The World Bank defines a central bank digital currency (CBDC) as a central bank liability that is digitally created and recorded on centralised or decentralised ledgers, denominated in an existing unit of account, and convertible in physical cash, commercial bank money, and other forms of money on demand by the holder at authorised entities.
CBDC provides households and businesses with both a new form of money and a new way of making payments, which could exist alongside other forms of money and payment systems, such as physical cash and bank deposits.
Zimbabwe’s electronic payment systems are already highly resilient and secure.
However, the continued shift from cash to electronic payments increases the reliance on electronic payment systems, which has implications for the diversity and resilience of the payments landscape.
Cards and cash are typically the only two options for point‑of‑sale transactions, with cards usually the only option for e‑commerce.
Consequently, the operational resilience of the card network is increasingly critical, and this increasing reliance on a single electronic payment method could reduce the resilience of the payments landscape.
Cash currently provides a useful contingency to electronic payment systems in the event there is a disruption to card payment networks.
However, as the use of cash in payments declines, the ability to use it as a contingency payment system will also decline.
CBDC could therefore enhance financial stability by contributing to resilience in payments and providing some core payment services outside of the commercial banking system.
By providing a new way to make payments, it could diversify the range of payment options, particularly for e‑commerce.
It is less likely that both card networks and a CBDC network would suffer outages at the same time, so CBDC could serve as a substitute.
The structure of the CBDC ecosystem could also be designed to avoid some of the vulnerabilities in payment systems that have evolved, complementing on-going work to enhance resilience in existing payment systems.
However, CBDC would still be vulnerable to a large‑scale outage of electricity and data networks, unless some kind of offline payments functionality is developed.
While the commercial bank money used in existing payment systems is not risk-free — for example, commercial banks can, and do, fail — the central bank’s prudential regulation and supervision help to ensure that these failures happen rarely and in an orderly way, and deposit insurance protects households in the event of a failure.
Consequently, users of existing payment systems can have confidence that the money they send will reliably retain its value, both while it is being used to make a payment, and while it is being held over time.
This safety and confidence may not exist to the same degree for new payment systems that have been proposed by several firms, including new entrants and existing technology companies.
These proposed payment systems include crypto assets known as “stablecoins” intended for use in transactions currently processed by retail or wholesale payment systems.
Stablecoins propose to create digital tokens or “coins” that they transfer.
Stablecoins vary widely in their design features, but most seek to provide stability of value via some form of backing.
Depending on the nature of assets backing the “coin”, and how they are held, the stablecoin may be unable to provide stability of value and redeemability at par back into commercial or central bank money. Uncertainty about, or large fluctuations in, the value of stablecoins could give rise to similar risks to financial stability associated with the operational or financial failure of the payment system itself.
These could include risks to the users’ ability to manage their liquidity or to meet payment obligations, or the risk of such fluctuations causing a collapse in confidence with potential contagion risks for the system.
Stablecoins may also not be interoperable with each other and with other payment systems, creating closed loops and inefficiencies.
Stablecoins will only be widely adopted if they provide functionality and efficiency benefits over existing payment systems.
But given the risks they could pose, it may be worth asking if CBDC can be designed to better meet those needs.
CBDC may be able to provide better payment services, backed by risk-free central bank money, and reduce the demand for new privately issued money-like instruments.
While the safety and resilience of payment systems are essential, a safe payment system is only beneficial if people use it.
Users, therefore, need fast, efficient, user‑friendly, and inclusive services, and innovation, driven by competition, is important in the payments landscape.
There are opportunities for improvements to address potential market failures in existing payment services.
For example, while card payments appear near-instantaneous to the user, the merchant can wait up to three days to receive funds.
There are significant efforts underway to further improve the existing payment system but to the extent, that these initiatives do not fully resolve such issues, a CBDC could help to enhance the speed and efficiency of Zimbabwe payments.
This could be both directly by offering a fast and efficient payment service to users and also indirectly by creating a more competitive payments landscape.
A well-designed, robust, open, CBDC platform could enable a wide range of firms to compete to offer CBDC-related payment services, and importantly to innovate in the payment services they provide to consumers, and how these are integrated into the digital economy.
In doing so, the introduction of CBDC could support competition in both cost and quality of payment services.
Increased competition and innovation could have benefits for the wider economy.
Changes in payment behaviour show that consumers will adopt the methods that are most convenient, such as cards, even though these methods might have a higher cost for businesses.
Since payment costs will ultimately be passed on to consumers, there would be net benefits for consumers and businesses if CBDC were able to provide greater convenience at a lower cost.
The next generation of payments will need to support a more digital economy and allow for seamless connections between different services used by households and businesses.
As a new system, CBDC could be designed with this in mind, supporting the wider economy.
This may increase the volume and frequency of these payments leading to the development of new services that can leverage this capability.
This could enable new business models, for things like paying for digital media.
For many users, cross-border payments are expensive, slow, and opaque. CBDC may offer a safer way to provide better cross‑border payments.
For example, central banks may be able to work together to link domestic CBDCs in a way that enables fast and efficient cross‑border payments. Individual domestic CBDCs could be designed around a common set of standards intended to support interoperability.
This might enable ‘atomic’ transactions between CBDC systems: where the transfer of CBDC in one currency is linked with a transfer of CBDC in another currency, in a way that ensures each transfer occurs if and only if the other does.
In conclusion, CBDC can be an innovation in both the form of money provided to the public and the payment infrastructure on which payments can be made.
However, the Reserve Bank of Zimbabwe has not yet made a decision on whether to introduce CBDC and intends to engage widely on the benefits, risks, and practicalities of doing so.
Zvendiya is an independent economist. email: rzvendiya@gmail.com +263776252112
* These weekly articles are coordinated by Lovemore Kadenge, an independent consultant, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe. Email - kadenge.zes@gmail.com and mobile No.+263 772 382 852.