The way that central bank digital currencies will work is a matter of great importance and there needs be informed discussion and debate about the requirements, goals and constraints of practical population-scale fiat electronic cash. But the fact is that CBDC is a complicated, emotive and (frankly) poorly-understood subject that needs collaboration across public and private sectors to deliver benefits to all stakeholders. With the interest the subject growing from all directions, Mastercard’s announcement of a new CBDC Partner Program to foster collaboration with key players in the space is very welcome.
Their inaugural set of partners includes the remittance platform Ripple, blockchain and Web3 software company Consensys, multi-CBDC and tokenized assets solution provider Fluency, digital identity technology provider Idemia, security technology group Giesecke+Devrient, digital asset operations platform Fireblocks and, of course, Consult Hyperion. We were delighted to be asked to join the program and, given our considerable experience in the design and development of mass-market electronic alternatives to cash – for clients ranging central banks, through commercial banks, to telecommunications operators and mass transit schemes – around the world, we will work with the partners to tackle key questions and advance the state of the art.
One of the key questions is, of course, the fundamental need for CBDC at all. Here, we are far from global consensus. Writing in the Financial Times earlier this year, a senior advisor to the Bank of England said that as CBDC is the digital equivalent of cash and that since we already have electronic commercial bank money, we don’t really need it. Similarly, in the Wall Street Journal, a technology writer said that a retail CBDC isn’t any different from the electronic money in bank accounts today—it’s just a digital dollar. But they are both wrong: there is a fundamental difference between electronic money that lives in bank accounts and electronic cash that lives… well, anywhere. In phones, USB sticks, laptops, smart cards, cars or wherever else we can put a microchip capable of secure processing.
Why does this matter? Well, when I sent my sister the money that I owed her recently, it went from my bank account through the banking system to her bank account. But in the future, I will send her electronic cash from the wallet in my laptop to the wallet in her phone and it will never go anywhere near banks or the banking system. There won’t be any clearing or settlement, which is why the existence of instant payment networks has nothing to do with the need for CBDC.
The modern economy needs both electronic money and CBDC. We need a safe and sound banking system but we also need safe and sound money that can move around outside that banking system to provide not only resilience in the infrastructue but, most importantly in my opinion, a platform for new products and services. This is where the real excitement should be. If there is going to be a digital dollar, it should be in a form that is a platform for open innovation. Electronic cash, like cash, is a pre-paid product with no credit risk. Anyone should be able to use a digital dollar API to create not mere emulations of the payment services that we have now, but new ways of transacting: micropayments, smart payments, conditional payments, whatever.
Jesse McWaters, who leads global regulatory advocacy at Mastercard, says that there are questions about the role of the private sector in CBDC issuance, security, privacy and interoperability. He is right, and Mastercard is looking to help answer some of these questions by fostering industry collaboration to draw on (for example) Fluency’s work to build interoperability among different CBDCs, Consult Hyperion’s work with central banks and payment processors to define their CBDC requirements and Ripple’s launch of an inaugural government-issued national stablecoin in collaboration with the Republic of Palau. Mastercard are to be applauded for their initiative to bring these questions forward for serious discussion and informed debate.