Increasingly, we are seeing governments and central banks focusing on the impact and opportunities of a central bank digital currency (CBDC). For example, this week, Stellar was picked by Mercado Bitcoin as the network of choice to explore use cases for a Central Bank Digital Currency (CBDC) in Brazil. And in the U.S., we recently submitted a response to the Federal Reserve's discussion paper that analyzed the role of a U.S. central bank digital currency (CBDC) in "the age of digital transformation."
Different forms of money serve different individual preferences and needs. We believe that by augmenting the existing system of wires, credit cards, and cash, with innovations like CBDCs and stablecoins we can begin to create a financial system that serves everyone. CBDCs could provide substantial improvements to people’s lives, including encouraging innovation in financial services, easing the distribution of social benefit payments, lowering the costs of financial services, and bringing safety and security to the unbanked. In short, we see central banks’ focus on developing CBDCs as an encouraging sign of their commitment to improving equitable access to financial services.
Below are our comments submitted in response to the Federal Reserve outlining our views on the positive impact of CBDCs on financial inclusion.
A well-designed CBDC could have a positive effect on inclusion and the economy by expanding access to and usage of affordable financial services. A CBDC could also contribute to green inclusive sustainable growth.
Expand modes of payments beyond financial institutions
Today in the United States, 6.9% of individuals are unbanked and account ownership is slightly lower than in other high income countries. The top two reasons cited for this are that adults do not have sufficient funds to maintain account balances at banks and their mistrust of banks.
The development of a CBDC could support financial inclusion through the design of low-cost solutions for consumers and MSMEs, specifically merchants accepting payments. A CBDC issued on the appropriate infrastructure could lead to the development of a real-time payments system, allowing for transactions to settle and finalize in seconds.
Reduce merchant acceptance costs of digital payments
One of the main friction points for the adoption of digital payments by merchants is acceptance costs and fees.
Costs remain high for merchants accepting retail payments due to the need for multiple intermediaries to complete a transaction. In recent years, innovation brought more affordable tools for retailers such as QR payments and mobile money. However, fees to accept a digital payment made by a consumer through a debit and/or credit card are still high for merchants.
A CBDC built using blockchain would reduce merchants' acceptance costs due to the efficiency to move value and the removal of intermediaries required to process a transaction.
Transition individuals and MSMEs from the informal to the formal economy
According to data from the World Bank, the informal economy in the United States amounts to 8.1 percent of the GDP. A CBDC could be the entry point to individuals and MSMEs to the formal financial system and economy. A CBDC could help those operating in the informal economy to start building a credit history based on their payments behavior. This would allow them to access new financial products, from lending and savings to investments and insurance.
Develop an innovative and competitive local ecosystem
The United States has one of the most innovative financial markets in the world. Having a CBDC could be an opportunity for the financial sector to enhance further innovative services for the unbanked and underbanked.
In a two-tier distribution model, the Federal Reserve would issue a CBDC and remain in control of monetary policy and financial entities would distribute a CBDC to consumers and MSMEs, minimizing the risk of banking disintermediation that affects the cost of credit and financial stability. If the CBDC were issued on an open blockchain, such as on the Stellar network, the Federal Reserve would also ensure that trusted financial entities selected by the Federal Reserve can validate and process payments, which enables competition.
This architecture would in turn incentivize the development of innovative solutions by financial entities in a competitive and secure environment as consumer needs evolve. A clear example of this could be offline products, specifically in rural regions or for vulnerable groups with a low rate of digital and financial literacy.
Reduce the cost of cross-border payments
The global average cost of cross-border payments remains high at 6.04 percent of the amount sent. This is more than double the United Nations’ Sustainable Development Goal target of 3 percent. The high costs of remittances have real-world impacts on individuals and businesses. High costs affect, for example, migrants seeking to send money home to their families, MSMEs importing products from foreign suppliers.
A CBDC built on an open network would enable cross-border payments including remittances and business-to-business payments that finalize in seconds and cost fractions of a cent, mainly due to the reduction of intermediation. For example, the total cost for senders in the United States to receivers in Colombia amounts to 1.6% on the Stellar network. This is far less than the average cost of sending funds using the centralized payments system, which amounts to 5.3% according to data from the World Bank Group.
A CBDC built on an open system could provide instant real-time payments in central bank money, so payees could receive funds instantly. The core ledger could be built with relatively simple functionality, so that it would be as efficient and cost-effective as possible.
An effective design model should prioritize interoperability, permitting that any CBDC account would be able to pay any other CBDC account, whether this is a commercial bank, a digital wallet provider, or other financial entity. These solutions and products can be built on an open system to enable a CBDC to meet payment needs as they evolve. A CBDC should also be interoperable with cash and electronic money at a domestic and retail level.