Neelanjit Das

AUG  01 2022

CBDCs may be more integrated with the life of an average consumer in the future. However, infrastructure adoption and risk and cost management are a challenge.

According to a report titled “The Future of Payments 2022”, published by the UK-based Finextra Research, digital assets like the Central Bank Digital Currency (CBDCs) and stablecoin could co-exist with the legal tender in the future, but their “trajectory and impact” cannot be known immediately.

Ville Sointu, former head of emerging technologies at Danish bank Nordea, said, “It’s the publicly stated goal of central banks to make sure potential future digital currencies they issue are seamlessly compatible with the existing commercial money system.” 

TerraClassicUSD source

However, the crashing of TerraClassicUSD (USTC) and the subsequent instability created by the sharp drop in the price of other digital assets might make investors and other stakeholders tread cautiously when dealing with digital currencies, the report noted.

The crash of the Terra (LUNA) token and its algorithmic stablecoin hit the headlines in May this year. 

US-based IT solutions company IBM’s Associate Partner, Payments, Mary Ann Francis, said that the CBDC process took years to develop, but its associated risks and consequences are yet to be fully determined or defined.

“The rise in CDBC demonstrates the strides made in adoption by central banks, but this process has taken years, and the consequences are yet to be fully determined. Like any or many new payments efforts, regulators and participants are cautiously engaging and evolving their practices as needed since the associated risks or impacts are yet to be fully defined,” added Francis.

Are There CBDC Infrastructure Challenges? Experts Decode

The report noted several challenges must be mitigated before the digital assets are implemented widely in the system. The primary problem is infrastructure; however, many European countries are currently studying their version of CBDC. It is still “unclear what infrastructure choices might be made for these coins,” the report said.

Inga Mullins, founder and CEO of blockchain and CBDC payment services company, Fluency, commented that presently, “central and commercial banks are experimenting with a whole host of technologies, approaches and system architectures, ranging from variations of current digital banking systems to comprehensive decentralized systems.”

However, Mullins said that it is reasonable to assume that digital currencies will be “designed from the outset to be fully integrated with the currently existing fiat currencies regimes. Moreover, this integration will need to be made fully transparent at the beginning of the CBDC rollout process.” 

According to Soren Mortensen, director of global financial markets, IBM, said a CBDC infrastructure currently exists, as shown by Banque de France’s recent experiments.

Mortensen added that this has “shown that the new digital world can co-exist with existing market infrastructures like Target2-Securities. The technology is already there to fully integrate these two worlds. Industry adoption is not a technology issue anymore but more of a transformation of the target operating model for financial institutions that still needs additional analysis to ascertain the cost benefits, as well as managements’ willingness to change.” 

But how the CBDC could be compatible with the existing fiat money is still not clear.

“How, what will exactly happen is still an unresolved design question in Europe. For virtual currencies, this path is a little murkier; it’s unclear how a pseudonymous system can be retroactively made compatible with the regulated monetary system,” added Sointu.

Future Outlook For CBDCs

People are generally moving to a more digital world with a decline in cash usage in established economies.

Cashless Economy: Mortensen highlighted the trend that people are generally moving to a more digital world with a decline in cash usage in established economies. He further believes that “digital currencies will grow in importance in a more digitally enabled world, and central banks will have to change the way they manage their money supply fiat vs. CBDC, as well as how their monies can be converted into more commercial currencies and back again.”

More Use Cases: According to Mullins, the integration with CBDC may be achieved in several ways depending upon the “medium or the specific digital wallets which the end-user would like to use for payments.”

He further elaborated with an example: “for online shopping, the integration can be achieved via a plugged native mobile or SDKs (software development kits) embedded in the banking app. We also expect to see the introduction of smart electronic cards like today’s credit cards but with a dedicated microchip triggering CBDC transactions.”

Mullins also said that as end consumers become more familiar with the technology and benefits of CBDC and integrate it with their day-to-day activities, “new products and services catering to both retail and commercial users will emerge to leverage the architecture of CBDCs.”

When this happens, he said, “commercial banks will be forced to innovate and enhance their level of service if they are to retain these customers. In addition, there will be a shift in AML (anti-money laundering) and regulatory procedures/laws to adapt to the new CBDC landscape and ensure illicit transactions do not occur.”

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