What will it take for digital payments/stablecoins/CBDCs to become a better alternative to existing systems? When will be their break-through moment?

A. Privacy

One of the key benefits presented by digital payments, particularly solutions enabled by distributed ledger technology (DLT), is increased transparency (thereby reducing risks of fraud, money laundering, counter terrorism financing, tax evasion, non-compliance with sanctions etc.).

Such developments may also give rise to privacy concerns. In the context of CBDCs, there may be concern about domestic surveillance.

Any digital solution that retail consumers would be willing to adopt will need to comply with relevant data protection laws which needs to be considered from the outset in the design stage. Also to be considered is the level of control any such payment tool will give consumers over their personal information (depending on policy approach users can potentially own more or less of the data generated by their interaction with the tool, which may in some circumstances enable monetization of valuable spending habits data and so on, features that cannot be replicated at present in traditional systems. Giving back control of data to consumers may also help with building trust).

Encryption and other privacy-preserving technologies can allow for the secure use, transfer and sharing of transaction data. There may be opportunities in the technology behind programmable payment solutions to embed certain rules, in order to automatically prevent unauthorized sharing of data when a transaction is made with the relevant instrument.

We explore digital identity and privacy further in chapter Digital Identity.

B. Singleness

The “singleness of money” refers to the need for money to remain as a defined, unambiguous unit of account – i.e. whether we hold our money in bank accounts, notes and coins, we can trust that all has the same value – the pound in my bank account equals the pound in your account. Wholesale central bank money plays a key role in achieving singleness.

The importance of “singleness” in any digital payment/money solution is recognized around the world.

For example:

• The BIS recently has discussed this in the context of stablecoins and tokenized deposits, where both are forms of private tokenized money representing liabilities of the issuer (and the holder has a claim on the issuer for redemption at par value in the sovereign unit of account), but the latter being more conducive to preserving the singleness of money by virtue of using tokenized central bank money (i.e. a wholesale CBDC) as a settlement asset.
• Andrew Bailey from the BoE also expressed, in a Speech on “New prospects for money” (10 July 2023) that digital money in the form of stablecoins currently fails the basic test of singleness. With respect to systemic stablecoins: “We will shortly set out proposals for regulating systemic stablecoins, under powers contained in the Financial Services and Markets Act 2023. Such stablecoins will have to meet the tests of singleness of money and settlement finality”.
• The Monetary Authority of Singapore highlights the need for singleness in its whitepaper on Standards for Digital Money.

In any new form of digital money/payment solution, singleness of money needs to be preserved. It should be the functionality of the money (i.e. what we can do with it) that is developed and improved, rather than the value of money. Whilst this is not necessarily a set of features that consumers need to understand, digital payments developers and issuers need to stay abreast of the rapidly evolving regulatory environment in this space to ensure that they are building compliant and future-proofed solutions that will be able to last in order that trusted adoption can be built over time.

C. Settlement finality

To achieve settlement finality means knowing that when we pay for something we can rest assured that it actually has been paid for – any new form of digital payment will need to allow for settlement finality.

Popular non-bank stablecoins such as Tether, USDC etc. cannot offer settlement finality in “real” money – however, this is still a developing space. New forms of digital payments can leverage technology that potentially offer settlement finality more efficiently than traditional systems. For example, the BIS has discussed the theory of a “unified ledger” in its report on a “Blueprint for the future monetary system”– this envisions interlinking central bank money, tokenized deposits and other tokenized assets thus allowing settlement finality while leveraging the technology efficiencies of tokenization.

D. Functionality and security

For any form of digital payment solution to be successful, there needs to be trust in the functionality of the system and there also needs to be trust in the security of the system to prevent hacking, identity fraud, theft, etc. Essentially appropriate technological and operational controls must be in place to ensure consumer protection.

The digital payments space has experienced some very well-publicized failures, these create “trust barriers” which then need to be additionally overcome in order to move forward. In the context of DLT-based payment solutions, the Terra/Luna collapse led to huge losses, and subsequently, public distrust in stability of private stablecoins which is unlikely to be overcome for a number of years. However, CBDCs, bank-issued stablecoins or tokenized bank deposits may ultimately lend more credibility and be potential candidates as a trusted instrument to be used as a payment solution.