The most enduring headline from the Beijing Winter Olympics may have nothing to do with medal counts or inspiring pursuits of athletic excellence. Instead, it could be a milestone from the latest real-world pilot of China’s digital currency, which was used to make more than 2 million yuan ($315,761 USD) in payments per day at the Games.
This is because Central Bank Digital Currencies (CBDCs) have the potential to help digitize entire economies and are a powerful next step on the journey towards the Internet of Value — what Ripple’s VP of Central Bank Engagement James Wallis says is: “Ripple’s vision to move money like information.”
Wallis recently hosted a roundtable-style webinar with expert panelists and guest speakers to explore the current state of CBDCs, particularly within the Americas. Beyond just implications for central banks, the conversation touched on what CBDCs could mean for consumers and commercial banks, the biggest opportunities in front of the technology and current roadblocks to its meaningful adoption.
John Kiff, former Senior Financial Sector Expert at the International Monetary Fund, said China’s pilot is one of six underway in the world — four of which are in the Americas. In total, more than 100 countries are currently exploring CBDCs.
The speakers agreed that the common goals of CBDCs are to advance financial inclusion, improve payments efficiency and protect monetary sovereignty.
Programmable Payments Settlement in Brazil
Fabio Araujo, an economist with the Central Bank of Brazil, said his country intends its CBDC to serve as the cornerstone for a new smart payments system.
Brazil already has a modern, effective payments system known as Pix, so has little need to improve payments efficiency in the near term. But as economies and societies become increasingly digitized, Araujo said that Brazil will need an additional programmable technology layer to settle payments and help fill the gap.
Rather than allow this layer to evolve organically or wait and see how things progress — which could potentially fragment unequally across society — Araujo is confident in Brazil’s commitment to proactively leading the creation of an equitable, public digital currency-backed system accessible by everyone.
Slow and Steady in the U.S.
In the United States, Stanford Graduate School of Business Professor of Finance Darrell Duffie said the Federal Reserve Board has so far only committed to the broadest possible parameters for a CBDC: a highly interoperable currency that can identify users, protect privacy and that will be intermediated by a payment service operator.
According to Prof. Duffie, it’s possible that a singular digital dollar might never even come to fruition. Instead, the government could upgrade the current payment rails in the U.S., diminishing the need for a new digital dollar, or allow stablecoins to become integrated into the current infrastructure to improve cross-border capabilities.
Ultimately, this will depend on regulators and how the technology proves out, making it difficult to predict. While he acknowledged that the U.S. is intentionally moving slower and more methodically than some other countries, if an effective digital dollar does emerge, he said, the Federal Reserve has pegged cross-border payments as one of its biggest use cases.
Overcoming Hurdles to Interoperability
This ability to deploy CBDCs for more efficient cross-border payments will help knit countries and regions together. However, for CBDCs to be used in cross-border payments and connect economies in ways that foster financial inclusion, extend payment systems and protect domestic currencies, they must first be interoperable.
This is a challenge, to say the least, and will require nations and regions to agree to technology, operational, government and legal standards. Kiff says that’s why the six CBDCs that have launched into pilot so far are focused only on domestic use cases and have “bookmarked” cross-border as a future opportunity.
With most countries possessing different anti-money laundering (AML) standards, Araujo said it’s challenging to match every nation’s needs through a single system.
“The vision is for a utopian [system] with global, seamless transactions. It’s possible, but there’s a lot to overcome first, with AML one of the most difficult,” said Araujo.
Agreement on international standards for interoperability is critical to balance privacy expectations with fraud prevention. Prof. Duffie sees these two forces — ensuring privacy while preventing money laundering and countering terrorism — as particularly challenging in the U.S. He hopes the country steps up to help lead on the development of these standards.
“There is not a lot of experimentation in America with CBDC-based cross-border payments [right now], but I’m sure we’ll be at the negotiating table for standards on [those transactions] in the future,” said Prof. Duffie.
A Promising, Inclusive Future with CBDCs
Successfully navigating these standards and delivering on the promise of interoperability will require sustained and deeply coordinated technology, regulatory and political efforts across countries.
Looking ahead 10 years, both Kiff and Araujo believe this will have progressed to the point that CBDCs will be used for wholesale settlement. Araujo anticipates they will also drive some regional cooperation and payment activity, while Kiff is less confident in retail use cases for CBDCs.
Ripple’s Head of Public Policy Susan Friedman expects that some form of digital currency — stablecoins, a CBDC or both — will gain prominence in the U.S. over the next decade. Given that the technical and financial capabilities of each are largely the same, she said it’s ultimately a policy question whether private enterprise or public bodies should issue them.
Whatever the future holds for CBDCs — be it layering on smart contracts or an uptick in retail use cases — Ripple’s Director of Business Development for CBDCs Joe Vollono reminded participants that it will arrive faster than we expect: “Ten years — even ten days — is a lifetime in this space.”
Download Ripple’s CBDC whitepaper to learn more about enabling the adoption of this technology.