The use of cash as a form of payment is declining as the use of privately issued money, issued by commercial banks, continues to increase. Britons have embraced digital payments with a vengeance and now tap their cards (or devices) on average 415 times a second, demonstrating a comfort with digital money that grows on a daily basis . 

It is against this backdrop which has seen discussions on the role of CBDCs – digital currency issues by a central bank alongside cash and bank deposits – intensify worldwide.

Much of the recent interest can be traced back to Libra Consortium announcement in 2019, which ran a project to develop a new Stablecoin (now abandoned). Today, some 80% of the world’s central banks are asking: are crypto currencies what comes next? And indeed, we even have some CBDCs live in Nigeria and the Caribbean.

Motivations and attitudes to CBDCs differ depending on who you are

The reasons why a CBDC may be adopted are clear. If designed well, CBDCs can:

• Reduce the need for central banks to print cash, and for users to handle physical money
• Improve tax collection 
• Enhance financial crime prevention 
• Reduce financial exclusion
• Preserve monetary sovereignty against new forms of private money
• Better management of benefits and subsidies

Where CBDCs are in use, they’re typically designed help achieve unique domestic objectives. In China, CBDCs offer the opportunity to expand access to a wider set of financial services and improve competition. In the Bahamas, it negates the need to transport cash to dozens of islands. In Sweden, the Riksbanken is motivated by a belief that the answer to a decline in notes and coins cannot be a state exit from the cash market. 

Equally the Bank of England is engaging with a wide group of stakeholders on whether or not to issue a retail sterling CBDC, has set out a series of principles underlying any move in that direction:

• CBDCs will not replace cash, which will be here as long as it is needed by users 
• Supporting financial inclusion and privacy must be central to any deployment 
• Non-CBDC innovations that can deliver the same benefits must be assessed
• CBDCs must not harm the Bank’s ability to meet monetary and financial stability objectives 

However, we firmly believe success and user adoption will require more.

Money can be so much more than it is today. So, what would work best for everyone? And what might the future look like? While the possibilities and potential have led to much discussion (and excitement), all too often emotion and nostalgia trump analysis and debate. Required is more deep thinking, consultation, and research, in line with how the Bank of England and House of Lords have approached the issue of what is money and what if anything needs to be done to better manage it.

That said, while it’s natural that discussions on CBDCs – indeed on the future of money – include financial institutions, academia, Fintechs, infrastructure, and technology firms, meaningful change will require a broader debate where the views of all users - civil society groups, merchants, charities business users and consumers – are represented.

A well designed CBDC could have the potential to enhance financial stability, support a resilient payment infrastructure, and enable financial authorities to better understand aggregate behaviour.

But why launch a CBDC? The UK has an effective retail payments system. Yes, it has room to improve, and there are plans to do so (for example, through The New Payments Architecture). And if launched, would users adopt a CBDC? As China is discovering, without a clear benefit users will stick with what they know and understand regardless of how innovative a new technology is perceived to be. Adoption is essential for success.

This is a significant year for the future of money (and payments) in the UK. Whilst we continue on with our regulatory delivery and infrastructure improvement, we also have to grapple with the debate around the design of our money. Whenever talk of money is involved it is hard to do so unemotionally. But we have to try as we confront a raft of trade-offs in tackling the difficult decisions around what money is, the benefits it should deliver, and how it should be managed. The industry has a real opportunity to work together to produce some very positive outcomes for our customers and society and a collaborative, customer-centric approach is essential for ensuring we get it right.

To find out more about Digital currencies and NatWest payment solutions, contact your usual NatWest representative.

Author

Lee McNabb, Head of Payments Strategy, NatWest