CBDC and Instant Payments: A Combination with Pitfalls

While CBDC and IP have many similarities, differences in messaging standards and the underlying technology can lead to siloed and compartmentalized technology development. The CBN therefore notes the need to ensure the smooth technical interoperability of both systems within the existing payments landscape. This appears to be an ongoing challenge – at least according to a new study by the Bank for International Settlements (BIS).

The BIS findings are based on interviews with 13 other central banks: Bahamas, Brazil (BCB), Canada (BoC), Denmark, EU, Ghana, India, Jamaica, Morocco (BAM), New Zealand (RBNZ), Switzerland (SNB), South Korea (BoK), and the West African Economic and Monetary Union (BCEAO). Seven of these central banks – not including, for example, the SNB – expect the two systems to compete rather than coexist, as they serve different purposes or can offer different benefits.

The combination of retail CBDC and IP poses significant challenges and risks. Overall, central bank respondents from Switzerland and New Zealand indicated that they are more cautious about issuing retail CBDCs due to their novelty, as they have promising features but also uncertainties. Some respondents also noted that from an end-user perspective, it is difficult to see the tangible benefits of CBDCs compared to IP payments. The Central Bank of Morocco acknowledged that there is a risk that such CBDC payments could cannibalize other initiatives in which the banking sector has invested, and saw this as a reason for caution.

Other central banks, such as South Korea’s, emphasize the need for completely independent infrastructures to ensure that if one system fails, the other can serve as a backup. In addition, different teams sometimes investigate or develop projects that affect both systems. According to the Reserve Bank of New Zealand, this can further increase the risk of coordination failures. This challenge is compounded when the two systems are introduced at different times. This can result in outdated design features and implementation choices that hinder interoperability.

Interoperability between the two systems is still under-researched and could lead to both efficiency gains and cost savings. Interoperability for cross-border payments is a lower priority for several of the central banks surveyed. The Bank of Canada, for example, indicated that work on a national CBDC should at least not create barriers to cross-border payments. The Reserve Bank of India, on the other hand, stresses the importance of cross-border interoperability not only with other CBDC systems but also with traditional payment systems, especially since not all jurisdictions may decide to issue retail CBDCs.

However, retail CBDCs pose new risks compared to IP systems, such as the disappearance of traditional commercial banks, which could lead to a change in demand for bank deposits and banking services. Technological and operational challenges, such as cybersecurity and business continuity, as well as the nexus between data privacy and anti-money laundering and terrorist financing regulations, are also barriers, according to the BIS study. In addition, the development and operation of both systems may lead to resource and capacity constraints. Central banks must therefore carefully consider how to integrate these systems to ensure both innovation and financial stability.

After careful analysis, the Banco Central do Brasil is considering introducing a CBDC project for commercial banks or other financial intermediaries (wholesale) instead of a retail CBDC project in the near future, as it claims that its IP system has already successfully contributed to improving financial inclusion. This aspect seems to be less relevant not only in countries like Switzerland, where financial inclusion is already very high, but also where instant payments work well. Apparently, the SNB is finding imitators, as it decided last year to extend the previously successful pilot operation for the integrated processing of transactions with tokenized bond transactions on SDX to wholesale CBDC in Swiss francs.

Gabriel Juri
SIX