FIS CBDC & DIGITAL CURRENCIES CONNECTED ECOSYSTEM™ supports central banks in realising policy objectives and enables innovation in the ever-evolving payments landscape
Central banks across the globe are exploring the possibilities of launching their own digital currencies, which must be designed to support policy goals and the issues of nations. When deciding to design and launch a central bank digital currency (CBDC), interoperability and integration are core technical requirements to consider, specifically when developing a CBDC for retail purposes. To optimise its benefits, CBDC needs to be connected to the wider existing and future payments ecosystems.
CBDC should be interoperable with other types of payment instruments, as well as efficient, low cost, accessible, user friendly, safe, secure, convenient and available at all times. It should be fully fungible with traditional currency, with the ability to easily convert one form of money to another on a 1:1 basis.
The rapid rise of stablecoins and cryptocurrencies is ushering in and evolving new formats of money and, as a result, a disconnect between the various new money formats is emerging. CBDC should co-exist with the conventional monetary system and can complement cash and operate as a backup payments rail. CBDC should also support the evolving future ecosystem and be interoperable with other digital assets.
It's almost impossible to predict what the ecosystem will look like in the future as different countries will proceed with different design decisions and approaches. Below we’re showcasing one of FIS’s ecosystem architectures for CBDC which can be tested via the FIS CBDC & Digital Currencies Connected Ecosystem™ enabled by APIs.
APIs can significantly accelerate the pace of product and infrastructure development, as well as the integration of various payment systems. The FIS CBDC & Digital Currencies Connected Ecosystem™ can also accelerate delivery of the prototypes, allowing central banks to test various use cases and scenarios for designing a CBDC and exploring different models.
In addition to our work with governments and central banks, we have conducted CBDC consumer research and have developed several theories based on the results. We believe the best approach for CBDC distribution models is a two-tiered approach where users will obtain wallets or accounts through their bank or payment service provider (PSP) in exchange for bank deposits.
Alternatively, users may make a card payment or exchange cash over the counter. Users will make payments to each other directly through their wallets or accounts in real time. These user wallets provided by banks and PSPs will be supported by a range of user devices such as wearables, mobile phones, cards and points of sale.
The central bank will own the CBDC core ledger and infrastructure; the central bank, banks and the PSPs will interact with the core ledger through APIs. APIs will also be used to manage interactions at the banks and PSPs with their back-end systems, payment gateways and banking platforms. The CBDC infrastructure will be integrated with RTGS and account-to-account payment systems to facilitate CBDC issuance and redemption. We envisage a number of shared services being supported by the CBDC platform, with overlay services providing additional value-add applications.
The central bank, banks and PSPs will have control panels for monitoring and management. They will have a network dashboard to allow the onboarding and offboarding of participants. Additionally, the ecosystem may be interoperable, connecting foreign CBDC networks or other networks, such as digital exchanges or digital asset networks.
FIS is exploring multiple mechanisms to enable interoperability with existing and new systems/ networks and the ability to use multiple digital currencies, enabled by APIs. This would enable instant and atomic currency and security settlement, eliminating risks and improving liquidity by collapsing multiple transactions, which may take days, into a singular transaction. Banks and PSPs will handle all user interactions and will onboard/ offboard and manage wallets or accounts. Banks and PSPs will also be able to send CBDC to each other.
We expect the emergence of many variations of wallets and accounts globally and there will be different wallet and account types based on users. Consumers’ wallets will differ from business wallets and will enable several payment and savings use cases. Some wallets may include loyalty schemes and promotions, and there may be ways to analyse and predict spending patterns. Business wallets will need additional functionality, applications and integrations. Finance departments will be able to use wallets to streamline reconciliation with sub-wallets for different departments. All wallets should better enable new functionalities such as internet of things (IoT) autonomous machine-to-machine payments.
Interoperability and Cross-Border CBDC
Today, there are a number of pain points that exist within the cross-border payments context. Cross-border payments are often slow and inefficient and rely on the existing legacy infrastructure. They are prone to compliance issues and suffer from frequent rejections, limited operational times and different standards. Some emerging countries are not part of the CLS cross-border multicurrency system and most cross-border payments are executed via the correspondent banking model using the existing legacy network, which is relatively costly and inefficient.
CBDC could potentially lower these costs significantly, benefiting businesses and, in turn, consumers in the form of lower prices for goods and services.
