Retail CBDCs and fast payment systems
Retail CBDCs and retail FPS share many similarities. Retail CBDCs make central bank
money available in digital form to households and businesses. Bank and non-bank
PSPs provide retail-facing payment services. The key difference from retail FPS is
that, for CBDCs, the instrument is a legal claim on the central bank. Retail CBDCs
are thus sometimes seen as “digital cash” – another form of central bank money
available to the public.34 In retail FPS, many of which are operated by the central
bank, the instrument being exchanged is a claim on private intermediaries (eg bank
deposits or e-money).
Nonetheless, both retail CBDCs and retail FPS build on public
data architecture with APIs that ensure secure data exchange and interoperability
between different bank and non-bank PSPs. Both feature high speeds and
availability, as transfers occur in real time or near real time on a (near) 24/7 basis.
These retail payment infrastructures have already shown their mettle in
enhancing efficiency and inclusion in the monetary system. Unlike crypto, which
requires high rents and suffers from congestion and limited scalability, CBDCs and
retail FPS allow for network effects to lead to a virtuous circle of greater use, lower
costs and better services. Because of their explicit mandates, central banks can design
systems to meet these goals from the ground up.
An open payment system resting
on the interoperability of services offered by competing private PSPs can challenge
rents in concentrated banking sectors and reduce the payments costs for end users.
Retail FPS have already made impressive progress in lowering costs and
supporting financial inclusion for the unbanked. For example, in just over a year
after its launch, the Brazilian retail FPS Pix is used by two thirds of the adult
population – with 50 million users making a digital payment for the first time.
Powered by innovative products and services offered by over 770 private PSPs, Pix
payments have now surpassed credit and debit card transactions (Graph 10.A). The
costs to merchants of accepting person-to-business (P2B) payments average one
tenth of the cost of credit card payments (Graph 10.B). Equally impressive progress
in inclusive, low-cost payments has been made in other economies.35
Retail CBDCs could play a similarly beneficial role as retail FPS, while offering
additional technological capabilities. For example, Project Hamilton – a joint project
by the Federal Reserve Bank of Boston and the Massachusetts Institute of
Technology Digital Currency Initiative – has shown the technical feasibility of a
CBDC architecture that can process 1.7 million transactions per second – far more
than major card networks or blockchains.36 The project uses functions inspired by
cryptocurrencies, but it does not use DLT. In its next stage, Project Hamilton aims to
create a foundation for more complex functionalities, such as cryptographic designs
for privacy and auditability, programmability and self-custody. The code for the
project is open-source and can be scrutinised by any developer, to maximise
knowledge-sharing and expand the pool of experts contributing to the code base,
including central banks, academia and the private sector.
BIS Annual Economic Report 2022 99
The TerraUSD implosion and fragilities in stablecoins Graph A1
A. Terra and Luna coins dropped in
value rapidly
B. Tether briefly lost its peg and
suffered $10bn in outflows1
C. Investors moved to USDC and
other asset-backed stablecoins
USD USD USD USDT bn USD bn
a TerraUSD and Luna collapse starting on 9 May 2022.
1 See technical annex for details.
Sources: CoinGecko; CryptoCompare; Messari; BIS.
100
75
50
25
0
1.00
0.75
0.50
0.25
0.00
Q1 2022 Q2 2022
a
Terra (Luna) (lhs)
TerraUSD (rhs)
Price:
1.00
0.99
0.98
0.97
0.96
0.95
82
80
78
76
74
72
Q1 2022 Q2 2022
a
Price (lhs)
Circulating supply (rhs)
80
70
60
50
40
Q2 2022
a
Tether
USDC
Market capitalisation:
Retail fast payment systems hold promise for rapid adoption and low costs Graph 10
A. Pix is gaining market share rapidly in Brazil’s growing
digital payments market…1
B. …and enables payment services at very low cost to
users and merchants2
No of transactions, mn %
P2B = peer-to-business
1 Excluding recurrent utility payments. 2 See technical annex for details.
Sources: Duarte et al (2022); Hayashi and Nimmo (2021); Central Bank of Brazil.
3,000
2,000
1,000
0
Q4 2020 Q1 2021 Q2 2021 Q3 2021 Q4 2021
Credit card
Debit card
Prepaid card
Pix
Pix
Bill payments
Debit card
Prepaid card
Bank transfer
Credit card
Other
2.0
1.5
1.0
0.5
0.0
United States Canada EU Brazil
Credit card
Debit card
Average cost of transaction: Pix P2B
Like retail FPS, retail CBDCs can be designed to support financial inclusion.37
Many central banks are exploring retail CBDC design features that tackle specific
barriers to financial inclusion, for instance through novel interfaces and offline
payments (see Box D). For instance,
Bank of Canada staff have researched the
potential for dedicated universal access devices that individuals could use to
securely store and transfer a CBDC. The Bank of Ghana has explored the use of
existing mobile money agent networks and wearable devices.38 Through tiered
CBDC wallets with simplified due diligence for users transacting in smaller values,
central banks can reduce the cost of payment services to the unbanked, thus
fostering greater access to digital payments and financial services. By allowing new
(non-bank) entities to offer CBDC wallets, they can also overcome the lack of trust
in financial institutions that holds back many individuals in today’s system.39
Both retail CBDCs and FPS can be designed to protect privacy and grant greater
user control over data. In the digital economy, every transaction leaves a trace, raising
concerns about privacy,
data abuse and personal safety. In addition, the resulting data
are of immense economic value – which currently accrues mostly to financial
institutions and big techs that collect, store and monetise users’ personal data.
The power over data of individual PSPs stems from the fact that, in conventional
payment systems, there is no single, complete record of all transactions. Instead,
every PSP keeps a record of its own transactions only. While payments across PSPs
are made through a centralised system and require instructions to be sent to a
central operator, these instructions may involve batched payments or incomplete
information about the purpose of the payment. Hence, even the central operator
has no complete picture of all payments. Privacy in payments is thus maintained
through a fragile combination of isolated record-keeping and the promise of
confidentiality by the central operator – but it is not guaranteed. In some cases,
data privacy laws give consumers the opportunity to grant or deny third parties
consent to use their data. But this option is often difficult to exercise effectively.
