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

July 22, 2020

Thank you very much for inviting me to give this keynote speech. I’m delighted to be here — mostly. I’m also a tad uncomfortable, as most public servants would be in my position. Or as most travelers feel — remember that concept of “travel,” from pre-Covid days? — as travelers feel when they set foot in a foreign land. This is a conference run by the private sector, with mostly private-sector participants, speaking private-sector language on private-sector topics. Instead, here I am — with just a few others among you — representing “the other side”: the public sector.

I should begin with a clear caveat. The views I will express are my own, and are not necessarily those of the IMF or its executive board. Moreover, neither my views nor my participation should be taken as an endorsement of R3 or any of the companies present here today.

So why did I come? To bridge a gap. To get to know each other. I am here to ask whether we can work together, and in what capacity. I think we can, but we’ll both have to evolve beyond our immediate areas of comfort.

Public-private partnerships look good on paper. But if we’re serious about them, we — the central bankers and regulators of the world — have to shift our focus to market design and contestability, firm entry and exit, anti-trust, and business model viability. Perhaps we must learn to be a little more agile, a little more open to change. And you — the innovators — have to learn about safety, resilience, stability, and policy objectives. These might constrain your products, and might require longer development times — but for good reason.

I will focus on public-private partnerships to provide central bank digital currency — CBDC. The goal of these partnerships is to preserve comparative advantages: for the private sector to interface with customers and innovate, and for the public sector to regulate, supervise, and ultimately provide trust. In so doing, I cannot emphasize too strongly the importance of regulatory clarity and consistency — domestically and internationally — to encourage innovation.

Note that public-private partnerships are not new, even for the provision of money. Cash is designed by central banks but distributed by commercial banks. And most of the money we use — in the form of commercial bank deposits — is created by the private sector; is a private liability; and is settled in great part through private clearinghouses, all under the strict supervision of the central bank.

So what would a public-private partnership look like for the provision of CBDC? Two models stand out.

The first model is “synthetic CBDC” (or “sCBDC,” for short), introduced last summer in my paper with Tommaso Mancini-Griffoli. And the second model — explored by various central banks, including the People’s Bank of China (PBOC) — is “two-tiered CBDC.” Both are increasingly debated, while the initial concept of “full-fledged” CBDC, in which the central bank is the sole developer of services, also remains an option, depending on country circumstances.

The two models of partnership differ according to where the boundary is set between the public and private sectors. Both models agree that customer interaction — including customer due-diligence, as well as wallet design and currency distribution — should be left to the private sector. The central bank, instead, would be charged with regulation and supervision.

But which side of this public-private partnership should issue currency and settle transactions? The two-tiered model argues for the central bank. The sCBDC model, instead, opens the door to the private sector. Digital coins, denominated in the domestic unit of account, would be privately issued, although fully backed with central bank reserves. The central bank would license these operators and carefully supervise them. In addition, legal structures would ensure that user funds, held as central bank reserves, would be isolated from the potential bankruptcy of sCBDC operators.

So both models offer an especially liquid and safe payment instrument.

The big difference is the degree of diversity and innovation in the currency itself. In the two-tiered model, the central bank picks one technology and upgrades it occasionally. That choice colors the innovations that come on top, as the currency is embedded in digital applications and spurs new assets. We can imagine, for instance, smart contracts used to program the contemporaneous exchange of DLT-based currency and bonds.

The sCBDC model, instead, encourages private-sector-led innovation at a more fundamental level. Private companies would compete to provide the most user-friendly form of currency and the most efficient settlement platform. Such dynamic innovation could be extremely valuable, given the pace of technological change, and given many central banks’ limited experience in providing retail services.

When a technology moves slowly, it is fine to set it in stone. Think of good old dark-room photography: We all knew what made the best film. The enabling technology was set. A great camera could be kept for years. But when digital photography was introduced, it was like jumping into a moving stream. Even great cameras quickly became obsolete as sensor technology rapidly evolved. And the diversity of cameras exploded as each innovated along a different dimension. In that environment, to have the public sector pick the winning technology would be difficult at best, probably costly, and potentially irrelevant as the private sector continued to innovate.

Even then, in the field of payments, innovation and experimentation cannot come at the cost of instability. Central banks must oversee the safety and soundness, and the operational resilience, of currency providers — as well as ensure financial integrity, financial stability, and the safety of customer funds.

These are challenges, but their nuances are well known. Central banks are used to fulfilling these objectives, even if some retooling may be necessary to evaluate operational risks stemming from new technologies, for instance.

However, central banks would also face new challenges specific to partnering with private firms. I will point out three specific challenges.

The first is the interoperability of coins. This is specific to sCBDC. Interoperability is important for users, so holders of different coins can pay each other. And it is important for market contestability, so new firms can enter and compete on a level playing field. As sCBDC gets off the ground, firms may seek interoperability to build up their user bases and stoke a dynamic developer community. However, interoperability is not always time-consistent. As soon as an sCBDC provider reaches scale, it will try to foster its own developer and user ecosystem by limiting interoperability. So central banks need to introduce and enforce standards, potentially through a consortium with private-sector companies.

The second challenge is related, and also concerns sCBDC. Market contestability equally relies on ensuring that the bundling of coins with social media or other platforms does not lead to unfair competition. Otherwise, the strong network effects of those platforms would be inherited by the coins. Central banks will thus have to collaborate with anti-trust authorities to strengthen regulation, embed rules in sCBDC licenses, and supervise operators.

The third challenge is to ensure payment system stability — namely, the resilience of business models to macro-economic shocks, including the policy cycle. Central banks will have to evaluate the viability of business plans, as well as the impact of design choices on firms’ bottom lines. For instance, sCBDC operators must be resilient to severe downturns and the low interest rates that accompany them. Even if an operator exits, the market must be sufficiently diversified for others to pick up the slack.

Given my limited time, these ideas merely scratch the surface of the complexities that are involved, but you see where I’m going. The more that central banks embrace public-private partnerships, the further they will stray from their comfort zone, and the more they will need to focus on scope for innovation, business model viability, market design, contestability, and anti-trust. Depending on country circumstances, this may well be a challenge worth tackling, given the potential social benefits of public-private partnerships.

Whatever route we take, we are in for changes in technology and payments. This is certainly an opportunity for the public and private sectors to get to know each other better, and to explore more efficient and effective ways to collaborate — not just domestically, but also across borders. I’m pleased to participate in this discussion. May this be the start of a sturdy bridge between the public and private sectors. Thank you.

[1] I am grateful to Tommaso Mancini-Griffoli and Federico Grinberg for collaboration on this speech.

IMF Communications Department


Phone: +1 202 623-7100Email: MEDIA@IMF.org