Lance Homer is the global head of digital payments and banking at the digital infrastructure services company Equinix, which is based in Redwood City, California.
Central bank digital currencies (CBDC) are taking hold in economies around the world as the need for efficient domestic and international transactions continues to increase. So far, CBDCs have been launched in 11 countries including Nigeria, Africa’s largest economy, with dozens more in the pilot and research phases. To advance the adoption of CBDCs, financial institutions must fully understand their value and embrace the digital infrastructure needed to enable them.
Banks have long been the trusted institution for storing money. As the world moved from physical to digital, banks built infrastructure to scale their capabilities in managing core banking ledgers and integrating traditional currency movement systems for debit/credit, real-time gross settlement (RTGS), batch ACH payments and even new real-time payments.
A shift to CBDCs would likely include banks not just managing traditional customer accounts, but also digital wallets for both consumers and enterprises. IT teams at financial institutions will need to leverage hybrid-cloud, ecosystems and digital infrastructure at the edge to build the foundation for CBDCs.
This digital infrastructure must be interoperable to accommodate the many entry points and technologies in a digital ecosystem – meaning, payment processors, platforms, exchanges, fintechs, digital wallet providers, and cloud, network and internet service providers all need to be involved to ensure the payment system works seamlessly.
With the right infrastructure in place, CBDCs hold the promise of providing more resilience, safety, availability and lower costs than private forms of digital money, such as unbacked cryptocurrencies, which are inherently volatile. Moreover, a successful CBDC would enable access to digital money that is free from credit and liquidity risks, helping underserved or unbanked populations access capital.
There are three critical ways that CBDCs will benefit consumers and financial organizations. First, CBDCs can streamline cross-border payments by introducing simplified distribution channels, and creating additional opportunities for cross-jurisdictional collaboration and interoperability. Additionally, CBDCs can reduce the cost of international remittance. CBDCs could make sending remittances easier, faster and cheaper by shortening payment chains and creating more competition among service providers. Faster clearance of cross-border payments would help boost trade within the region and with the rest of the world.
Second, CBDCs can improve compliance for financial organizations. A CBDC intermediary verifies the identities of customers just like traditional financial institutions, providing a clear paper trail to follow transactions. CBDCs can also help prevent illegal transactions like money laundering by involving private sector partners to adhere to institutional rules including in due diligence, record-keeping and reporting requirements.
Finally, CBDCs expand access to formal financial systems for those without bank or credit card accounts. CBDCs can be used to distribute targeted welfare payments and can be accessed in remote areas, allowing people who can’t afford to use the conventional banking system a better chance to hold their assets.
CBDCs have the potential to simplify and unify our global economy by expanding consumer access to financial systems and providing safer ownership of money in digital channels, which would promote international trade. To realize these benefits, financial institutions must continue to develop their digital infrastructures to embrace new innovations like CBDCs.