Evolving to Work Better Together: Public-Private Partnerships for Digital Payments

IMF News, July 22, 2020

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Canonical URL: Evolving to Work Better Together: Public-Private Partnerships for Digital Payments

Speech by Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department, IMF.
Speech delivered at the “Building CBDC: A Race To Reality” conference sponsored by R3 on July 22, 2020.
Purpose: to explore whether and how the public and private sectors can work together to provide central bank digital currency (CBDC), preserving comparative advantages of each side while ensuring safety, resilience, stability, and policy objectives.

Public sector role emphasized: regulation, supervision, and provision of trust.
Private sector role emphasized: interfacing with customers and innovation.
Regulatory objective highlighted: the importance of regulatory clarity and consistency — domestically and internationally — to encourage innovation.
Historical analogy: cash design by central banks and distribution by commercial banks; commercial bank deposits as private liability and private clearing under central bank supervision.

Three options noted:
- "Synthetic CBDC" (or "sCBDC"), introduced last summer in a paper by Tobias Adrian with Tommaso Mancini-Griffoli.
- "Two-tiered CBDC", explored by various central banks including the People’s Bank of China (PBOC).
- "Full-fledged" CBDC, where the central bank is the sole developer of services (remains an option depending on country circumstances).
Common agreement across models: customer interaction (customer due-diligence, wallet design, currency distribution) should be left to the private sector; central bank tasked with regulation and supervision.
Key distinctions:
- Two-tiered model: central bank issues currency and settles transactions; central bank picks a technology and upgrades it occasionally.
- sCBDC model: private sector issues digital coins denominated in the domestic unit of account, fully backed with central bank reserves; central bank licenses and carefully supervises operators; legal structures to isolate user funds held as central bank reserves from potential bankruptcy of sCBDC operators.
Comparative implication:
- Two-tiered: less diversity in the currency technology; central bank’s choice influences downstream innovation.
- sCBDC: more fundamental private-sector-led innovation in currency form and settlement platforms; firms compete on user-friendliness and efficiency.

Essential oversight areas for central banks:
- Safety and soundness of currency providers.
- Operational resilience.
- Financial integrity.
- Financial stability.
- Safety of customer funds.
Need for potential retooling to evaluate operational risks from new technologies.

Interoperability of coins:
- Importance for users (holders of different coins can pay each other) and market contestability (new firms can enter and compete).
- Issue: interoperability may be time-inconsistent as scaled sCBDC providers may limit interoperability to build their own ecosystems.
- Policy implication: central banks need to introduce and enforce standards, potentially through a consortium with private-sector companies.
Bundling and market contestability:
- Risk that bundling coins with social media or other platforms could lead to unfair competition due to platform network effects being inherited by coins.
- Policy implication: central banks should collaborate with anti-trust authorities, strengthen regulation, embed rules in sCBDC licenses, and supervise operators.
Payment system stability and business model resilience:
- Central banks must evaluate viability of business plans and design impacts on firms’ bottom lines.
- Example concern: sCBDC operators must be resilient to severe downturns and the low interest rates that accompany them.
- Market requirement: sufficient diversification so that other firms can pick up the slack if an operator exits.

Central banks will need to shift focus toward:
- Market design and contestability.
- Firm entry and exit.
- Anti-trust considerations.
- Business model viability.
Private innovators will need to incorporate:
- Safety, resilience, stability, and policy objectives — which may constrain products and lengthen development times.
Country circumstances matter: the appropriate model and degree of public-private partnership will vary by country and may present challenges worth tackling given potential social benefits.

Technological change in payments presents opportunities for deeper public-private collaboration domestically and across borders.
Call to action: build a sturdy bridge between the public and private sectors to explore efficient and effective collaboration.

Speech text by Tobias Adrian; collaboration acknowledged with Tommaso Mancini-Griffoli and Federico Grinberg. July 22, 2020.