The financial landscape is undergoing a profound transformation marked by the rise of central bank digital currencies (CBDCs) and fast payment systems (FPS). A recent report from the Bank for International Settlements (BIS) sheds light on the evolving relationship between these technologies, raising questions about whether they serve as competitors or complement each other within the realm of modern finance.
CBDCs, which are digital representations of cash issued by central banks, are designed to provide an alternative to physical cash, aiming to enhance transaction efficiency. In contrast, fast payment systems allow users to execute rapid transactions using private money within existing banking infrastructures. The BIS delineates this key distinction, stating, “Retail CBDCs are a new form of central bank money for the general public,” while “FPS to date allow end users to transfer private money.”
To gain insights on the implementation of CBDCs and FPS, the BIS engaged with 14 central banks worldwide. The report highlights Brazil’s success with its Pix system, which has garnered adoption from over 90% of the adult population. Additionally, Brazil is in the process of expanding its offerings with Drex, a wholesale CBDC aimed at enhancing interbank financial transactions.
Nigeria exemplifies a dual approach to these technologies, utilising FPS for instant retail payments while also launching the eNaira as a means to boost financial inclusion. The BIS asserts, “FPS primarily drive instant retail payments, while the eNaira aims to increase financial inclusion,” thus signalling the ability of both systems to target distinct objectives simultaneously.
A critical point of reference in the BIS report is the inherent difference in security and stability between CBDCs and FPS. It states, “The chief difference is that retail CBDCs are a claim on the central bank,” equating them with the safety of physical cash, opposed to FPS which involve transactions with private money in commercial banks. Despite their differing mechanisms, both systems aim to enhance transaction speed and accessibility, contributing to broader financial inclusion and economic efficiency. The report notes that both types of systems enable instant and typically low-cost transfers, expanding access to financial services.
The adoption of fast payment systems has been more widespread compared to retail CBDCs. Currently, consumers and businesses in approximately 120 jurisdictions can execute fast payments, while only three countries—The Bahamas, Jamaica, and Nigeria—have successfully rolled out live retail CBDCs. For instance, Nigeria’s eNaira reported around 900,000 active wallets, accounting for just 0.5% of the population one year post-launch.
The BIS report also raises caution regarding the risks entailed with the introduction of retail CBDCs, particularly in relation to existing banking ecosystems. The potential for market participants to be disintermediated poses a significant threat, as highlighted by the BIS: “The main risk… relates to the impact on the existing ecosystem and the potential disintermediation of market participants.” This disruption could lead to a decrease in bank deposits and adversely affect traditional lending frameworks.
Similarly, fast payment systems are confronted with their share of challenges. Operational issues and cybersecurity threats remain prevalent concerns. The BIS further notes, “Both FPS and retail CBDCs face potential risks including operational, financial and reputational challenges.”
Concluding its findings, the BIS asserts that there is no one-size-fits-all solution to the adoption of these financial technologies. The choice between implementing a retail CBDC, an FPS, or a combination of both is highly dependent on various contextual factors, including market features and previous implementation choices. Each jurisdiction must consider its unique financial environment and policy objectives to determine the most suitable path forward.
As advancements in digital finance continue to unfold, the potential coexistence of CBDCs and FPS is expected to significantly influence the future landscape of payments, promoting enhanced efficiency, security, and inclusivity in financial transactions.
Source: Noah Wire Services