Author: NayaOne – nayaone.com
Money as a unit of value has evolved in various forms over time — from tokens made of stones and metals to coins and paper notes. In recent decades the paradigm has shifted from physical to digital, with physical cash making up for only about 20% or lesser of the money in circulation across various countries. The remainder exists only in digital formats on ledgers and servers of financial institutions.
In such a digital world, the need for efficient and secure solutions is imperative; therefore, with the advent of distributed ledger-based cryptocurrencies, the idea of government-issued digital money — specifically termed Central Bank Digital Currencies (CBDCs) — came into being. These digital tokens that are currently on the experimentation list of countries far and wide have gained quite the momentum in recent times — with around 100 countries currently exploring the notion, in contrast to the 35 that were exploring the option in May 2020.
CBDC Utility — Retail & Wholesale
The premise for CBDCs is built on the innovative use of technology to enable fast and secure transactions, maintain records efficiently, and increase the overall efficiency of the financial system. Just like fiat money (or M0 money supply — central banks’ technical speak for the most liquid form of money i.e. cash), CBDCs are the digital variant that can be applied in retail as well as wholesale (or commercial) settings.
Retail CBDCs are issued by the central bank to the general public for use on a regular basis — just like cash. Amongst the diverse applications that retail CBDCs have to offer, the facility for direct monetary transfers between individuals (P2P), between an individual and merchants for financing products and services (P2M), or between businesses (B2B) enables reduced friction in clearing and settlement of retail transactions, either online or offline.
China’s digital yuan (e-CNY), which has been on trial by the People’s Bank of China for some time now, successfully managed to garner sizeable utility due to its wide availability and government promotions — with 261 million users (almost one-fifth of the country’s population) having digital yuan wallets as of January 2022. Nigeria’s eNaira also sets a transformative example of how retail CBDCs can be used for furthering financial inclusion and public welfare. One of its utilities is enabling middlemen-free government aid transfers to those in need. Households, businesses, and the Nigerian diaspora can also make secure payments without yielding interest amongst peers and financial institutions.
Wholesale use cases for CBDCs, on the other hand, focus on settlements, both domestic and cross-border, between central banks and commercial financial institutions that hold reserves at the central banks. At this level, CBDCs can strengthen the risk management associated with transactions, alongside resolving concerns surrounding counterparty credit and liquidity.
Banque de France’s recently completed experiment for interbank settlements using CBDC — consisting of the testing of an end-to-end transaction lifecycle of a digital bond, from issuance, subscription, and eventually coupon payment — is a prime example of wholesale use of CBDCs.
Another notable example is the mCBDC Bridge, a co-creation project involving the BIS Innovation Hub Hong Kong Centre, the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China, and the Central Bank of the United Arab Emirates, that puts emphasis on a wholesale CBDC that supports multi-currency cross-border payments. Realising the complexity of the many networks and arrangements of large global banks, the project demonstrates a prototype platform (the mBridge) that can bridge the limitations of existing systems by delivering real-time international settlements using distributed ledger technology (DLT).
CBDCs Are Here to Stay
It goes without saying that CBDCs are set to revolutionise the payments landscape with their promising potential. The research, development, and experimentation of central bank technologies are paving the way for innovation in financial services. This is something that aligns perfectly with our mission at NayaOne — to help financial institutions build better products and services.
We provide a platform for experimentation, development, and launch of various financial technologies — CBDCs being one of them. From multiple use case testing involving third-party collaboration to simulations to analyse performance and usability, the NayaOne platform can be a powerful catalyst for innovative CBDC projects.