Dr. (Mrs). N. Suma Reddy
Assistant Professor, Commerce Department
St. Ann’s College for Women, Mehdipatnam, Hyderabad-500 028
K. Rajeswari
Assistant Professor, Computer Science Department
St. Ann’s College for Women, Mehdipatnam, Hyderabad-500 028
Abstract
Financial innovation in Digital currency augmented and brought us into the age of Blockchain and crypto currencies. Despite a cautious stance to digital or crypto currencies, Central Bank Digital Currency (CBDC) is considered as a potential solution for central banks across the world to replace fiat currency notes and to counter the growth of crypto currencies. The main motivation for Central Banks is to limit the risk inherent in the global shift to cashless payment as they are responsible for safety of the monetary system. CBDC gives more control over the currency circulation thereby giving more control over monetary and forex system but it also comes with several challenges – both from public acceptance, financial management and technology perspectives. The paper gives a critical view on these challenges and explore how various existing central banks were trying to figure out a potential solutions in their respective jurisdictions. The challenges will help policy makers and central banks in drawing learning experiences from others to overcome regulatory barriers and thereby be able to address them. In this context some there are unsettled questions regarding ethics, privacy, environmental and technological constraints. Being an emerging subject, it is a hot topic amongst academicians considering lot of research gap existing in the subject. With the imminent implementations of CBDCs, it is vital to explore these issues.
Keywords: Regulatory challenges, financial regulations, financial stability, central bank digital currency, digital currency, payment systems.
INTRODUCTION
Investopedia defined Central Bank Digital Currency (CBDC) as a digital tokens, that are similar to cryptocurrency that are issued by a central bank. CBDC is considered to be the next-generation alternative to conventional paper currency notes. Issued by the central banks of the respective countries, these blockchain-based adoptions help get rid of the problems that come with fiat currency notes (such as soiling and tearing) and management-related issues (such as canceling or recalling notes of a specific series) with great ease. Increased financial inclusion and digitalization helped CBDC to slowly start penintrating into the socity and is all set to becoming the future of cash. However, while CBDC does bring out several advantages, it poses certain challenges that governments and policymakers must address to have a successful acceptance by the public. CBDC comes in two variants – the wholesale variant, which banks use for inter-bank payments and settlement, and the retail variant, which is offered to the general public. While banks and institutions can quickly adapt to the wholesale CBDC, this paper intends to explore many challenges with retail implementation. A Meta-SWOT analysis highlights the high investment costs, privacy issues, and technological-related errors such as the digital divide and electrical outages, among others (Syarifuddin, 2023). Central banks had to quickly run for the implementation of CBDC because globally, individuals are open to taking risks and trying their luck with cryptocurrencies, which central banks and governments do not have control over, considering the jurisdiction-free nature of the cryptocurrencies. However, the bankruptcy filings by various financial intermediaries (such as the FTX cryptocurrency exchange) and the use of cryptocurrencies in financial crimes, apart from the crypto winter that started at the end of 2021, threaten investment safety though cryptocurrency investors are not worried. Financial regulators are burdened with more work though governments on a global scale have to work together to bring about a framework and understanding of how to combat cryptocurrency. However, until governments come together to frame policies and treaties, each can implement and control their currencies since this is a subject within their jurisdictions. The introduction of CBDC as a legal tender as against to cryptocurrencies which do not enjoy such recognition in most jurisdictions has brought about confidence amongst its users. The implementation of a mass scale use-case of Blockchain, such as CBDC in turn fosters the adoption of blockchain and related technologies (Manda & Lubza Nihar, 2023).
OBJECTIVES OF THE STUDY
The purpose of this research study is to use descriptive research approach to understand and identify the challenges and issues surrounding the practical implementation of CBDC for use by retail customers.
SIGNIFICANCE OF THE STUDY
The purpose of this study is use to understand and identify the challenges and issues that come in the practical implementation of CBDC by central banks in countries whose governments have passed legislation to implement CBDC in their country. Being an emerging topic, the quantum of academic research is still very limited but is quickly evolving. The study contributes to the researcha/academic literature by contributing, summarizing and providing a discource on the topic so that central banks will be able to consider the potential issues that comes in the path of the practical implementations. Finally, the study lays the groundwork for future research on the topic, by identifying areas that require further investigation on each of the issue from a managerial or a technological implementation.
