Mainstream, tech, and fintech media is bubbling with central bank digital currency (CBDC) chatter. The Bank for International Settlements (BIS) is performing excellent research on the topic. They’re answering the critical questions of “why consider CBDC?” and “how to create a CBDC?” amongst other topics. Nearly all central banks are at some stage of researching the merits of CBDC. Bahamas is presumably the farthest along with the Sand Dollar, closely followed by China with the DCEP project.

Some of the frequently mentioned CBDC main drivers are:

• improve financial inclusion
• substitute coins and bills in a cashless economy
• prevent currency substitution (counter private stablecoins such as Facebook’s Diem)
• maintain (or establish) currency hegemony
• improve payments between countries

However, CBDC brings several complications and challenges, as BIS and IMF have pointed out:

• a CBDC would potentially disrupt the commercial banking system with severe consequences
• legal frameworks are not in place to allow central banks to issue digital currency
• Incentives may be needed to attract people to use CBDC
• the operating model for CBDC is untested and unclear

Ultimately, the benefits of a CBDC would be that individuals have universal access to instant, cheap (even free), and safe payments. I think we can all agree on that end goal.

Here’s the kicker. Individuals can have universal access to instant, cheap (even free), and safe payments without CBDC. The CBDC key drivers above can also be addressed without CBDC. It’s called payments modernization.

Payments modernization can, of course, mean many things such as real-time payments, account-to-account payments, open APIs, etc. At M10, we think of payment modernization as the first step towards a possible CBDC. It involves the interconnection of tokenized central bank money and commercial bank money (I'm saving the details for a later post), much like money works today. Just more efficient and secure.

This type of payments modernization is a low-risk path for central banks to deliver most of the CBDC benefits. Payments modernization done right is a step towards CBDC, but without addressing challenges such as lack of legal framework and disrupting the commercial banking system.

We encourage central banks to continue the research and experimentation of CBDC, and in parallel, implement payments modernization solutions that provide a future option for CBDC. This approach will bring the key benefits of CBDC to market faster, reduce the cost for central banks, and avoids the potential risks of CBDC.