A new paper from the International Monetary Fund (IMF) explores the challenge of central bank digital currency (CBDC) adoption. It urges central banks to avoid a ‘build and they will come’ attitude, noting considerable adoption challenges by those that have already launched. Two takeaways from the paper are that some of the suggested merchant incentives might compete with consumer benefits. And the small scale central bank survey included has some interesting findings.
The core of the paper is the proposed REDI Framework for adoption. That includes Regulatory strategies, Education, Design choices and Incentive mechanisms.
Notable central bank CBDC survey takeaways
Amongst the 18 survey respondents, three benefits from the central banker’s perspective stood out. They are the CBDC will provide a digital version of central bank money, increased financial inclusion and reduced costs of cash management.
None of the 18 central banks are considering distributing via banks alone. Almost two thirds plan to distribute via banks and non-bank payment service providers (PSPs), with 12% contemplating non-bank providers alone.
The survey found that half of the central banks questioned said they will probably allow payment providers to use consumer payment data with consent. The other half are undecided. Greater privacy is one of the consumer benefits touted by some of the advanced economies, whereas the IMF respondents are more likely to be emerging economies.
Merchant and acquirer incentives
Another often discussed CBDC advantage is that it encourages competition amongst payment providers. However, during the adoption phase, the costs for intermediaries could outweigh the benefits. Hence, the paper proposes offering some intermediaries exclusive rights within a region or for a particular user group.
Other merchant incentives explored include:
- subsidies for consumer-facing intermediaries during launch
- minimizing costs for the merchant facing intermediaries (acquirers)
- allowing intermediaries to charge for value added services
- provide a white label wallet solution that the intermediaries can rebrand
- encourage the participation of developers.
The paper steps through some of the hurdles encountered in the jurisdictions that have launched. While it talks about specifics, as an outsider, we’d observe this is a new technology product and hence a CBDC launch is about product market fit. With new technologies, the first iteration is a minimum viable product.
However, many of the emerging economies conducted full launches with MVPs that had major gaps. The weaknesses were different in each jurisdiction. The challenge of doing a full launch in that manner is consumers who gave it a whirl and were dissatisfied might be unwilling to give it a second chance once the central bank fixes the deficiencies.
