Central Banks are developing their Central Bank Digital Currencies (CBDCs). According to the IMF, the lenders of last resort aim to offer a foolproof payment solution as CBDCs will be harder to steal than bales of bank notes. Additionally, the apex banks want to offer a safe and secure payment solution for the bustling e-commerce industry. Currently, online payment solutions such as Venmo and Paypal control online payment. A disruption to these platforms could halt online businesses, and the IMF wants to mitigate such risks.
In a comprehensive analysis of the state of CBDCs, the IMF has identified key focus areas for risk management. The first is the development of offline CBDC platforms. The second is promoting financial inclusion for the millions of unbanked people. According to John Kiff, focusing on these areas will enable Central Banks to offer CBDCs that can facilitate the transition to the new way of payment. The retired IMF senior financial sector expert believes offline CBDCs will determine their success.
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How Offline CBDCs Work
John Kiff says that CBDCs have been in the making for 30 years. In 1993, the Bank of Finland unveiled its Avant stored-value card. The platform used a card reader device to check the bank ledgers and verify that a customer has funds. The National Westminster Bank in the UK launched a similar program called Mondex. The card reader was designed as a point-of-sale device.
The two platforms were p2p based and offline. The same technology can be enhanced to design CBDCs that do not rely on the internet. Lately, Avant and Mondex concepts have been improved. The upgrades incorporate near-field communication (NFC) connections or exchanging authorization code features that do not rely on the internet. The German firm Giesecke+Devrient is developing such a platform in collaboration with the Bank of Ghana, designing an eCedi. According to unconfirmed reports, the People’s Bank of China’s e-CNY is also an offline CBDC.
Offline CBDC Devices Will Be Expensive
The high cost of offline CBDC devices is prohibitive to their adoption. For instance, WhisperCash, a Fintech firm, offers a $70 credit-card-sized battery-powered device for CBDC transactions. This price is high, especially for users in the third world. The firm has an alternative affordable solution. Dubbed the ‘feature phone,’ the $5 phone has a $2 chip embedded in its sim card, enabling the gadget to support text-based transaction validation and authentications.
Central Banks Need to Rethink Their Coding
Jamaica and Korea are at advanced stages of building their payment platforms. To support the interoperability of the new platforms, SWIFT and Capgemini are jointly developing a global CBDC infrastructure. The seamless global financial messaging and money transfer solutions will support cross-border money transfers.