The Potential of Central Bank Digital Currencies

July 2020
The use of cryptocurrencies has been a hot topic since their inception, with people initially looking to use them to disrupt existing payment solutions and open new, unregulated payment channels which essentially looked to use them like cash in a digital world. Since then, the initial anarchic view of their use has been tempered with research and understanding and now many look to them as a potential avenue to improved payment options that fit within, or at least can coexist with, regulatory guidelines and frameworks designed to keep the users safe and avoid the potential of fraud or other criminal activity. Due to their potential, many financial institutions and central banks have been looking at the potential of using existing digital currencies, or even creating their own.

A paper on this very topic was released recently by staff at the Currency Department of the Bank of Canada, which investigated the findings of experiments on the possible use of digital currencies by a central bank. Titled ‘CBDC adoption and usage: some insights from field and laboratory experiments’, the paper used previous research and tests to determine how a digital currency could be applied in the context of the Canadian central bank ; however, the insights drawn could be applicable to a number of central banks in other jurisdictions and can also be extrapolated to more general situations. 

One of the first conclusions drawn by the authors was that there needs to be a ‘clear niche’, or a specific reason for the new currency to be used over existing options. The number of cryptocurrencies and more traditional alternative payment methods available worldwide has grown to a huge degree in the few decades or so, with many having no real benefits to necessitate their use above existing payment choices, or at least having so little difference that the benefits were not worth the effort of changing from existing options. Without a significant benefit, new options will not gain enough traction to see wholesale use. This needs to be taken from both the perspective of the merchants and the customers or public who will be using it, as without a driving force behind its use on both sides, the barriers to entry and peoples preference to existing, known options will hinder the acceptance of new options.  

The report highlighted instances such as Hong Kong’s Octopus card as an example of a significant success, as it has grown far beyond its initial scope with its simple, convenient and increasingly flexible use. Conversely, the Mondex store-value card of the 1990s is held up as a notable failure, with the report noting that it lacked any real benefits over cash and had issues regarding the public perception of its privacy, trustworthiness and possible hidden costs. Whilst this report focuses on currencies, this principle is the same when applied to new products or services. If there is no significant advantage (real or perceived) or if there is (real or perceived) weakness in a new development or solution, it is highly unlikely that it will be adopted or succeed. 

The second area of consideration the report discussed was the possibility of a Central Bank Digital Currency (CBDC) to be successful by focusing on the traits that would make a new solution more desirable than existing options. In this case, the report suggested, this could be to act like cash but with the ability to improve options for transactions. In particular, the potential to act like an electronic form of cash was highlighted. The report suggests that the benefits of cash over existing alternatives were its ubiquitous accessibility, lack of transaction costs, privacy and ability to be used without an internet connection. Contactless cards, mobile payments, online transfers and other options all have their advantages but they could not compete with traditional fiat currency in the areas in which cash holds an advantage. The report posited that a CBDC that mimicked cash but could also be used in the digital world would hold enough of a benefit to be successful should it be introduced. 

Three specific manners that could work were picked out for discussion. One option covered using a CBDC with transparency and little or no transaction fees to mimic the use of cash with frequent low-value transactions in a digital environment. Another featured the idea of an electronic payment method with a focus on privacy, combating the concerns over data breaches and data misuse that have become a common occurrence in recent years. Whilst this second option was noted to be unlikely to replicate the full privacy of cash as payment system, with some of the research being conducted at the Blockpass Identity Lab and other places around the world it may be possible in the future to ensure total anonymity and privacy in situations where it is required, depending on how regulations develop. Finally, the paper posed the option of a solution which allowed transactions to be completed without an internet connection to mitigate the issues that existing digital payment systems have during power outages or when internet connectivity is low or unavailable. These three options showcase three excellent potential use cases for a CBDC and highlight the benefits of blockchain and cryptocurrencies in providing more efficient, decentralised, privacy-focused solutions as well as opening up new avenues for development that have not been possible before. 

The next section of the report focused on the importance of achieving critical mass when establishing a new payment system, emphasising the importance of appealing to customers and merchants alike to see successful adoption. Simplifying and expanding payment options was found to be a significant positive for new payment systems with examples of China’s WeChat Pay and Sweden's Swish used to show how effectively new systems could be implemented. The paper also discussed how government policies have been shown under test conditions to create favourable circumstances and similar favourable use and increased interaction with specific currencies, which could be applied to CBDCs to mitigate the risk of other currencies with different criteria and possibly volatile price fluctuations from being used too readily. 

Culminating with a look at developments in Canada and how CBDCs could fit into the public sector there, the report underlined the importance of ‘universal accessibility, transparent and lower per-transaction fees, a high degree of privacy, and robust offline capabilities’ for a new digital currency solution. It concluded that the Bank of Canada was in a strong position to explore this possibility. These findings, however, could apply to almost any country and to other uses of technology, not just digital currencies. The huge potential of blockchain and crypto has yet to reach the mainstream but it is likely that it will do so in the coming years. In all of this, Blockpass sits ready to provide regulatory compliance as new developments and solutions seek to fit in with the legal framework of various jurisdictions to allow them to be used in a safe and responsible manner. Whether it is providing a digital identity that can be linked to a privacy-focused currency to allow it to be used in regulated industries, or providing user-centric identity verification options for companies in any industry, Blockpass is there to help. 

The Blockpass platform is fully automated and hosted in the cloud, with no integration or setup fee. Within minutes, businesses can sign up to the KYC Connect® console, test out the service, and start conducting identity documents verification, KYC and AML checks. Sign up for FREE at