It’s been a few weeks since the State Bank of Pakistan (SBP) Governor Reza Baqir gave a new talking point to every Tom, Dick and Harry out there when he said the regulator was “studying central bank digital currency (CBDC)” in an interview to CNN.

Soon began the hype, led by tech evangelists, as to how this could be a game-changer and whatnot. What exactly would it change? The usual responses revolved around its potential to proliferate digital payments.

However, digital payments have far too many facets and routes, which often get lost in all the noise every time there’s a discussion. And for any meaningful conversation about them, it is imperative to understand the distinction between the different channels rather than clubbing everything together.

After all, everything from a debit card charged at the point-of-sale system or sending your friend money via your bank’s mobile app to bitcoin and CBDC comes under the umbrella of digital payments. Yet, each of them serves a different purpose along with its unique challenges and advantages. Cryptocurrencies, for example, are hailed for their technological sophistication, which ensures transparency but are subject to the kind of volatility that cannot exist in a healthy financial system — unless it’s for the sole purpose of speculation.

Digital payments have far too many facets and routes, which often get lost in all the noise every time there’s a discussion on the topic

The debate about CBDCs should revolve around what value it exactly adds. It can’t — or shouldn’t, at least — be the digitisation of payments alone as that objective can be achieved by the existing channels at hand such as debit cards, albeit with a significant push from all stakeholders. One oft-cited benefit of crypto is its decentralised nature and how it’s free from anyone’s manipulation — the ultimate libertarian dream — but that obviously is not relevant to CBDC since it’s backed and controlled by a monetary authority.

Then what can a — possibly blockchain-based — centralised digital currency bring to the table, especially to the end-user, in terms of daily transactions or the system as a whole? For instance, one pertinent question could be: what difference does it make to a customer — even the seller, for that matter — buying something off an e-commerce store and paying via mobile wallet as long as the costs of transaction are negligible and experience nimble?

Let’s try to understand the science behind it first. The key difference between, say, a Rs100 in your Easypaisa account versus the same amount in a CBDC is that the former would be recognised as the liability of Telenor Microfinance Bank and the latter as that of the SBP. Basically, instead of printing money, the monetary authority will issue tokens for rupee. In other terms, the intermediary layer — i.e. the financial institutions — between a central bank and the masses is removed for the distribution of e-money.

CBDCs also don’t particularly help with the free flow of capital between countries, which was considered a key advantage of cryptocurrencies as it’d bring down the cost of cross-border payments — since it’s extremely expensive and inefficient, especially for less developed countries. In fact, there have been stories of how Mexican immigrants in the United States were using bitcoins to send remittances. This was actually one of the key promises of Diem — erstwhile Libra, Facebook’s stablecoin that was launched with a great deal of hype but has since had a bumpy ride. Theoretically, central banks can come up with multi-currency CBDCs, as the Bank of International Settlement proposes, but then one can argue that the current problem with regard to the international capital flow is the protectionist policies of states.

At the same time, the entry of the SBP in the digital payments arena could encourage banks to boost their efforts, which seem half-hearted at best. But the main advantage possibly lies in the development finance–related use cases. With free money at its disposal, the central bank can potentially fill in the void left by our financial institutions. Imagine the SBP depositing money directly into the accounts of the underprivileged segments of society.

Again, let’s be mindful that all of this is still mere talk as the design of the CBDC will differ from country to country. Basically, anything I or others say is mostly conjecture with the aid of some fancy words. In the end, it’s managing the operations depending on the financial system there. Plus, the cost and operations of running such an infrastructure would be a bigger challenge than any conceptual reservation raised. Ambitious as it may be — the jury is still out on utility — we might be better off doing the easy stuff, such as eliminating the burdensome documentation requirements first in order to digitise payments.

Published in Dawn, The Business and Finance Weekly, May 24th, 2021