Innovations that transform the world historically rest on revolutionary, but above all viable, use cases.
Utility is instrumental to adoption, and as money movement becomes increasingly digitized, central bank digital currencies (CBDCs) are one payment instrument that nations around the world are growing increasingly interested in investigating.
“There’s clearly an ecosystem building up around CBDCs,” James Wallis, VP of Central Bank Engagements at Ripple, told PYMNTS.
“Truly digital money that is blockchain-based opens up a whole load of new possibilities that are just not possible with traditional money,” he said.
But could CBDCs one day be as instrumental to payments as their proponents believe?
“These applications have to be of use,” explained Wallis. “They have to provide value to people or companies, and usability is a key theme.”
Boosting the case for usability is the fact that today’s digital economy, ironically, primarily rests upon a payment architecture created decades ago that was designed to support the settlement and transaction needs of fiat currency or physical money.
Those legacy systems are in need of a revamp in order to support new expectations around instant clearing and settlement, security, and ease of use.
21st Century Financial Infrastructure
Wallis says CBDCs are a “pretty important” topic for Ripple, and he sees them as being a “platform for innovation.”
Driving the pace of innovation, and key to its adoption, Wallis said, will be a seamless user experience combined with the real-world utility of actually using CBDCs to pay for retail goods, bills, utilities, etc.
“Without exception, every project we’re involved in has cross-border payments as one of the top topics that they want to improve — whether that’s remittances or trade flows,” he said.
Another area being investigated by more than 90 nations around the world is the viability of technical interoperability.
“When you think about the emerging world of DeFi [decentralized finance] and the innovation that’s going on around digital payments of all different sorts, the technology has to work. Users need to be able to take an asset from one chain to another,” Wallis noted.
Crucial to making this idea of interoperability a reality, he added, is “collaboration with the private sector.”
“We’re looking at the co-existence of a CBDC with other forms of digital payments, including stablecoins and crypto, as well as with lending protocols and the ability to leverage some of the DeFi aspects of [digital money],” Wallis said.
He emphasized that commercial banks “will be pivotal” to the CBDC landscape, not the least of which is due to interbank settlements using wholesale CBDCs.
Separately, Wallis believes that the digital wallets end-users will hold for using CBDCs will “come from financial services providers … a lot of them are realizing that and starting to lean in and become a part of the conversation.”
“Over 90% of countries have something going on in the CBDC space, and while there are different motivations one of the core ones is payment efficiencies. And for that to be a reality the CBDC needs to be able to interoperate with what exists today — people have to be able to go and buy coffee, make a payment for a good or a service,” Wallis said.
That’s why Ripple held its first CBDC Innovate™ Challenge in 2022 aimed at enterprise and individual developers, and designed to investigate the real-world use cases of CBDCs across a variety of payment occasions, from the big to the small, the global to the local. This year, applicants are invited to submit a CBDC application of their choosing.
The 2023 challenge has just begun and is now open for entries at https://ripplecbdc.devpost.com/.
“It’s not just about the central bank, or the commercial bank, it’s about any application that might be of use in the future,” Wallis said. “We’re looking to encourage developers to create applications that could be turned into commercial applications for central banks and commercial banks to enable business efficiencies.”
What Makes CBDCs Successful
While user experience is “critical,” Wallis explained that when thinking about what makes a CBDC successful or not, it comes down to three elements.
“One is obviously the policy side and the rules and guardrails established by the central bank and governments. Secondly is the technology, which has to do what it says [it will do] and provide the platform. The third is usability — the CBDC’s applications have to be of use to people, companies, and countries,” Wallis said.
He added that when working with Montenegro to launch that nation’s own CBDC or stablecoin, Ripple was able to lean on a new full stack solution called the Ripple CBDC Platform that is designed to provide central banks and commercial banks with “everything they need to manage and issue CBDCs.”
Ripple has a “vision called the Internet of Value,” where money movement becomes as easy and intuitive as sending an email or retrieving data from the internet.
An exciting part of realizing that vision, Wallis says, is a new CBDC project Ripple is working on in Hong Kong sponsored by the Hong Kong Monetary Authority.
“The use case [for the project] is around tokenized real estate, and it also has a DeFi lending protocol. All the different elements of Web3 are coming together, you have digital currency with the CBDC and you have the ability to tokenize property and take out loans against that through a DeFi protocol,” Wallis said.
He emphasized that innovative applications like this one are what he means when he describes CBDCs as “a platform for innovation.”
