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Navigating Design Choices: Essential Considerations for CBDCs

by Felista Amagarat, Senior Research Analyst - 29 January 2024

In the initial installment of our blog series, we focused into the realm of Central Bank Digital Currencies (CBDCs) and their potential as a game-changer in the pursuit of financial inclusion in Africa. We explored the nuances of CBDCs, acknowledging their varied features and functions across nations, shaped by policy choices and market environments. As we navigate the intricate landscape of CBDC development, we will explore in this second part the key considerations, principles, and the human-centered design approach needed to create inclusive digital currencies.

The potential for CBDC to transform financial institutions and the way people trade presents central banks with an incredible chance to modernize their economies. Nonetheless, the design's capacity to inspire confidence and user trust is what makes it successful. Preserving monetary and financial stability, safeguarding user privacy, upholding strict standards for operational and cyber resilience, preventing financial crime and sanctions evasion, and promoting environmental sustainability are all essential components of CBDC. Although the methods used to create CBDCs may vary throughout nations, several high-level strategies have been put forth that may be able to assist in navigating such trade-offs and dependencies.

Designing User-Friendly CBDCs: Lessons from successful implementations

A good strategy for designing CBDCs is to focus on delivering a human centered design Lessons from successful implementations provide a roadmap for designing inclusive digital currencies.

In Sweden, the development of the e-krona showcases the importance of a human-centered design approach. Collaborating with UX designers and conducting extensive surveys, the Swedish central bank tailored the digital currency to meet the diverse needs of citizens, ranging from tech-savvy individuals to those less familiar with digital financial services. This strategic choice led to a more accessible and user-friendly CBDC, enhancing usability.

Singapore's Project Ubin exemplifies the value of regulatory sandboxes and diverse expertise. By engaging in controlled testing of CBDC infrastructure with a focus on behavioral economics, Singapore's Monetary Authority explored the potential impact on user behavior and adoption. This approach allowed policymakers to assess the implications of CBDC usage on consumer behavior, addressing potential challenges and optimizing the design for widespread acceptance.

Moving to Cambodia, the implementation of the Bakong reveals a hybrid model for public serving CBDCs. Collaborating with financial intermediaries, the National Bank of Cambodia enabled citizens to hold digital cash directly, bridging the gap between traditional banking and digital currencies, thereby addressing financial inclusion and government-to-person transaction concerns. This model allowed for a more inclusive financial ecosystem, reducing reliance on traditional banking channels and expanding access to digital currencies.

In Europe, the European Central Bank's (ECB) exploration of a digital euro emphasizes collaboration with commercial banks and payment service providers. This engagement ensures seamless integration with existing financial infrastructure, promoting interoperability and broad accessibility. The strategic choice of collaboration with established financial entities contributes to the stability and acceptance of the digital euro within the broader financial system.

Lastly, the Bank of England's efforts in designing a digital currency focus on public awareness and engagement. Through online forums, town hall meetings, and educational initiatives, the central bank addresses concerns related to distrust of financial institutions, privacy, safety, and flexibility, actively involving the public in shaping the digital currency's design. This choice enhances transparency, builds trust, and ensures that the CBDC aligns with public expectations and values.

These real-world examples underscore the importance of a holistic approach, combining human-centered design, regulatory innovation, collaboration with financial stakeholders, and proactive public engagement in the quest for designing CBDCs that truly foster financial inclusion. Each choice carries implications for usability, adoption, and the overall success of CBDCs in promoting inclusive financial systems.

Charting the Future: key considerations for CBDC implementation and beyond

As we ravel on what the future holds for CBDCs, Central Banks might consider reflecting on the following questions

  • Why the need to adopt a CBDC? Assess business cases and scenarios and align them to current and future payment landscape and realistic adoption goals.
  • Which constituencies does the CBDC aim to address? Design choices should be based on the user segment: private citizens, commercial banks, or corporations.
  • What role will the central bank play? Central Banks should consider leveraging existing relationships with commercial banks and corporations to achieve adoption goals.
  • What resources and capabilities will be required? Central banks are likely to need new decision-making processes, new change management practices, and talent experienced in forging partnerships.
  • What changes beyond payments will central banks need to enforce? Hurdles in regulation, commerce enablement, and fiscal rights will need to be overcome to achieve central banks’ adoption goals.

In conclusion, successful implementations of CBDCs prioritize user experience and accessibility. Examples from Sweden, Singapore, Cambodia, and the European Central Bank demonstrate the importance of collaboration, testing, and bridging the gap between traditional banking and digital currencies. Additionally, raising public awareness and engagement is crucial to address concerns and ensure that citizens are actively involved in the design process. By following these strategies, governments can create CBDCs that cater to the needs of all citizens. However, the current market share, standing at less than 1% as of the end of 2022 in countries with CBDC implementations or advanced pilot programs suggests that further observation and evaluation are necessary. The transformative power lies in the hands of central banks, who wield significant influence.

Sources

  1. https://www.institute.global/insights/tech-and-digitalisation/central-bank-digital-currencies-can-increase-financial-inclusion
  2. Global Findex 2021
  3. https://www.afi-global.org/wp-content/uploads/2022/09/Central-Bank-Digital-Currency-Special-Report_isbn.pdf
  4. https://www.statista.com/stati...
  5. https://www.bis.org/publ/othp40.pdf
  6. https://www.worldbank.org/en/p...

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