By: Lou Grilli, Senior Innovation Strategist, PSCU
Part I of my exploration of cryptocurrency’s potential impact on debit and other forms of payments ended with a discussion of stablecoins, a cryptocurrency tied to a stable asset. In part II, we’ll look at a special category of stablecoin, one that is issued and controlled by the central bank of a country. This is referred to as a Central Bank Digital Currency (CBDC), which is intended to replace paper currency with digital, increasing security and monitoring. This is the type of cryptocurrency that may have the most impact on payments.
In fact, Visa’s head of crypto, Cuy Sheffield, states that CBDC will be the most important payment trend of the next decade:
I’d argue that Central Bank Digital Currency (CBDC) is one of the most important trends for the future of money and payments over the next decade. Regardless of anyone’s personal views of whether it’s good or bad, the reality is that global interest in it is not going away. The impact may not be felt for several years, but can only hasten the movement away from paper money and checks to a more fully digital payments ecosystem.
As such, Visa has stepped into the CBDC segment, filing a patent for a method for offline digital currency payments. The premise, according to Visa, is that an “offline payment system, put simply, creates an experience similar to physical cash. But instead of paper in your wallet, it’s bits and bytes in your phone.” And more recently, Visa announced a pilot program, Visa Crypto APIs, the latest leg in its digital currency strategy that will bring crypto (including Bitcoin) to financial firms — and in turn, enable customers to buy and sell those digital assets. Visa proposed a system that would use “open source technology and public key infrastructure” so transaction messages could be signed without the need to be connected to the internet.
In addition, Mastercard is launching a CBDC testing platform for central banks to assess platforms and solutions. Mastercard’s platform enables the simulation of issuance, distribution and exchange of CBDCs between banks, financial service providers and consumers.
A Look Across the Globe
The Bank of England was the first to announce a CBDC, the “Virtual Pound Sterling.” This CBDC is still in the discussion stages, as the major banks in England debate performance, privacy and security. China, meanwhile, moved forward with trials of its digital yuan, or eCNY, in early 2020. Major firms such as China’s largest ride-hailing company and largest food delivery giant are included in the trial for acceptance. Although it is a digital currency issued by the central bank, to end users and merchants it looks more like the digital wallets that already dominate commerce in China, including Alibaba and Tencent. China’s digital currency is not considered a true cryptocurrency by purists, in that the central bank maintains the ledger (there is no blockchain or distributed ledger).
Interestingly, the first CDBC to fully launch beyond a trial was the Bahamas Sand Dollar. Each Sand Dollar is pegged to the Bahamian dollar, which in turn is pegged to the U.S. dollar. Given that the Sand Dollar pays no interest, and cannot be held or used non-domestically, its use has been minimal. Other countries either in trial or with limited capabilities include Barbados, France, the Marshall Islands, Sweden, Thailand, Turkey and Uruguay. There is also a trial ongoing for “Aber,” which would be the first CBDC of two central banks —a joint currency of Saudi Arabia and the Arab Emirates.
In the U.S., the Fed is collaborating with MIT to research technologies, with the goal of building and testing digital currency platforms and learning the intricacies of building a CBDC. In written remarks to a question on China’s pilot of their CBDC, newly appointed Secretary of the Treasury Janet Yellen responded that digital currencies can improve the financial system’s efficiency and that she plans to encourage cryptocurrency assets for legitimate activities.
The Challenge of Estimating the Impact on Debit
Since there are such few active instances of CBDC, and China’s closed environment does not lend itself to direct comparison to other markets, there are no case studies that show what the impact cryptocurrency has or will have on other payment forms, including debit. There have been some projections, however, as to how the introduction of a CBDC might impact banking in general.
The Fed produced an abstract comparing means of payments when a CBDC co-exists with other forms of payments. This abstract does not directly infer that there is a direct impact on debit transactions, positive nor negative, but does explore challenges and benefits to banks, including:
- Accessibility of purchasing for the unbanked would improve in places where cash is not a viable payment method (online purchases, making airline reservations, etc.). Many of these transactions will use a debit card as the intermediary means between the digital wallet and acceptance at existing online and brick and mortar merchants.
- Service availability would increase. The availability of ACH transactions is subject to banking business hours. Even cash has limitations, as the availability of cash is subject to access to an ATM. The ability of cryptocurrency is constant, however. There is no need to go anywhere, or wait for anything.
- Immediacy will be the expectation. As more consumers experience the immediacy of digital payments, this in turn drives greater expectations, leading to greater adoption. Debit card users today already appreciate the service availability of card networks; the greater adoption would therefore come at the expense of cash and to a lesser extent, check payments.
As emphasized in part I of this series, credit unions can best serve their members by staying informed of the latest news and trends on the future of payments. In this regard, one of the most important steps a credit union can take is to educate their call centers (and all member-facing staff) to be able to answer questions around crypto.
In our rapidly evolving industry’s landscape, it’s natural for members to ask their primary financial institution if they should buy crypto. Not having a crypto product doesn’t take away from the need to have credit unions that can knowledgeably speak about the topic, however. By staying ahead of the curve and being observant of payment trends, credit unions can ultimately help their members – and their organization – thrive.
Lou Grilli is a senior innovation strategist at PSCU, tasked with building and shaping a superior payment and member experience capability for PSCU and its Owner credit unions. Grilli’s long career in payments includes product management, product development and thought leadership in credit, debit, loyalty, mobile payments and digital wallets. He has spent the last six years in roles dedicated to the credit union industry.