This week, a press release from China announced they had expanded acceptance of the digital Yuan onto public transport in 12 cities. China has led the way in the development of a Central Bank Digital Currency (CBDC), launching a trial in 2020 which has been expanding steadily. But what does this mean? What is a CBDC? And when will I need to consider accepting them in public transportation?
First off, what is a CBDC?
A digital currency would essentially be a digital representation of cash. But don’t we have that already? You might ask. We do in some contexts, such as value held in a transit stored value account such as Oyster or SmarTrip, but critically a CBDC is not the same as value held in your bank. A CBDC is cash, in digital form, backed by the full power of the central bank.
For example, the Bank of England defines CBDC’s as money that a central bank can produce in digital form, unlike physical notes and coins, in the form of an amount on a computer or similar device.
If you need a quick explanation, here’s Dave Birch describing CBDC’s at a recent breakfast briefing we held in the City of London:
So why is China so far ahead?
China have been considering a CBDC since 2014 and launched a pilot of the Digital Yuan or e-CNY, initially in four cities, but expanded later to a number of other cities and provinces with the goal of being able to use the e-CNY at the 2022 Winter Olympics. China’s goal in moving quickly is to displace a number of commercial payment and banking propositions such as Alipay and WeChat Pay which control nearly 90% of consumer payments in the digital sector. China is also attempting to boost the Yuan’s international position to align with global currencies such as USD and EUR.
However, China’s speed to market has come at some cost which was first highlighted at the Winter Olympics e-CNY trial. The trial was open to foreign visitors to the Games, however, the vast majority of visitors used conventional credit debit payments on Visa’s network. This was not helped by the US government raising privacy concerns regarding the ability of China’s government being able to track user’s payments.
Privacy is one area, that takes some time to get right.
When will we see CBDC in the US, the UK and the EU?
Currently, according to the CBDC tracker, central banks across the world are looking seriously about CBDC’s and what that means for them and how they should shape any potential offer. Consult Hyperion are working with a good number of them today. It is our expectation, however, that we are still a few years away from the launch of a CBDC in a major western economy or region such as the EU.
The US, UK and the EU are all in the research phase of developing digital currencies. There are several critical areas of discussion, some of which have been skipped in the development of the e-CNY but are critical, in our view, to the success of CBDCs. And we should know, having developed digital currencies in the 90’s with Mondex and the 00’s with mPesa. These critical facets of CBDC’s must be carefully weighed:
- Wholesale mechanisms
- Retail mechanisms
- Offline capability
- Privacy – the balance between Pseudonymity and Anonymity
- Business models
So, what does this mean for Fare Collection?
In our estimations, CBDC are still a few years off and we’d expect pilots in the next 3-5 years with wider adoption after that in the 5-10 year timescale. What that means depends on where you are in your development cycle. If your system is operational, then our recommendation is to do nothing at this point. However, if you are in the process, or planning to redevelop your system, which will be in place for the next 10-15 years, then it could be worth considering how CBDC’s could be integrated into your system when the time come and ensure the right hooks are in place.
One thing we would expect, though, is that if CBDCs do become reality then transit agencies will be required to support them. Inclusivity, including among the most deprived sections of society, is a major requirement for all CBDC systems we have seen. It is unthinkable that governments, central banks and regulators will not require their adoption in mass transit systems. We believe that transit agencies need to engage with these developments and the various consultations that are underway in order to ensure that the eventual use of CBDCs in transit solutions does not result in major changes to existing models.
Consult Hyperion are global specialists in the development of CBDCs working with a number of central banks and global payment organizations. We can help you position your system to be in the right place for CBDC acceptance when the time comes. Come speak to us!