The Bank of International Settlements together with the world’s major central banks have identified 3 requirements for the widespread adoption of a Central Bank Digital Currency (CBDC). In a report published in September 2021, they lay out the major requirements a CBDC must fulfill for it to be adopted by end users and be generally accepted by merchants worldwide. In their report, they discuss past payment innovations’ benefits and failings as well as consider which features are most valued by end-users. They also highlight the results of an investigation into which incentives will drive the consumer adoption of a potential CBDC.
Strategies for Consumer Adoption of a CBDC
As I see it, the strategies for the adoption of CBDCs will differ between countries. These strategies must be tailored to their individual economies as the economic structures and payment landscapes are different in each one. Also, each jurisdiction has a different legal structure and different laws which require that CBDCs are implemented in ways that are acceptable to the local conditions.
One of the selling points is the inclusive nature of CBDCs. It would help to make banking more accessible to those who are currently excluded from the banking system. To achieve a network effect similar to the US dollar and Euro dollar by permeating through the shadow banking system, it needs to use existing banking technology and infrastructure. Whether this is a similar system that runs parallel to the current traditional financial system, but is completely separate, or if the system is shared and intermediaries just extend their operations to include the potential CBDC is still being discussed.
CBDC adoption would be improved if, instead of everyone needing to either buy or learn how to use a new type of technology such as digital wallets, they could use their existing cards or accounts. Everyone already knows how to use a physical card to either tap to pay or scan a QR code to effect payment. However, not everyone is aware of how to set up cryptocurrency wallets and transfer funds between them. So, the actual implementation of such a currency would be pivotal to its eventual adoption from consumers.
Following the Path of Least Resistance
End-users are going to take the path of least resistance. The non-financial market players have shown a good understanding of what users require from new payment products and which conditions are necessary to facilitate the adoption of a central bank currency. The central banks need to take the changing context into account if they are to successfully launch CBDCs onto the market. Therefore, it shouldn’t be surprising that the paper goes on to discuss the need for continuous innovation in a multi-tiered system. The central banks will look after the currency. They’ll set the rules, decide on whether the CBDC is interest-bearing or not and maintain the core structure.
Outsourcing Services
The central banks will outsource the actual services that are required by end-users. So, facilities for prepayments, checking your accounts, and the ability to transact across ledgers, are best handled by third-party providers who have the experience and infrastructure to offer customer service. Once payments are made, billings, reporting, and all the other services that end-users require to have control over their finances must be in place.
The Federal Reserve doesn’t have the experience or the resources in place to offer customer service to the public. It’s not like Walmart or Lowe’s or Home Depot where they have a help desk, and you can stroll in and have your problems dealt with. This is where we get to the fulfillment of the three basic needs for consumer adoption of a CBDC.
The above figure shows the rate of adoption of a potential CBDC in the form of a current account. The consumers who were surveyed were from the Netherlands. As can be seen, it was essentially half and half in terms of the question of adoption. The second pie chart that is all green breaks down the group of people who would open a CBDC current account even further by how much they would be willing to transfer into the account if they could use it. Possibly, the more a person is willing to transfer into a CBDC current account, the more likely they would be to actively use it.
Fulfilling the 3 Needs for CBDC Adoption
1. Network Effects
The network effect of widespread adoption of CBDCs may, for instance, result in fewer ATMs. As less traditional cash is circulated, the cost of providing ATMs increases to a point where they are no longer economically viable. The commercial banks will then remove these non-productive assets. Which could lead to further incentives to remove cash from the system.
Achieving desirable network effects includes payment mechanisms that may be more successfully adopted in a one-sided market, such as a person-to-person payment. So, the CBDC design might choose to emphasize peer-to-peer options similar to crypto’s functionality. This will facilitate adoption and heavily influence the network effects of adoption.
2. Fulfill Unmet User Needs
Merchants and users will also not wish to purchase new devices with which to access the new currency. Following the path of least resistance requires meeting users’ unmet needs. For the digital currency to meet the needs of the general population, it must offer, in its digital form, the unique advantages of bank money, as well as the associated services.
To ensure large-scale adoption, you want the CBDC to utilize existing infrastructure and technology. Users don’t want to buy new devices and learn new skills to adopt the currency. They want to use what is already familiar to them.
Fulfilling this need will ensure almost instant adoption of the new currency by the majority of merchants using systems already integrated with their existing accounting and point of sale systems. However, this approach would also build a reliance on existing networks and infrastructure with potential negative impacts on resilience and competition. This is one of the cost-benefit analyses that they have been talking about throughout their reports.
3. Being the Safest Form of Money
For the currency to be the safest form of money, it must have the ability to provide finality of settlement, liquidity, and integrity. This is achieved by the Central Bank’s digital currency being a liability of the central bank. So, there is no “counterparty risk” really. The central bank can just print what it needs to fulfill its obligations.
Should There Be a Separate CBDC Infrastructure?
The central banks and BIS are discussing whether to create a parallel but separate infrastructure and network for the CBDC. They are looking at a scenario where the traditional financial system crashes or falters in some way, or even if it’s just a specific segment of the market, the Central Bank digital currency version would still be open. So, people would still be able to transfer currency using that route. Or they’d also use the same system and stack another mode of value onto the same system. This would be better and easier to implement. However, you have the risk of that system also having problems. This was highlighted in lessons learned from the past adoption of non-traditional payment services.
They give examples of Swiss, a mobile phone app launched in Sweden, as well as M-Pesa Mobile Pay and VIPs from Denmark and Norway. These were based on text messages or SMS technology. These provided the unbanked population with access to basic banking-like services. Their key success factors appear to be that if it offered service in a market where no convenient digital alternative existed, and that onboarding was easy, people would take the path of least resistance and adopt the technology.
There have been some unsuccessful services, such as Pay Box in Germany. It had insufficient advantages over the established system. So, it wasn’t good enough to overcome the humps relative to the current system they already had. The high user costs and a lack of cooperation in engaging customer use meant that adoption never managed to achieve a sustainable level.
If consumers don’t value the service’s unique selling point, in the case of Pay Box, its anonymous payments, and banks being hesitant to enable a service due to the existing electronic payments system being a lucrative revenue source, then it won’t be a successful implementation. The lack of existing customer partnerships leads to a failure in at least nine examples of alternative payment solutions.
The main takeaway is that for consumer adoption of a CBDC, it has to fulfill the needs that aren’t already being met to achieve the required network effects. Ultimately, for a CBDC to function in a systematic way that is easy to implement in terms of technology, people shouldn’t have to go out and get new devices and then learn how to use them.
For More on CBDCs:
https://jamesdforsythe.com/category/cbdcs/
https://youtube.com/playlist?list=PLi62lGg0Z1u48mEjPUO58FMQvmWGC_gw6
A Link to the BIS paper
https://www.bis.org/publ/othp42_user_needs.pdf
Source to pie chart
[1] Bijlsma, Michiel & Cruijsen, Carin & Jonker, Nicole & Reijerink, Jelmer. (2021). What triggers consumer adoption of CBDC?. 10.13140/RG.2.2.33511.57768.
https://www.researchgate.net/publication/351351293_What_triggers_consumer_adoption_of_CBDC