LITERATURE STUDY
Being an emerging technological implementation, the quantum of critical research work in the area is still evolving. For example, critical examination of some basic operations – such as operations fund and defunding have not been formally studied yet to the extent it deserves attention (Castejon-Molina et al., 2023). A systematic mapping study found cryptocurrency adoption, central bank digital currency regulation, accounting for cryptocurrencies and risk for cryptocurrencies as the regulatory challenges that are identified by research so far (Silva & Mira da Silva, 2022). Table 1 shows coverage of “central bank digital currency” by various research databases. Figure 1 shows how academic community increasingly got interested in research on the topic over the years – from 18 publications in 2014 to 13,283 publications by the end of 2022 (measures are of dimensions.ai database alone).
Table 1: Coverage on "central bank digital currency" by select academic research databases
Research Database | Total Results | Publications in 2020 | Publications in 2021 | Publications in 2022 |
Springer Link | 16,208 | 1,459 | 2,896 | 4,409 |
Proquest | 4,24,650 | 84,304 | 98,140 | 1,15,813 |
Wiley Online Library | 51,196 | 2,981 | 3,344 | 3,302 |
Oxford University Press | 1,606 | 115 | 131 | 128 |
Google Scholar | 2,27,000 | 23,700 | 27,000 | 27,300 |
Science Direct | 3,435 | 451 | 535 | 200 |
Emerald Insight | 2,168 | 223 | 291 | 417 |
Data Source: Author compilation based on a search done in the respective database; Data of 2022 is as of February 2, 2023.
Figure 1:Increasing publications on the topic over the years
Data Source: Dimensions.ai database; Data is till end of December 2022 captured on February 23, 2023.
RESEARCH METHODOLOGY
Considering the recent evolution of the concept, this study uses Descriptive research to gather preliminary information, observe the past growth and expansion of the currency, draw experiences from existing implementations by other countries, record the situation that lead to the implementation and describe the possible implications from the issues and challenges.
DATA COLLECTION
Secondary data sources were used for collecting information necessary for this study. The data is collected from several journals, research papers and websites.
RESEARCH FINDINGS
Digital Literacy: The digital literacy levels of the population is an important aspect in determining how successful will the adaptation of CBDC will be. eNaira – the digital currency of Nigeria had faced the challenges of illiteracy while pushing its product. To be safe, Nigeria banned cryptocurrencies (Oladipupo & Amodu, 2022) that paved way for confusion-free implementation of eNaira. It is essential to create a user-friendly interface and provide adequate education and support to users to make CBDCs accessible and easy to use. Additionally, convincing people to switch from traditional payment methods to a new and unfamiliar digital currency may be a challenge, especially in countries where cash is still widely used.
Balancing Act: Central banks have to do a balancing act between modernity and monetary stability when issuing CBDC. CBDC supplements the existing bank currency notes. Both CBDC and Fintech have the potential to preserve financial stability and help reach to unbanked adults in a cost efficient manner. The successful implementation of technology-led mass adoption projects such as CBDC requires much support from Governmental and policy measures to have public acceptance. Effective implementation by the Governments will help build the much-necessary positive public sentiment. (Ngo et al., 2023). However, globally a large scale income inequalities exists that hamper the quick adoption of CBDC. There will be several bad actors to be identified and stopped from being active when hacking or the interruption of the blockchain network that is used for the service delivery happens (Ozili, 2023).
Change in consumer usage patterns: Considering the digital currencies have the ability to change in payment patterns, consumer spending habits are likely to get changed. The choice of cash or digital currency will slowly become phased out forcing consumers to adapt to digital payment systems only (Jagrič et al., 2022).
Privacy Issues: Privacy is another major issue that prohibits individuals. Research using the privacy calculus theory showed that the right level of perceived benefits leads to higher rates of privacy disclosure. Hence, marketing the CBDC requires much highlighting of the perceived benefits of using CBDC over conventional wallet money or fiat money (Jabbar et al., 2023). System designers have a range of technology choices that they can offer depending on the system needs that are proposed by the CBDC (Darbha & Arora, 2020). How far will compliance be brough considering has anti-money laundering (AML) and Know your customer (KYC) is yet to be seen. Strong encryption and security measures must be implemented to safeguard user data and transactions.
Anti-money laundering (AML): CBDC has anti-money laundering (AML) as a potential use-case. However, there is no empirical evidence to say it is a perfect solution to the AML problems yet. Also, regulators are generally seen to be reactive than proactive when it comes to socially undesirable phenomena. Of course, this stand is often taken to allow for fostering the ecosystem over strightly following by the rule books and restricting its growth. Studies suggest that attempts to undermine the controls for the implementation of CBDC will be dealt with improved innovation resulting in a game of cat and mice situation (Dupuis et al., 2022). Past experiences show that ensuring compliance while also preserving user privacy and security is a delicate balancing act.
