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CBDCs will require balancing the needs of consumers: BIS

With the rise of crypto this year, central bank digital currency (CBDC) has also seen a fair amount of traction from governments worldwide. Since they are generally less volatile than traditional cryptocurrencies, governments find them suitable for day-to-day transactions. Moreover, governments can also have reasonable control regarding the underpinnings of their CBDCs. However, governments tend to over-regulate new technologies to keep them in check which sometimes, can defeat their advantages. So, balancing is vital when incorporating CBDCs. Other than this, there is much to talk about CBDCs rather than government stance, underpinnings, issuance, and customer benefit.

This is why the Bank of International Settlements (BIS) has released a report: CBDC – User needs and adoption. Through this 14-page report, BIS has tried to provide a fine print of developing an optimal CDBC, keeping in mind customers, merchants, and additional incentives. Moreover, it also contains lessons from previous experiments that governments should keep in mind in developing a CBDC. Also, a brief explanation of designing a CBDC.

CBDCs need adoption and usage if they have to motivate their issuance

BIS states that to boost the adoption rate, CBDCs have to reference use-cases and design choices envisaged for it. Moreover, it also presents issues that most jurisdictions will consider while evaluating the project. The key points BIS has put forward are:

  • Merchants will chiefly drive the future usefulness of CBDCs. However that is only possible if they push forward for users to adopt the new asset class.
  • A CBDC should keep up with the times and future needs of users, incorporating necessary innovations.
  • Every CBDC issued in a country will have to be tailor made. This is according to the diverse economic structures and payment landscapes.
  • Adoption of CBDC will require a strategy targeting the majority of consumers along with reaching smaller parts of the population.
  • Along with the CBDC adoption strategy, further exploration in financial stability safeguards is imperative. This is in order to meet public policy objectives and user needs.

Lessons for CBDCs Adoption

Technological innovation has been transforming the markets for retail payments at a pace over recent years. Many new payment methods, platforms, and interfaces have evolved, becoming faster, cheaper, and safer. These new non-financial market players have a better understanding of what users need from their payments products. Moreover, they have a fair idea of what conditions are necessary to facilitate adoption. Central banks will need to take into account this evolving context if they choose to launch a CBDC. The report also briefs out some points regarding this:

  • Every CBDC adoption strategy will require some tinkering to suit diverse economic structures and payment landscapes of indvidual jurisdictions.
  • CBDC adoption will have a higher success rate if it is able to plug in the gaps unachieved due to traditional finance pain points. In fact, it will also boost the implementation of the use of existing, accessible, technology and infrastructure.

Design of CBDCs

The report outlines a few points regarding the design and development of a CBDC:

  • A CBDC adoption strategy requires a fast-changing payments landscape that balances the needs of the majority of consumers. Moreover, it also reaches the smaller parts of the population.
  • Different users and needs both present and in the future needs to be defined and considered in the system’s design. Moreover, the analysis of specific market segments through user personas and stories portrays an important method of investigating user needs. In fact, it also provides informative consultations with prospective end-users.

Designing a CBDC requires a detailed understanding of future needs. This starts with but is not limited to the mainstream consumer, who may choose among a wide array of current, privately, and publicly provided payment methods and future innovations.

For the mainstream consumer, a CBDC combining the safety, security, privacy, and low cost of cash with the ability to be used online, could become an attractive proposition for few purposes. In addition, it is important to explore the needs of other specific user segments carefully. Moreover, this is in line with the commitment of this group of central banks to provide universal access to safe and low-cost means of payment.

Final Thoughts

As economies are running towards becoming digital, user needs are evolving rapidly. In fact, due to this, innovation is readily shaping user services like never before. Most of the developments started happening way quickly due to the COVID-19 pandemic. Now, to meet the ever-so-increasing public’s financial requirements, it has to adopt CBDCs and use them at a sufficient scale favourably.

Moreover, this would largely depend on the public policy objectives and future market conditions in each jurisdiction. This would also require the development of a CBDC promising optimization adoption across groups through meeting a diversity of user needs. It may also require an assortment of private intermediaries in CBDC ecosystems.

Finally, the next steps in this line are developing and researching user requirements and financial stability safeguards on system design.

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