In the cross-border context, CBDC can support:
According to the World Bank Global Index 2017, there are 1.7 billion people who are excluded from the formal financial system. Financial inclusion is an enabler. One of the key motivations central banks have highlighted for CBDC is financial inclusion; therefore, it needs to be designed and implemented to tackle this main objective.
Financial inclusion means different things to different institutions or individuals. The fundamental aim, however, is to provide basic financial services to those who are unbanked. In some jurisdictions, especially in nations with large unbanked populations, exploration of CBDC is an opportunity to strengthen financial inclusion. The countries with the highest unbanked populations currently include Morocco, Vietnam, Egypt, the Philippines, Mexico, Peru, Colombia, Indonesia, Argentina, and Kenya. By introducing a CBDC, central banks would have an opportunity to provide a digital means of payment and improve access for underserved populations.
It’s important to understand the root cause of why there are unbanked populations in specific nations. Reasons include distrust in the banking system, educational barriers and reachability in countries that are scattered across different islands—and some people may find it easier to budget using cash. In order to ensure there is mass CBDC adoption, central banks need to control the issuance, as central banks are the most trusted bodies to launch a digital currency. Central banks will need to ensure there is sufficient customer support and should promote educational programs on how to obtain, set up and manage wallets/ accounts for CBDC.
If the issuance of CBDC is left to private sector institutions, there’s a possibility that we’ll face the same adoption barriers as those posed by existing financial products and services within the retail payments space. There has been limited and varied success by retail banks in reducing unbanked populations, especially in geographies with a low GDP and income per capita. Central banks and governments need to consider the exchange mechanisms (i.e., how to exchange cash deposits for CBDC), while identity and KYC requirements will also be required. These are all critical design decisions central banks would need to make.
We also have predictions on how retailers will react to and use CBDCs. A retail CBDC should be designed with the needs of consumers in mind. It needs to go beyond the functionalities of cash, but ideally incorporating the specific properties of cash that people like.
CBDC should be designed with the next generation in view. This includes features like programmability and designing a payment method that is user friendly, instant, innovative and secure. With a CBDC, we have an opportunity to design wallets and accounts according to future needs, and in some markets CBDC will be interest bearing. Creating infrastructure and applications that will support those individual central bank objectives is important. With cash, if lost, there is no way to get your money back. With CBDC, we project there will be ways to recover/ restore the funds.
Businesses and retailers will likely welcome the lower transaction costs that come with CBDC and appreciate the instant receipt of funds. Rather than going through a payment service provider, they will be able to directly interact with the consumer and may even offer loyalty rewards to incentivise consumers to use CBDC. We also envision businesses doing accounts payable and accounts receivable, thereby improving efficiencies.
CBDC accounts and wallets could potentially be used to store CBDC savings, as not every country has deposit insurance protection in place. Businesses could potentially use CBDC to send scheduled, instant and large-value payments due to lower costs; this would have improved payment transparency, less operational overheads and greater security.
FIS supports central banks and other institutions by using FIS’s CBDC and Digital Currencies Connected Ecosystem™ to explore the use cases and design options for CBDC, simulating the future ecosystem to assess the feasibility and the benefits for nations. Public and private sector institutions can collaborate and advance their knowledge and skills through practical experimentation. The FIS Connected Ecosystem™ can help institutions ideate and define their future role(s). It can also accelerate the implementation of a live CBDC and be used to test rollout strategies.
Through the FIS CBDC and Digital Currencies Connected Ecosystem™, participants can engage with payments and digital currencies experts to be future ready and become digital money pioneers. In the context of cross-border and interoperability, central banks and governments need to explore further the benefits of exchanging bilateral currencies payment-versus-payment (PvP) and investigate how much trade between neighbouring countries could be settled in foreign currencies. This would also help nations and governments assess the overall elimination of the bulk fees in the cross-border context.
FIS is a leading provider of technology solutions for financial institution and business of all sizes and across any industry globally. We enable the movement of commerce by unlocking the financial technology that powers the world’s economy. Our employees are dedicated to advancing the way the world pays, banks and invests through our trusted innovation, proven performance and flexible architecture. We help our clients use technology in innovative ways to solve business-critical challenges and deliver superior experiences for their customers. Headquartered in Jacksonville, Florida, FIS ranks #241 on the 2021 Fortune 500 and is a member of Standard & Poor’s 500® Index. To learn more, visit www.fisglobal.com