Central bank digital currency Digital currency issued by a central bank
One important role of a central bank is to issue a currency that can be used as legal tender for payments in that country. 

Traditionally, the currency is issued in the form of paper notes and coins. It is costly for the central bank to issue these notes and coins. There is also the risk of counterfeit notes and fraud.

The central banks of many countries are looking into issuing the currency in digital form. It will have the following advantages:

1. Be less costly to administer, compared to paper notes and coins
2. Improve productivity in the retail sector, as digital payment is more efficient than cash payment (i.e. paper notes and coins)
3. Reduce the risk of conterfeit and fraud.

However, many countries were not successful in introduce digital payment to reduce the cash payments due to many difficulties of implementing this change, such as the high cost of technology and a preference to stick to the familiar cash payments.

There are a few exceptions:

1. China has been highly successful in using digital payment using mobile phones. It is spearheaded by two highly successful digital payment platforms that are privately operated, namely AliPay and WePay.

2. Some advanced countries are successful in digital payments using credit or debit cards linked to bank accounts. 

Even so, there are still a significant segment of the population that does not have a bank account and cannot using digital payment (by mobile phones or bank cards). 

There provides an opportunity for a central bank can introduce a digital payment platform to replace the cash payment. It can be implemented using the following steps.

1. The central bank platform should adopt the traditional database technology, instead of blockchain technology, to allow it to handle a high volume of transactions to be processed at low cost. It is not necessary to use blockchain technology for this purpose, as it is too costly to operate. (I mention this point, because many papers on central bank digital currency suggest the use of blockchain).

2. The financial regulator should register and approve digital payment platforms and require them to comply with regulations to ensure that they are operated soundly and safely and that are independently audited.

3. The approved platforms should be  inter-operable, i.e. digital payments can be made between parties that are registered in different platforms. This will remove the need for any party to be registered on multiple platforms. It will also allow for more payment platforms to be approved for operation and create a more competitive market (rather than a market that is dominated by a few large platforms who have the resources to sign up many merchants and customers).

4. Consumers can register for an e-wallet to make digital payments. The e-wallet can be linked to an approved bank account for transfer of funds, but this should be an option. A consumer can also open an e-wallet that is not linked to a bank account. They can top up the e-wallet with cash through a retail outlet that provide this service.

5. The platform should allow allow the customer to make payment using a mobile phone (and QR code), or by a payment card that is linked to an e-wallet. The card payment is to cater to consumers that do not use a mobile phone. It is actually more convenient for consumers to pay with a payment card, instead of a mobile phone using QR code.

6. The merchant can use a mobile app to receive card payment or to check for customer payments using QR codes. The larger retail outlets can use a special POS device, but this should be an option. This will allow the merchant and retail outlets to receive digital payment easily, conveniently and at low cost, and encourage them to choose digital payment instead of cash payment.

7. Digital payment should be free to the customers (just like payment using paper notes and coins). The merchant should pay a small fee that is similar to the charges that they pay to banks for cash deposits.

8. As an added service, the platform should allow the customers and merchants to transfer excess funds to be placed on term deposits to earn interest at rates comparable or better than those offered by banks. This service may encourage customers to use the e-wallet. 

The infrastructure that I have suggested will have a low cost of operation and will introduce convenience to customers and merchants. It will encourage them to move towards digital payments, to replace the customary payment using paper notes and coins.

Tan Kin Lian
 

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