Money20/20: Considering CBDCs as an enabler not an instrument

Editorial credit: Kieran O'Connor

“So my question is, architecting tomorrow’s money is quite interesting, but to architect it, there have to be some requirements of what it’s supposed to do and it’s really not clear to me what CBDCs are supposed to do.”

Kicking off Money20/20 in Amsterdam, Rita Martins, Author of ‘Web3 in Financial Services’, oversees a discussion titled ‘Architecting Tomorrow’s Money, an Insider’s View’, which promises to reveal how cutting-edge solutions are paving the way for Central Bank Digital Currencies (CBDCs) to redefine the financial landscape.

The above quote comes from an audience member of said panel towards the end of the discussion. He continues: “I just wonder at the minute because I see lots of pilots and trials going on, which all seem a bit pointless to me.

“It shouldn’t be up to technologists to decide how, as far as money should work, it should be up to civil society. So, what’s happening to engage society?”

Guest speaker Richard Brown, Chief Technology Officer at R3, answers the question. Brown points to the consumer value proposition, a concept that he and fellow panellist Daniel Eidan, Advisor & Solution Architect at BIS, mention at the beginning of the show.

It is quite fitting for the man, who coined the phrase “CBDC” in a blog post in 2013 to answer this all-important question, which has the audience leaning in.

The Hurdles

Yet, first let’s go to the start of the panel. Brown tells the audience what is needed to develop CBDCs and mentions some of the hurdles that are slowing down the adoption of the technology.

Brown explains: “Something that I think we often miss is that cash is a product, it’s massively successful and it’s widely adopted.

“Just because it’s got the central bank’s logo on the front, there has to be this compelling issue of value. And until there is, people will not be forced to choose to adopt it, or even try it.”

This point perfectly pinpoints where CBDCs are up to in relation to the technology’s development.

Eidan adds that hurdles such as governance and regulation are why the financial sector is launching so many pilots and experiments.

He states: “Governance is a persistent issue. The larger the scale of the network of payments, the more complex governance becomes. Aligned with that are legal issues, once you cross jurisdictional boundaries, there’s legal things that just don’t align.”

Lately, CBDCs have become a big talking point in the payments landscape, and topics such as interoperability, cyber and identity have taken centre stage of these discussions. 

Although conversations around the topic have developed, the same regulatory challenges that have existed from launch still loom, giving an effect that the industry has reached a stagnant point.

However, in Brown’s view this is not the case. He alludes to CBDC adoption in retail being just around the corner. 

In fact, these regulatory issues will only be solved after Central Banks find ways to make the digital assets attractive, which is what is being looked at via the pilots and experiments that the audience member labelled “pointless”.

How to make the product attractive

Firstly, the bank’s must understand not only why cash is desirable as a product, but the three functions of currency in general.

“Money allows people to store value, exchange and use it as a unit of account”, Eidan tells the audience.

Once this is understood, banks can then begin to backwards engineer cash and decide what parts serve people and what aspects are not needed in the modern world.

For example, Brown believes that CBDCs have to have an offline story. He states: “You have to be able to spend it when the internet goes down.”

Eidan adds: “We think about CBDCs, not necessarily as an instrument on its own, but as an enabler when we think about programmability and composability.

“I mean, we all start with this notion of how we can model physical cash conditions, but the exciting thing is we take away some of the restrictions and we start to think about new models.”

This mission of desirability leads back to the earlier question from the audience. On this, Eidan makes the point that money serves different functions for different entities, sharing that optionality is a good thing.

He says: “It’s important to survey those entities and elicit those requirements. And I think you make a good point that there’s a little bit of proof of concept fatigue. And if you look at all these experiments in isolation, you may end up either overwhelmed or underwhelmed depending on your perspective, however, I think you have to look at the whole body of work.

“I also agree with you that it’s not about technologists to make the decisions, I think technologists can inform policymakers, and help policymakers understand the architecture of tradeoffs and different systems.”

The future of CBDCs

Leading the discussion full-circle back to the future features of CBDCs, Eidan says: “If you’re optimising for offline, you’re losing somewhere else, if you’re optimising for speed and efficiency, then you may miss out on some of the offline characteristics.”

CBDCs are still at an early stage in development and although they get mentioned a lot, their exact use and features are nowhere near cemented. However, these conversations and pilots need to be happening, to protect civil society. 

Brown concludes: “Whose problems we’re trying to solve? And there’s also this fundamental planning assumption. Do we believe exactly what the central banks say? Do we believe physical cash will go away, or  it will just decline irrelevance? Because if it will, we do need an answer for how we will fulfil some of its features in the digital realm.”