How CBDCs Might Change Our Daily Payments
"The only advantage of having a bank account is that it enables digital payments." "For regular people CBDC wallets will be treated as alternatives for card payments." Traceability may not be desirable for more privacy-minded consumers.
Central bank digital currencies (CBDCs) could provide consumers with cheaper and faster payments, according to experts in the cryptocurrency and blockchain industry. They’ll sidestep the need for an account with a commercial bank, and in the process will reduce many of the costs and risks that come with the commercial payment system.
In fact, CBDCs might bring more than just cheaper and more secure payments for consumers. They could also speed up cross-border payments and settlements, as well as improve money de-anonymity.
At the same time, analysts speaking to Cryptonews.com affirmed that CBDCs might serve one other important function, which isn’t specifically focused on direct financial or economic gains. That is, CBDCs might neutralize the potential challenge posed by Facebook’s Libra, which is launching a payment system on top of the world’s biggest social network, thus threatening to create a new money monopoly.
What will CBDCs do for consumers?
“CBDCs will be the next revolution in finance,” said Massimo Buonomo, a global expert in blockchain and cryptocurrencies with the UN Alliance of Civilization.
“Essentially CBDCs will be exactly the same as paper money but only in a digital form.”
Speaking to Cryptonews.com, Buonomo explained that there will be two different kinds of CBDCs, depending on where you are in the world.
- First, there’s what he referred to as the “one-tier model.” Here, digital money is “to be transferred directly from the central bank via the social security system (one option) to a single person.”
- Secondly, there’s the “two-tier model.” In this case, the CBDC is “transferred via intermediaries (mostly banks) to a single person.”
According to Bankex CEO Igor Khmel, most CBDCs currently in the pipeline are based around the two-tier model. For instance, the digital Chinese yuan would be distributed via commercial banks. This also might be the case with the digital US dollar.
Either way, a significant feature for consumers will be that the payment infrastructure underlying the CBDC will most likely be developed and run by a central bank.
“The difference with traditional digital money is that there's an interoperability standard supported at the central bank level,” Khmel told Cryptonews.com.
“That means that digital money from one bank can go directly to another merchant/bank, skipping interchange, Visa/[Mastercard], SWIFT, etc.”
For Massimo Buonomo, the significance of this at the consumer level is that it will reduce costs and increase security.
“Nowadays to make an electronic payment we have to use a private player (card processing company, bank account, etc.),” he said. “That costs money and has security issues. CBDCs instead would allow us to do the same transactions with a digital wallet as with electronic payments but without costs and with much higher security. That is much more beneficial for customers.”
No bank accounts
In fact, Buonomo went a step further than this and suggested, in many cases, CBDCs will eliminate the need to open an account with a commercial bank.
“Because in the current interest rate environment the only advantage of having a bank account is that it enables digital payments,” he explains.
With a central bank digital currency, “all you need is a digital wallet which allows you to hold digital money and makes you pay the bills using the mobile phone without using the credit card.”
Importantly, consumers will face “no fees to be paid to credit card processing companies (Visa, Mastercard, even SWIFT). No fees to be paid to banks for bank money transfers, or for holding a bank account.”
Igor Khmel agrees with this to an extent, at least insofar as CBDCs will mean consumers won’t need a bank account to make payments.
He said, “For regular people CBDC wallets will be treated as alternatives for card payments, quicker, securer and more appropriate in some situations, such as small routine payments or large transfers, such as paying for rent where ACH [Automated Clearing House], wires or checks are used now.”
Settlements, Facebook, and competition
Naturally, CBDCs won’t bring only benefits to consumers. They may also end up having less-than-desirable consequences for certain consumers.
“CBDC will improve the speed of cross-border settlements, money de-anonymity,” said Igor Khmel. “Since CBDC are traceable, they are not fraud and money laundering friendly, that means that CBDC users will enjoy a world with less restriction, AML [anti-money laundering] control and friction.”
Such traceability may not be desirable for more libertarian-minded consumers who don’t particularly want their central bank recording every transaction they make. Still, others may appreciate the fact that CBDCs are also being harnessed by central banks to prevent Facebook’s Libra from forming a new monopoly over money and payments.
“Facebook Libra was the main reason why China started its commercial usage of the e-RMB,” said Igor Khmel.
“They got ‘CBDC FOMO [fear of missing out]’ - got afraid that a US company got the first-mover advantage in the global digital currency rally. Facebook has 2X more audience than the Chinese central bank, so they could take over the whole market; it has more currency adoption power than any country in the world.”
Nonetheless, while CBDCs may end up preventing Facebook from becoming too powerful, both Khmel and Buonomo affirmed that they’ll also bring distinct benefits of their own for the consumer.
Assuming that CBDCs make payments cheaper, Buonomo concluded by suggesting that “the only way for private players [e.g. banks and payment companies] to survive would be to give a real value to customers in terms of service or remuneration of deposits.”