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What Fintechs Should Know About Central Bank Digital Currencies

Are you a bank or a non-bank fintech? With 11 countries already having launched their own Central Bank Digital Currencies (CBDCs) and more than 100 countries in the process of developing one, payment players are taking notice.

OpenWay sheds light on what opportunities may arise in this complex and rapidly-developing space through its “What Fintechs Should Know About Central Bank Digital Currencies” report.

What are Central Bank Digital Currencies?

Central Bank Digital Currencies (CBDCs) are also known as digital cash. It is the digital version of a country’s currency. The public can access central bank money as digital coins or tokens, or a digital account accessed through a personal device.

The central bank has a sole monopoly on the issuance of digital money and does not have a profit motive. So using CBDCs can reduce transaction costs and promote financial inclusion, as well as achieve other goals in line with the central bank’s oversight role.

Most importantly, CBDCs are recognised by law and backed by the central bank, which cannot go bankrupt, unlike commercial banks which can fail and wipe out people’s savings.

Why central banks are in a rush to roll out CBDCs

1. The rise of cryptocurrencies, crypto assets, and stablecoins. Central banks are concerned about the increasing activity in this volatile, unregulated market and the financial instability it brings. Issuing CBDCs is a way of reinforcing the central bank’s role of establishing and conducting monetary policy in a rapidly changing, interconnected financial ecosystem.

2. The massive push for digital payments brought on by the pandemic. With less cash being used, private sector solutions providing digital payments are becoming more popular. This can diminish the role of the central bank, and in the case of cryptocurrencies, circumvent regulations.

3. Geopolitical motivations. The US dollar is used in almost every central bank and financial institution in the world, and this role is a concern for some governments. CBDCs could be used for almost instant settlement across borders without any intermediate currencies being involved.

Fast Facts: CBDCs around the world

CBDCs, crypto assets and blockchain

There is speculation that crypto will play a role in government-backed financial initiatives. However, cryptocurrencies are too volatile for governments to plan tax revenues, expenditures and economic activity around them. Unsurprisingly, the vast majority of countries have rejected crypto assets as legal tender.

International financial agencies and central banks around the world are interested in aspects of blockchain technology like permissioned ledgers that can be merged into existing regulatory framework.

Potential applications are back office functions, cross-border payments, and trading. CBDCs could use permissioned ledger technology to preserve consistent identities and make financial systems more secure.

What roles could fintechs and commercial banks play in the development of CBDCs?

1. Become an enabler of cross-border transactions. Blockchain technology and the fintechs who provide them may be called to participate in developing cross-border payments using CBDC. CBDCs of various countries could be exchanged in real-time on digital platforms. This could potentially be done very cheaply within a simpler banking relationship and benefit developing countries especially.

2. Enable payments interoperability and inclusivity. Fintechs could provide valuable consulting services, technological innovation and integration assistance to ensure that the domestic and global payment systems remain unified and inclusive. The ability to interface with existing payment systems is important to ensure that CBDC can be used for everyday payments, both domestically and abroad.

3. Provide expertise in designing a CBDC that will be adopted and integrated into the current payments landscape. Many technologies such as distributed computing, distributed ledger, machine learning, and predictive analytics are areas where fintechs can provide their expertise. Business cases and best practices from consumer-facing financial institutions can be used by central banks to create CBDC solutions that will be widely adopted as soon as they are launched.

4. Provide innovation labs and technologies for experimentation with CBDC development. Central banks are teaming up with fintechs to experiment with existing digital infrastructure and services such as blockchain-as-a-service to pilot and launch prototype CBDCs.

How banks, fintechs and non-bank fintechs can prepare for disruption

OpenWay, as a participant of the most recent G20 summit and a vendor serving tier-1 payment players across the globe, is watching development of CBDCs with keen interest. Its Way4 digital payment software platform has anticipated many key payment features requested by central banks, commercial banks and non-bank fintechs in their prototype and testing of digital payment instruments.

The adoption of a CBDC will most likely bring new digital business models and additional opportunities to commercial banks and financial service providers for revenue and growth, similar to the way that roles and tasks are distributed today within the financial ecosystem.

As central bank experts reach towards partnerships to build innovation, companies will benefit from knowledge sharing and new models of collaboration.

Find out more by downloading OpenWay’s “What Fintechs Should Know About Central Bank Digital Currencies” report here.