactful where they interoperate seamlessly across payment types and take advantage of existing networks to facilitate broad and frictionless merchant acceptance. Interoperability can strengthen the domestic payment ecosystem and reinforce the role of central bank money.
Two-tier with private sector participation: CBDC architectures that include private sector participation offer the best opportunity for innovation, interoperability and sustainability. Private sector competition ensures that the central bank retains institutional governance of the core monetary infrastructure while relying on banks and fintechs to compete in the distribution of the CBDC and the development of innovative user experiences.
Consumer protection: Consumers should be confident that a CBDC provides the protections needed for in-person and online transactions, and they should also understand how those protections may differ from those offered by other payment methods. This will require a framework of standards and rules that safeguard the security of every transaction while ensuring that all parties are treated fairly and equitably.
There are places where we are already seeing these principles put into practice where a CBDC was the right solution for the problem. In 2020, the Bahamas introduced a CBDC called the Sand Dollar. After the devastation of Hurricane Dorian, which killed dozens and caused $3 billion in damages, and the economic impact of the pandemic, the government decided it needed a bold new way to help citizens. Bahamas residents tend to be very reliant on cash. But when banks and ATMs are impacted by disasters, it becomes incredibly difficult for people to access their cash and receive government help.
Because restoring phone service is often easier than restoring electricity, a CBDC offers a way for residents to easily access money from their phones. Mastercard partnered with Island Pay, which works with the Central Bank of the Bahamas, to offer a prepaid card that gives users the option to pay using Sand Dollars or to convert those Sand Dollars to traditional Bahamas dollars to pay for goods and services wherever Mastercard is accepted. That flexibility means that if a merchant doesn’t accept Sand Dollars yet, the user can still make their purchase with the prepaid card.
As central banks continue to explore CBDCs, it’s important they keep these kinds of private-public partnerships top of mind. Companies like Mastercard, which has had global acceptance for billions of cards and more than 90 million acceptance locations around the world, can help central banks evaluate their future payments plans and, if a CBDC is truly the right solution, help them build out the infrastructure needed for a new digital currency that lets people pay for goods and services how they want, where they want.
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