Interoperability: Several central banks, such as the Bank of England, have put forth the need for interoperability with existing innovative payment platforms, including existing blockchain networks, as a central requirement in the design process (Coulter, 2023). This can increase the utility value of the application and opens door for financial product innovation and experimentation (Salampasis et al., 2023) thereby making it a rightful competitor to the several cryptocurrency coins that are already in distribution. However, there is a need for thorough testing of the system by both the central bank and the third-party application providers. A failure to lift the product and get user acceptance will mean that it will turn into a rocket that failed to launch and will have high probability to be not of much acceptance. Because there is a maintenance cost – such as to upkeep the transactional data on the blockchain ledger of the network hosting the digital currency, it will turn out to be a procedural headache for the central banks. Thus, household trust is essential for the success of CBDC(Solberg Söilen & Benhayoun, 2022). Understanding customer-specific determinents helps weave an ecosystem or use-cases around CBDC which will help ease the stress in pushing the product to the households. For example, if a consumer wants to use their CBDC to purchase goods or services from a merchant that only accepts traditional payment methods, an interoperable solution must be in place to facilitate the transaction.
Cost factors: CBDC implementations come with an immense cost. Blockchain networks are already struggling to answer to the huge power that they are consuming (Sedlmeir et al., 2020) and CBDC will add fuel to fire considering the implementation comes from the Government and the Regulators. The Digital Euro turned out to be a monolithic project and is more expensive than the digital dollar and the digital yuan (Sandner & Gross, 2023). A significant challenge in implementing CBDCs is building the technical infrastructure to support them. This includes developing secure and efficient payment systems, implementing strong encryption protocols, and ensuring that the underlying technology is scalable and can handle high transaction volumes.
Role of Banks & Branches: The role of banks and bank branches in the context of CBDC is still unclear and is to be formally proposed by regulators. Further, banks and their staff have to be specially trained to handle a wave of customer queries, including reports and complaints of fraud, cyberattacks, data theft or missing money because of wrong transfers. Banks will have to consider setting up special desks and helpline to deal with these till the whole system adjusts to the transformation.
Impact on NII growth of banks: As can be seen from the Vietnam experience, issuing CBDC will have a direct impact on percent cash and will slow commercial banks' NII growth in which large banks may be more vulnerable than smaller banks with higher return savings deposits. The topic will surely be an area of researcher interest for those studying banks and their performance (Dinh & Dinh, 2022).
Cross-border settlement: A successful implementation of retail CBDC will mean opening doors for cross-border settlements thereby allowing the country to be truly global in the digital economy context. World Bank and Bank for International Settlements (BIS) can help in bringing about co-operation between central banks. The Project Jura of November 2021 is a step towards this. Of course, several legal and regulatory aspects have to be examined (Inozemtsev & Nektov, 2022).
CONCLUSION
While agreeing that CBDC is an innovative and futuristic technology-backed service that helps us do away with physical currency notes, CBDC will face acceptance and adoption challenges, particulary from countries with poor digital literacy rates. Central banks will have efforts to do a balancing act. As this paper shows, other challenges include change in consumer usage patterns, privacy issues, AML, interoperability, cost factors, role play by banks and their branches, bank NII growth and cross-border settlement issues. Once the central banks overcome these managerial issues, apart from technology-based implementation issues, the pave will be formed for the smooth adoption of this feature. The zenith lies in doing away with paper currency notes and allowing digital payments, as simple as that of making a payment by tapping a digital watch or a digital ring!
CREDIT AUTHOR STATEMENT
All the researchers have worked on this paper over the last year at different times and in different ways, and the paper evolved dynamically over time. We are happy that, overall, each author has contributed to the study.
COMPLIANCE WITH ETHICAL STANDARDS
There were no humans or animals involved in this research. The authors have complied with ethical standards of research (including plagiarism, informed consent, misconduct, data fabrication and falsification, double publication and submission, redundancy, amongst others).
CONFLICT OF INTERESTS
The authors hereby confirm that there are no conflicts of interest concerning the research, data, authorship, or publication of this article.
FUNDING
The authors performed the research in their individual/personal capacity and have not received any explicit funding for the purpose of this research from any institution or a funding agency.
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