G20 TechSprint 2022 Drives CBDC Innovation for Financial Inclusion and the Underbanked

The central bank of Israel is currently exploring the possibility of launching a retail central bank digital currency (CBDC), in partnership with the Hong Kong Monetary Authority (HKMA) and the Bank for International Settlements (BIS) with the view of achieving a launch over the next few months. The Bank of Israel (BOI), despite widespread support from the public for the digital currency, has still demonstrated reservations around the launch of a CBDC, instead having conducted research on the proposed digital shekel for many years. Dubbed the Selah Project, it will be led by the BIS Innovation Hub Centre in Hong Kong and will begin in 3Q 2022 with the view of creating a more efficient payment system that will increase competition in the local payment market.

The Selah Project will trial a bifurcated model where the central banks in question interact with the consumer directly, removing intermediaries, such as banks and other financial institutions. The primary risk with this model is the potential for disintermediation where the population may opt to invest all monies directly with the central bank, thereby denying commercial banks the liquidity required to continue to operate.

In alternative projects around the world, various central banks are developing other ways of preventing the risk of disintermediation. As an example, the European Central Bank intends to install a cap for digital euro issuance to US$ 1.56 trillion.

CBDCs are seeing a significant amount of attention, with several pilots either having been launched or announced. Currently, as of July 2022, the global CBDC competition of G20 TechSprint 2022 is running with both Bitt and IDEMIA selected by the BIS and Bank Indonesia as finalists. This third iteration of the G20 TechSprint draws in the best of fintech, science, business, and marketing to enter their solutions into the competition and help drive the industry of wholesale and retail CBDCs.

As well as IDEMIA, Giesecke+Devrient (G+D) has also developed a solution for the budding CBDC market, the G+D Filia. As G+D’s retail CBDC solution, Filia, provides programmability, enabling financial service providers to build on reliable infrastructure provided by central banks. G+D’s Filia is already seeing real-world use cases, with Brazil’s CBDC, the Real Digital, being developed from Filia for its dual offline payment capability in a challenge that evaluates use cases of a digital currency in the Latin American country.

CBDCs are not fully part and parcel of the payments market and global economy yet; however, a significant number of market drivers and inhibitors are present and shaping the project landscape, including connectivity, financial inclusion, transference, distribution, and interoperability as the most critical challenges and opportunities for CBDCs.

The proposal from IDEMIA and Bitt amalgamate one of the world’s most prominent CBDC systems, Bitt’s Digital Currency Management System (DCMS), with IDEMIA’s offline payment solution, demonstrating a commitment to digitizing economies and providing competitive digital payment technologies without usurping existing financial infrastructure and regulatory frameworks. The end result is a solution that aims to offer retail CBDC to all, including people without connectivity and the underbanked.

Indeed, many pilots have launched or are intending to trial CBDCs in domestic and retail environments. In many emerging economies, national digital currencies are primarily being considered to increase financial inclusion by allowing governments to include unbanked populations in the digital economy. Some of the most recent announcements include:

• The Philippines and Vietnam beginning feasibility studies on CBDCs as Chinese payment apps drive further into Southeast Asia. Alipay and WeChat Pay have driven monetary authorities' interest in CBDCs.
• The Bank of Jamaica is on the cusp of launching a nationwide digital currency following recent approval from legislators with the goal of driving financial inclusion for many on the island of nearly 3 million who do not have a bank account.
• The Reserve Bank of New Zealand (RBNZ) is considering issuing a CBDC. The new digital currency would acquire the liability of the RBNZ, which would shoulder the associated responsibility.
• Nigeria is proposing to launch the eNaira. The eNaira features stringent access right controls by the central bank and draws its value from the physical Naira and is being launched to fulfill several objectives:
  • Facilitating Remittances: The eNaira will help lower remittance transfer costs, streamlining the process for remittance of funds to Nigeria by obtaining eNaira from international money transfer operators, then issuing them to recipients through wallet-to-wallet transfers.
  • Reducing Informality: Nigeria has a significant informal economy; equivalent to over half of Gross Domestic Product (GDP) and 80% of employment.
  • Financial Inclusion: For now, the eNaira wallet is currently only available to those with bank accounts, but will expand to any citizen owning a mobile handset, regardless of bank account ownership.
• The Swedish Riksbank is investigating the possibility of issuing e-krona to strengthen the resilience of Sweden’s domestic payment system. The e-krona would provide parties other than banks direct access to a payment infrastructure where they can offer payment services to their customers, thereby encouraging competition.

The Qatar Central Bank is currently in the foundation stage of issuing its CBDC to stay abreast of the already impressive digital transformation in the financial sector.