Cash and Retail CBDCs: What is our future of payments?

I am cash averse. Always have been, always will be. And this is probably even more the case now, with the imminent general adoption of Central Bank Digital Currencies (CBDCs). My dislike for cash probably comes from my mum. Very early on, she instilled within me the idea that people could attack you for your money. To make it even more real, she would give me the exact amount of money for buying bread, and sometimes not even enough. Looking back now, I think “Seriously, who would attack a six-year-old for two Francs?” (And yes, I am old enough to  have been around for Francs!) Absolutely nobody Mum, especially in France! 

For some reason, the idea that cash can get you killed has lingered. As a consequence, 1) I still never carry cash with me, even here in Singapore (ie, the safest place on earth) and 2) this is probably why I am so passionate about digital payments. So, imagine my face when I arrived in Bali for my holiday and saw all the cash-only places! The queues at the ATM could compete with those of famous nightclubs. Needless to say, cash usage should probably decrease with the introduction of QR code interoperability.  

However, cash use doesn’t always come down to poor infrastructure. With the economic crisis hitting the UK badly, people are turning back to cash for budgeting reasons. I’m actually puzzled by this. Why would you use cash to manage your money better when all kinds of better alternatives have emerged with Open Banking, apps like Plum, Cleo (wow that website design hurts my eyes!), Chip, Moneybox or even a neobank like Monzo. People can understand their spending habits better and save automatically to pay their bills. With the mandatory introduction of Variable recurring payments, these value-added services will become the new norm very soon. Interestingly enough, and very surprisingly, the ECB recommends cash for better budgeting. 

The ECB gives other reasons why cash is still king in some situations. Almost none of them convince me. Take data privacy. For me, the argument is valid in developing countries where data collection can have dreadful repercussions, as seen in Afghanistan. But, in a developed country, I think that horse has already bolted. Sorry to break the news! With your phone, people can track your location and understand your spending.  

Going a step further, I would argue that most of the ECB’s arguments in favour of cash can be easily assuaged by a retail CBDC. 

With CBDC, the concept of privacy is completely decided by the regulating jurisdiction. The idea of creating privacy tiers, explained by David Birch in his book Currency Cold War, completely resonated with me. You want privacy, you pay for it. Arguably, people in developed countries often want privacy for not-so-genuine reasons. It also means that, for unsafe developing countries, identities could be better hidden. 

Combined with smart contracts, CBDCs could also be a great cash management tool. Money can flow directly from your wallet to its destination without any human intervention. Indeed, smart contracts could be set when the oracle has checked the history of money movement, retrieving information off the blockchain as well, and has confirmed that the newly, or about to be, legally signed contract will be honoured. Ok, I’ll stop with the technical talk. 

Moving on, and looking at some of the other reasons listed in the ECB’s article. Direct liability on the central bank, instant settlement* although one could argue that this is not really needed for retail, only instant clearing is and security are all organic properties of CBDCs.  

Regarding inclusivity, another reason listed in the article, there are two schools of thought on this topic. For example, Antony Lewis, author of Bitcoins and Blockchains, is not convinced that CBDCs can help to increase financial inclusion. I am more on the pro-side, hence my engagement in Mojaloop’s CBDC Centre of Excellence.

However, to be inclusive,  CBDCs need to come with 1) deep, deep rethinking of the concept of identity and 2) a clear design of how offline payments will work. I am convinced that these problems can be solved if considered within the ecosystem they exist. In other words, access to CBDCs should be thought of in conjunction with network coverage within a given country (to be able to get online in the first place), access to affordable electricity (for charging your phone) and, of course, alternative ways of identifying people or perhaps performing AML (I do agree with Antony on this point though, that CBDCs do not solve the KYC/AML issues). I think the Philippines is probably a model to copy in the way they are trying to address the challenge of financial inclusion. 

To conclude, please don’t misunderstand me. Cash will not disappear. We have never seen a method of payment disappearing, ever. However, I am convinced that the next version of cash is around the corner, and it will be adopted way faster than we can imagine. Of course, some design principles still need to be decided, like the ones we have already discussed. There’s also the question of whether CBDCs are a store of value and, if so, how to ensure they do not compete with bank’s commercial deposits and kill an entire industry.  

Work is well underway. According to a BIS survey , “Central banks found that 86% are actively researching the potential for CBDCs, 60% were experimenting with the technology and 14% were deploying pilot projects”. So, banks, it is time to prepare your payments infrastructure for CBDCs and make sure your payments engine and core banking systems can process them and be connected to a ledger operated in a blockchain and by a third party. As Mike mentioned in his last article, if you think ISO 20022 is hard, well, the adoption of CBDC, and, particularly the ramifications, are on a completely different level in terms of complexity.  

Now, the real thing that really worries me is that my sons will need to carry a phone to buy bread! This is way more dangerous than carrying two Francs, isn’t it?! 😉 (Says the lady who got her phone snatched in London.)  

* This is the exchange of funds between the debtor and creditor banks, although one could argue that this isn’t needed for retail. For this category, only instant clearing is required, which is instant fund movements between creditor and debtors.