Kevin Rutter is the research lead at R3.

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“CBDC, not bitcoin” is the new “blockchain, not bitcoin.”

Since 2014, discussions of a publicly accessible digital payment vehicle issued by a central bank have matured significantly. Central bank digital currencies (CBDCs) have been the center of many high-level discussions, notably at the Bank for International Settlements (BIS) and the International Monetary Fund (IMF).

The breadth of reports from experienced central bankers validates blockchain technology in a way that crypto-anarchists, armchair blockchain economists, and even millennials that got smoked by buying cryptocurrencies last Thanksgiving (2017), can collectively be proud of.

However, the cruel reality is that consumer adoption of new retail payment innovations is often difficult – whether that innovation is magic internet money or new Sacagawea U.S. dollar coins. Further, just as payment habits with physical cash, credit card, or cell phone use varies from country to country, different regional consumer preferences regarding anonymity, fees or interest payments would persist with a digital manifestation of “physical cash.”

New technologies are cool, but the road to adoption is treacherous – history is littered with the decomposed debris of failed payment innovations that did not provide what consumers wanted.

Successful and wide-scale CBDC implementation would require architects to consider consumer demand, payment habits, and preferences within a particular country – possibly resulting in idiosyncratic design decisions.

Adding to the growing discourse on the topic, in a recent research report for R3, JP Koning evaluates what a CBDC might look like if it were to be issued by the central bank of Brazil, the world's eighth largest economy.

While this paper anchors the analysis through specific treatment of the Brazilian market, many of the design decisions that central banks (or private sector companies on behalf of central banks) would have to make can be generalized to other economies as well.

Building on his earlier work, JP questions whether CBDCs should be in bearer form or account-based, whether they should be private like physical cash or have identities tied to transactions (and to what extent), and whether CBDCs should pay interest or not.

He presents three potential high-level archetypes for a CBDC: a cash-like digital bearer instrument; an account at the central bank; or a hybrid approach that combines features of cash and accounts.

Thus far, central bank innovation teams have done incredible work with blockchain technology.

Project Jasper’s Phase 3 white paper, a collaborative effort between Payments Canada, the Bank of Canada, TMX Group, Accenture and R3, required coordination amongst many different stakeholders –the breadth of analysis and innovative thinking shows in the end result.

The recent report on creative approaches to cross-border settlement systems by the Monetary Authority of Singapore (MAS), the Bank of England, and the Bank of Canada is a must-read for payment nerds. A report on decentralized liquidity savings mechanisms, a result of a Project Ubin prototype built for the MAS, shows the promise of decentralized netting.

The focus on wholesale, or interbank payments, thus far, is entirely merited as these projects are more contained in scope and may provide more concrete benefits to market participants, at least in the short term.

Yet while progress with wholesale payments is great, retail, or consumer, payments are also ripe for innovation.

Despite the persistence of and even increases in the amount of physical cash in some regions, consumers globally are trending towards digital payment use.

Building digital solutions on top of existing financial market infrastructure may only enable private sector-led retail-level payment innovations to get so far.

Existing underlying payment infrastructures in several regions can lead to interoperability and access limitations and complexities.

Future innovation with platforms backed by central bank-issued money, if done with a responsible and careful architecture, has the potential to better serve payment niches that are either currently poorly addressed by the private sector, or fill the future gap left by paper’s inevitable decline in the wake of more digital payment volume.

A “big bang” move to cryptocurrencies may be (nearly) impossible, but a premeditated and deliberate phased rollout of a CBDC is not only possible, but it may be what certain types of consumers in certain types of regions need.

Piggy banks image via Shutterstock