As the global landscape sees 130 countries embarking on the exploration of central bank digital currencies (CBDCs), a remarkable increase from the 35 countries engaged in 2020 according to the Atlantic Council’s CBDC Tracker, the success of these digital financial instruments is under intense scrutiny. To navigate this terrain, central banks are turning to digital twins—replicas of payment or settlement systems—to meticulously examine design nuances, policies, and plausible wallet limitations that could propel widespread acceptance of CBDCs.
By employing digital twins, central banks can embark on secure test scenarios to simulate potential adoption scenarios, thus fine-tuning the designs, policies, and attributes that can effectively drive CBDC popularity.
Network analytics firm FNA has taken a significant step in this direction. They’ve employed an agent-based model to construct a digital twin of Spain’s retail payment ecosystem, effectively assessing the potential impacts of varying design choices on the adoption rates of retail CBDCs. This simulation-driven approach enables CBDC stakeholders to engage in iterative testing, ensuring that the proposed designs align with central bank objectives, attract both consumers and merchants, and, crucially, maintain financial system stability.
Carlos León, Director of Financial Market Infrastructures and Digital Currency Solutions at FNA, elaborates on the potential of employing digital twins. He emphasizes that this innovative strategy constitutes the initial phase towards comprehending and dissecting the repercussions of digital currencies.
Crafting an Optimal Adoption Scenario
Mr. León identifies the existence of an “adoption sweet spot,” a scenario achieved through a delicate combination of appealing design attributes, stimulus policies, and judicious restrictions on retail CBDC holdings. This equilibrium strikes a balance between fostering high enough adoption rates to ensure CBDC efficacy, while simultaneously preventing an influx that might jeopardize financial stability.
In dissecting the toolkit available to central banks to gauge and influence adoption rates, Mr. León cites remuneration policies as a significant component. These policies involve offering consumers an interest rate on their retail CBDC holdings—an approach that has been broached during the initial exploratory phases of CBDCs. However, he notes that while effective in stimulating adoption, such incentives are not without risk. Central banks are now increasingly cautious about incorporating these incentivizing mechanisms into design choices, given that offering interest rates comparable to or even surpassing those provided by commercial banks could inadvertently trigger a substantial migration of deposits.
Balancing Privacy and Practicality
The modeling undertaken by FNA introduces two types of retail CBDCs—one offering complete anonymity and another mirroring the privacy levels of conventional digital payment systems. Importantly, preferences between these alternatives vary across countries.
For instance, in Colombia, where cash usage remains high, anonymity is prioritized by consumers. Conversely, countries like the UK, where cash utilization is significantly lower, show an inclination toward CBDCs with privacy attributes akin to existing digital payment systems, largely due to the familiarity of sharing information with commercial banks.
Shaping the Future of Money
The evolution of CBDCs signifies a novel territory wherein central banks assume a consumer-facing role—constructing products for both consumers and merchants. This shift necessitates that central banks not only carry out regulatory functions but also leverage consumer-focused models similar to those utilized in the private sector. It’s imperative that central banks balance their motivations with the needs of consumers and merchants to ensure successful CBDC adoption. León underscores the pivotal role of digital twins in this process, enabling comprehensive testing of features and outcomes.
Ultimately, the convergence of enticing design choices, well-considered stimulus strategies, and cautious CBDC holding limitations may unlock the optimal adoption formula. Central banks stand at a pivotal juncture, tasked with determining whose requirements will take precedence in shaping the trajectory of retail CBDCs.
